estimated fuel economy levels that will be achieved under both the
baseline scenario, which assumes that manufacturers will continue to
comply with the MY 2016 CAFE standards, and under alternative increases
in the standards that apply to MYs 2017-25 passenger cars and light
trucks. Specifically, if the agency has underestimated the fuel economy
levels that manufacturers would have achieved under the baseline
scenario--or is too optimistic about the fuel economy levels that
manufacturers will actually achieve under the proposed standards--its
estimates of fuel savings and the resulting economic benefits
attributable to this rule will be too large.
    Another major source of potential overestimation in the agency's
estimates of benefits from requiring higher fuel economy stems from its
reliance on the Reference Case fuel price forecasts reported in AEO
2011. Although NHTSA believes that these forecasts are the most
reliable that are available, they are nevertheless significantly higher
than the fuel price projections reported in most previous editions of
EIA's Annual Energy Outlook, and reflect projections of world oil
prices that are well above forecasts issued by other firms and
government agencies. If the future fuel prices projected in AEO 2011
prove to be too high, the agency's estimates of the value of future
fuel savings--the major component of benefits from this rule--will also
be too high.
    However, it is also possible that NHTSA's estimates of economic
benefits from establishing higher CAFE standards underestimate the true
economic benefits of the fuel savings those standards would produce. If
the AEO 2011 forecast of fuel prices proves to be too low, for example,
NHTSA will have underestimated the value of fuel savings that will
result from adopting higher CAFE standards for MY 2017-25. As another
example, the agency's estimate of benefits from reducing the threat of
economic damages from disruptions in the supply of imported petroleum
to the U.S. applies to calendar year 2020. If the magnitude of this
estimate would be expected to grow after 2015 in response to increases
in U.S. petroleum imports, growth in the level of U.S. economic
activity, or increases in the likelihood of disruptions in the supply
of imported petroleum, the agency may have underestimated the benefits
from the reduction in petroleum imports expected to result from
adopting higher CAFE standards.
    NHTSA's benefit estimates could also be too low because they
exclude or understate the economic value of certain potentially
significant categories of benefits from reducing fuel consumption. As
one example, EPA's estimates of the economic value of reduced damages
to human health resulting from lower exposure to criteria air
pollutants includes only the effects

of reducing population exposure to PM2.5 emissions. Although
this is likely to be the most significant component of health benefits
from reduced emissions of criteria air pollutants, it excludes the
value of reduced damages to human health and other impacts resulting
from lower emissions and reduced population exposure to other criteria
air pollutants, including ozone and nitrous oxide (N2O), as
well as to airborne toxics. EPA's estimates exclude these benefits
because no reliable dollar-per-ton estimates of the health impacts of
criteria pollutants other than PM2.5 or of the health
impacts of airborne toxics were available to use in developing
estimates of these benefits.
    Similarly, the agency's estimate of the value of reduced climate-
related economic damages from lower emissions of GHGs excludes many
sources of potential benefits from reducing the pace and extent of
global climate change.\772\ For example, none of the three models used
to value climate-related economic damages includes those resulting from
ocean acidification or loss of species and wildlife. The models also
may not adequately capture certain other impacts, including potentially
abrupt changes in climate associated with thresholds that govern
climate system responses, interregional interactions such as global
security impacts of extreme warming, or limited near-term
substitutability between damage to natural systems and increased
consumption. Including monetized estimates of benefits from reducing
the extent of climate change and these associated impacts would
increase the agency's estimates of benefits from adopting higher CAFE
standards.
---------------------------------------------------------------------------

    \772\ Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866, Interagency Working Group on Social Cost of
Carbon, United States Government, February 2010. Available in Docket
No. NHTSA-2009-0059.
---------------------------------------------------------------------------

    The following tables present itemized costs and benefits for the
combined passenger car and light truck fleets for each model year
affected by the proposed standards and for all model years combined,
using both discount rates prescribed by OMB regulatory guidance. Tables
IV-67 and 68 report technology outlays, each separate component of
benefits (including costs associated with additional driving due to the
rebound effect, labeled ``dis-benefits''), the total value of benefits,
and net benefits using the 3 percent discount rate. (Numbers in
parentheses represent negative values.)
BILLING CODE 4910-59-P

[GRAPHIC] [TIFF OMITTED] TP01DE11.239

[GRAPHIC] [TIFF OMITTED] TP01DE11.240

[GRAPHIC] [TIFF OMITTED] TP01DE11.241

[GRAPHIC] [TIFF OMITTED] TP01DE11.242

BILLING CODE 4910-59-C
    Similarly, Tables IV-69 and 70 below report technology outlays, the
individual components of benefits (including ``dis-benefits'' resulting
from additional driving) and their total and net benefits using the 7
percent discount rate. (Again, numbers in parentheses represent
negative values.)
BILLING CODE 4910-59-P

[GRAPHIC] [TIFF OMITTED] TP01DE11.243

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

    \774\ Using the central value of $22 per metric ton for the SCC,
and discounting future benefits from reduced CO2
emissions at a 3 percent annual rate. Additionally, we note that the
$22 per metric ton value for the SCC applies to calendar year 2010,
and increases over time. See the interagency guidance on SCC for
more information.

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

[GRAPHIC] [TIFF OMITTED] TP01DE11.244

[GRAPHIC] [TIFF OMITTED] TP01DE11.245

[GRAPHIC] [TIFF OMITTED] TP01DE11.246

BILLING CODE 4910-59-C
    These benefit and cost estimates do not reflect the availability
and use of certain flexibility mechanisms, such as compliance credits
and credit trading, because EPCA prohibits NHTSA from considering the
effects of those mechanisms in setting CAFE standards. However, the
agency notes that, in reality, manufacturers are likely to rely to some
extent on flexibility mechanisms and would thereby reduce the cost of
complying with the proposed standards to a meaningful extent.
    As discussed in the PRIA, NHTSA has performed an analysis to
estimate costs and benefits taking into account EPCA's provisions
regarding EVs, PHEVs produced before MY 2020, FFV credits, and other
CAFE credit provisions. Accounting for these provisions indicates that
achieved fuel economies would be 0.5-1.6 mpg lower than when these
provisions are not considered:

[GRAPHIC] [TIFF OMITTED] TP01DE11.247

    As a result, NHTSA estimates that, when EPCA AFV and credit
provisions are taken into account, fuel savings will total 163 billion
gallons--5.8 percent less than the 173 billion gallons estimated when
these flexibilities are not considered:

[GRAPHIC] [TIFF OMITTED] TP01DE11.248

    The agency similarly estimates CO2 emissions reductions
will total 1,742 million metric tons (mmt), 5.0 percent less than the
1,834 mmt estimated when these EPCA provisions are not considered:
\775\
---------------------------------------------------------------------------

    \775\ Differences in the application of diesel engines and plug-
in hybrid electric vehicles lead to differences in the percentage
changes in fuel consumption and carbon dioxide emissions between the
with- and without-credit cases.

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

[GRAPHIC] [TIFF OMITTED] TP01DE11.249

    This analysis further indicates that significant reductions in
outlays for additional technology will result when EPCA's AFV and
credit provisions are taken into account. Tables IV-77 and 78 below
show that, total technology costs are estimated to decline to $133
billion as a result of manufacturers' use of these provisions, or about
15 percent less than the $157 billion estimated when excluding these
flexibilities:

[GRAPHIC] [TIFF OMITTED] TP01DE11.250

    Because NHTSA's analysis indicated that these EPCA provisions will
modestly reduce fuel savings and related benefits, the agency's
estimate of the present value of total benefits will be $488 billion
when discounted at a 3 percent annual rate, as Tables IV-79 and 80
below report. This estimate of total benefits is $27 billion, or 5.2
percent, lower than the $515 billion reported previously for the
analysis that excluded these provisions:

[GRAPHIC] [TIFF OMITTED] TP01DE11.251

    Similarly, NHTSA estimates that the present value of total benefits
will decline modestly from its previous estimate when future fuel
savings and other benefits are discounted at the higher 7 percent rate.
Tables IV-81 and 82 report that the present value of benefits from
requiring higher fuel economy for MY 2017-25 cars and light trucks will
total $397 billion when discounted using a 7 percent rate, about $22
billion (5.3 percent) below the previous $419.2 billion estimate of
total benefits when FFV credits were not permitted:

[GRAPHIC] [TIFF OMITTED] TP01DE11.252

    Although the discounted present value of total benefits will be
modestly lower when EPCA AFV and credit provisions are taken into
account, the agency estimates that these provisions will reduce net
benefits by a smaller proportion. As Tables IV-83 and 84 show, the
agency estimates that these will reduce net benefits from the proposed
CAFE standards to $355 billion from the previously-reported estimate of
$358 billion without those credits, or by only about 1 percent.

[GRAPHIC] [TIFF OMITTED] TP01DE11.253

    Similarly, Tables IV-85 and 86 immediately below show that NHTSA
estimates manufacturers' use of EPCA AFV and credit provisions will
increase net benefits from requiring higher fuel economy for MY 2017-25
cars and light trucks, but very slightly--to $264 billion--if a 7
percent discount rate is applied to future benefits. This estimate is
$2 billion--or 0.8 percent--higher than the previously-reported $262
billion estimate of net benefits without the availability of EPCA AFV
and credit provisions using that same discount rate.

[GRAPHIC] [TIFF OMITTED] TP01DE11.254

    The agency has performed several sensitivity analyses to examine
important assumptions. All sensitivity analyses were based on the
``standard setting'' output of the CAFE model. We examine sensitivity
with respect to the following economic parameters:
    (1) The price of gasoline: The main analysis (i.e., the Reference
Case) uses the AEO 2011 Reference Case estimate for the price of
gasoline. In this sensitivity analysis we examine the effect of using
the AEO 2011 High Price Case or Low Price Case forecast estimates
instead.
    (2) The rebound effect: The main analysis uses a rebound effect of
10 percent to project increased miles traveled as the cost per mile
driven decreases. In the sensitivity analysis, we examine the effect of
using a 5, 15, or 20 percent rebound effect instead.
    (3) The value of CO2 benefits: The main analysis uses
$22 per ton discounted at a 3 percent discount rate to quantify the
benefits of reducing CO2 emissions and $0.174 per gallon to
quantify the benefits of reducing fuel consumption. In the sensitivity
analysis, we examine the following values and discount rates applied
only to the social cost of carbon to value carbon benefits, considering
low, high, and very high valuations of approximately $5, $36, and $67
per ton, respectively with regard to the benefits of reducing
CO2 emissions.\776\ These are the 2010 values, which
increase over time. These values can be translated into cents per
gallon by multiplying by 0.0089,\777\ giving the following values:
---------------------------------------------------------------------------

    \776\ The low, high, and very high valuations of $5, $36, and
$67 are rounded for brevity; the exact values are $4.86, $36.13, and
$66.88, respectively. While the model uses the unrounded values, the
use of unrounded values is not intended to imply that the chosen
values are precisely accurate to the nearest cent; rather, they are
average levels resulting from the many published studies on the
topic.
    \777\ The molecular weight of Carbon (C) is 12, the molecular
weight of Oxygen (O) is 16, thus the molecular weight of
CO2 is 44. 1 gallon of gas weighs 2,819 grams, of that
2,433 grams are carbon. One ton of CO2/One ton of C (44/
12)* 2433grams C/gallon *1 ton/1000kg * 1 kg/1000g = (44 *
2433*1*1)/(12*1*1000 * 1000) = 0.0089. Thus, one ton of
CO2*0.0089 = 1 gallon of gasoline.
---------------------------------------------------------------------------

     ($4.86 per ton CO2) x 0.0089 = $0.043 per
gallon discounted at 5%
     ($22.00 per ton CO2) x 0.0089 = $0.196 per
gallon discounted at 3% (used in the main analysis)
     ($36.13 per ton CO2) x0.0089 = $0.322 per
gallon discounted at 2.5%
     And a 95th percentile estimate of
     ($66.88 per ton CO2) x 0.0089 = $0.595 per
gallon discounted at 3%
    (4) Military security: The main analysis does not assign a value to
the military security benefits of reducing fuel consumption. In the
sensitivity analysis, we examine the impact of using a value of 12
cents per gallon instead.
    (5) Consumer Benefit: The main analysis assumes there is no loss in
value to consumers resulting from vehicles that have an increase in
price and higher fuel economy. This sensitivity analysis assumes that
there is a 25, or 50 percent loss in value to consumers--equivalent to
the assumption that consumers will only value the calculated benefits
they will achieve at 75, or 50 percent,

respectively, of the main analysis estimates.
    (6) Battery cost: The agency conducted a sensitivity analysis of
technology cost in relation to battery costs for HEV, PHEV, and EV
batteries. The ranges are based on recommendations from technical
experts in the field of battery energy storage technologies at the
Department of Energy (DOE) and at Argonne National Laboratories (ANL),
and were developed using the Battery Performance and Cost (BatPac)
model developed by ANL and funded by DOE.\778\ The values for these
ranges are shown in the table below and are calculated with 95 percent
confidence intervals after analyzing the confidence bound using the
BatPac model.
---------------------------------------------------------------------------

    \778\ Section <IP_ADDRESS> in Chapter 3 of the draft Joint TSD has a
detailed description of the history of the BatPac model and how the
agencies used it in this NPRM analysis.
[GRAPHIC] [TIFF OMITTED] TP01DE11.255

    (7) Mass reduction cost: Due to the wide range of mass reduction
costs as discussed in Chapter 3 of the draft joint TSD, a sensitivity
analysis was performed examining the impact of the cost of vehicle mass
reduction to the total technology cost. The direct manufacturing cost
(DMC) for mass reduction is represented as a linear function between
the unit DMC versus percent of mass reduction, as shown in the figure
below:
[GRAPHIC] [TIFF OMITTED] TP01DE11.256

The slope of the line used in the central analysis for this NPRM is
$4.32 per pound per percent of mass reduction. The slope of the line is
varied + 40% as the upper and lower bound for this sensitivity study.
The resultant values

for the range of mass reduction cost are shown in the table below:
[GRAPHIC] [TIFF OMITTED] TP01DE11.257

    (8) Market-driven response: The baseline for the central analysis
is based on the MY 2016 CAFE standards and assumes that manufacturers
will make no changes in the fuel economy from that level through MY
2025. A sensitivity analysis was performed to simulate potential
increases in fuel economy over the compliance level required if MY 2016
standards were to remain in place. The assumption is that the market
would drive manufacturers to put technologies into their vehicles that
they believe consumers would value and be willing to pay for. Using
parameter values consistent with the central analysis, the agency
simulated a market-driven response by applying a payback period of one
year for purposes of calculating the value of future fuel savings when
simulating whether manufacturers would apply additional technology to
an already CAFE-compliant fleet. In other words we assumed that
manufacturers that were above their MY 2016 CAFE level would compare
the cost to consumers to the fuel savings in the first year of
operation and decide to voluntarily apply those technologies to their
vehicles when benefits for the first year exceeded costs for the
consumer. For a manufacturer's fleet that has not yet achieved
compliance with CAFE standards, the agency continued to apply a five-
year payback period. In other words, for this sensitivity analysis the
agency assumed that manufacturers that have not yet met CAFE standards
for future model years will apply technology as if buyers were willing
to pay for the technologies as long as the fuel savings throughout the
first five years of vehicle ownership exceeded their costs. Once having
complied with those standards, however, manufacturers are assumed to
consider making further improvements in fuel economy as if buyers were
only willing to pay for fuel savings to be realized during the first
year of vehicle ownership. The `market-driven response' assumes that
manufacturers will overcomply if additional technology is sufficiently
cost-effective. Because this assumption has a greater impact under the
baseline standards, its application reduces the incremental costs,
effects, and benefits attributable to the new standards. This does not
mean that costs, effects, and benefits would actually be smaller with a
market-driven response; rather, it means that costs, effects, and
benefits would be at least as great, but would be partially
attributable not to the new standards, but instead to the market.
    Varying each of these eight parameters in isolation results in a
variety of economic scenarios, in addition to the Reference case. These
are listed in Table IV-87 below.
BILLING CODE 4910-59-P

[GRAPHIC] [TIFF OMITTED] TP01DE11.258

BILLING CODE 4910-59-C
    The basic results of this sensitivity analysis are contained in
Chapter X of the PRIA, but several selected findings are as follows:

    (1) Varying the economic assumptions has almost no impact on
achieved mpg. The mass reduction cost sensitivities, battery cost
reduction sensitivities, and the market-based baseline are the only
cases in which achieved mpg differs from the Reference Case of the
Preferred Alternative. None of these alter the outcome by more than 0.2
mpg for either fleet.
    (2) Varying the economic assumptions has, at most, a small impact
on per-vehicle costs, fuel saved, and CO2 emissions
reductions, with none of the variations impacting the outcomes by more
than 10 percent from their central analysis levels, save for several
exceptions including alternate fuel price sensitivities and the
sensitivity involving a 20 percent rebound effect.
    (3) The category most affected by variations in the economic
parameters considered in these sensitivity analyses is net benefits.
The sensitivity analyses examining the AEO Low and High fuel price
scenarios demonstrate the potential to negatively impact net benefits
by up to 40.3 percent or to increase net benefits by 29.5 percent
relative to those of the Preferred Alternative. Other large impacts on
net benefits occurred with the 20 percent rebound effect (-38.4%),
valuing benefits at 50 and 75 percent (-63.0% and -31.5%,
respectively), and valuing the reduction in CO2 emissions at
$67/ton (+28.1%).
    (4) Even if consumers value the benefits achieved at 50% of the
main analysis assumptions, total benefits still exceed costs.
    Regarding the lower fuel savings and CO2 emissions
reductions predicted by the sensitivity analysis as fuel price
increases, which initially may seem counterintuitive, we note that
there are some counterbalancing factors occurring. As fuel price
increases, people will drive less and so fuel savings and
CO2 emissions reductions may decrease.
    The agency performed two additional sensitivity analyses presented
in Tables IV-88 and IV-89. First, the agency analyzed the impact that
having a retail price equivalent (RPE) factor of 1.5 for all
technologies would have on the various alternatives instead of using
the indirect cost methodology (ICM). The ICM methodology in an overall
markup factor of 1.2 to 1.25 compared to the RPE markup factor from
variable cost of 1.5. Next, the agency conducted a separate sensitivity
analysis using values that were derived from the 2011 NAS Report. This
analysis used an RPE markup factor of 1.5 for non-electrification
technologies, which is consistent with the NAS estimation for
technologies manufactured by suppliers, and an RPE markup factor of
1.33 for electrification technologies (HEV, PHEV, and EV); three types
of learning which include no learning for mature technologies, 1.25
percent annual learning for evolutionary technologies, and 2.5 percent
annual learning for revolutionary technologies; technology cost
estimates for 52 percent (33 out of 63) technologies; and technology
effectiveness estimates for 56 percent (35 out of 63) technologies.
Cost learning was applied to technology costs in a manner similar to
how cost learning is applied in the central analysis for many
technologies which have base costs that are applicable to recent or
near-term future model years. As noted above, the cost learning factors
used for the sensitivity case are different from the values used in the
central analysis. For the other inputs in the sensitivity case, where
the NAS study has inconsistent information or lacks projections, NHTSA
used the same input values that were used in the central analysis.

[GRAPHIC] [TIFF OMITTED] TP01DE11.259

[GRAPHIC] [TIFF OMITTED] TP01DE11.260

    For today's rulemaking analysis, the agency has also performed a
sensitivity analysis where manufacturers are allowed to voluntarily
apply more technology than would be required to comply with CAFE
standards for each model year. Manufacturers are assumed to do so as
long as applying each additional technology would increase vehicle
production costs (including markup) by less than it would reduce
buyers' fuel costs during the first year they own the vehicle. This
analysis makes use of the ``voluntary overcompliance'' simulation
capability DOT has recently added to its CAFE model. This capability,
which is discussed further above in section IV.C.4.c and in the CAFE
model documentation, is a logical extension of the model's simulation
of some manufacturers' decisions to respond to EPCA by paying civil
penalties once additional technology becomes

economically unattractive. It attempts to simulate manufacturers'
responses to buyers' demands for higher fuel economy levels than
prevailing CAFE standards would require when fuel costs are
sufficiently high, and technologies that manufacturers have not yet
fully utilized are available to improve fuel economy at relatively low
costs.
    NHTSA performed this analysis because some stakeholders commenting
on the recently-promulgated standards for medium- and heavy-duty
vehicles indicated that it would be unrealistic for the agency to
assume that in the absence of new regulations, technology and fuel
economy would not improve at all in the future. In other words, these
stakeholders argued that market forces are likely to result in some
fuel economy improvements over time, as potential vehicle buyers and
manufacturers respond to changes in fuel prices and in the availability
and costs of technologies to increase fuel economy. NHTSA agrees that,
in principle, its analysis should estimate a potential that
manufacturers will apply technology as if buyers place some value on
fuel economy improvements. Considering current uncertainties discussed
below regarding the degree to which manufacturers will do so, the
agency currently judges it appropriate to conduct its central
rulemaking analysis without attempting to simulate these effects.
Nonetheless, the agency believes that voluntary overcompliance is
sufficiently plausible that corresponding sensitivity analysis is
warranted.
    NHTSA performed this analysis by simulating potential
overcompliance under the no-action alternative, the preferred
alternative, and other regulatory alternatives. In doing so, the agency
used all the same parameter values as in the agency's central analysis,
but applied a payback period of one year for purposes of calculating
the value of future fuel savings when simulating whether a manufacturer
would apply additional technology to an already CAFE-compliant fleet.
For technologies applied to a manufacturer's fleet that has not yet
achieved compliance with CAFE standards, the agency continued to apply
a five-year payback period.
    In other words, for this sensitivity analysis the agency assumed
that manufacturers that have not yet met CAFE standards for future
model years will apply technology as if buyers were willing to pay for
fuel savings throughout the first five years of vehicle ownership. Once
having complied with those standards, however, manufacturers are
assumed to consider making further improvements in fuel economy as if
buyers were only willing to pay for fuel savings to be realized during
the first year of vehicle ownership. This reflects the agency's
assumptions for this sensitivity analysis, that (1) civil penalties,
though legally available, carry a stigma that manufacturers will strive
to avoid, and that (2) having achieved compliance with CAFE standards,
manufacturers will avoid competitive risks entailed in charging higher
prices for vehicles that offer additional fuel economy, rather than
offering additional performance or utility.
    Since CAFE standards were first introduced, some manufacturers have
consistently exceeded those standards, and the industry as a whole has
consistently overcomplied with both the passenger car and light truck
standards. Although the combined average fuel economy of cars and light
trucks declined in some years, this resulted from buyers shifting their
purchases from passenger cars to light trucks, not from undercompliance
with either standard. Even with those declines, the industry still
overcomplied with both passenger car and light truck standards. In
recent years, between MYs 1999 and 2009, fuel economy overcompliance
has been increasing on average for both the passenger car and the light
truck fleets. NHTSA considers it impossible to say with certainty why
past fuel economy levels have followed their observed path. If the
agency could say with certainty how fuel economy would have changed in
the absence of CAFE standards, it might be able to answer this
question; however, NHTSA regards this ``counterfactual'' case as simply
unknowable.
    NHTSA has, however, considered other relevant indications regarding
manufacturers' potential future decisions. Published research regarding
how vehicle buyers have previously viewed fuel economy suggests that
they have only a weak quantitative understanding of the relationship
between fuel economy and future fuel outlays, and that potential buyers
value fuel economy improvements by less than theoretical present-value
calculations of lifetime fuel savings would suggest. These findings are
generally consistent with manufacturers' confidential and, in some
cases, public statements. Manufacturers have tended to communicate not
that buyers absolutely ``don't care'' about fuel economy, but that
buyers have, in the past, not been willing to pay the full cost of most
fuel economy improvements. Manufacturers have also tended to indicate
that sustained high fuel prices would provide a powerful incentive for
increased fuel economy; this implies that manufacturers believe buyers
are willing to pay for some fuel economy increases, but that buyers'
willingness to do so depends on their expectations for future fuel
prices. In their confidential statements to the agency, manufacturers
have also tended to indicate that in their past product planning
processes, they have assumed buyers would only be willing to pay for
technologies that ``break even'' within a relatively short time--
generally the first two to four years of vehicle ownership.
    NHTSA considers it not only feasible but appropriate to simulate
such effects by calculating the present value of fuel savings over some
``payback period.'' The agency also believes it is appropriate to
assume that specific improvements in fuel economy will be implemented
voluntarily if manufacturers' costs for adding the technology necessary
to implement them to specific models would be lower than potential
buyers' willingness to pay for the resulting fuel savings. This
approach takes fuel costs directly into account, and is therefore
responsive to manufacturers' statements regarding the role that fuel
prices play in influencing buyers' demands and manufacturers' planning
processes. Under this approach, a short payback period can be employed
if manufacturers are expected to act as if buyers place little value on
fuel economy. Conversely, a longer payback period can be used if
manufacturers are expected to act as if buyers will place comparatively
greater value on fuel economy.
    NHTSA cannot be certain to what extent vehicle buyers will, in the
future, be willing to pay for fuel economy improvements, or to what
extent manufacturers would, in the future, voluntarily apply more
technology than needed to comply with fuel economy standards. The
agency is similarly hopeful that future vehicle buyers will be more
willing to pay for fuel economy improvements than has historically been
the case. In meetings preceding today's proposed standards, two
manufacturers stated they expected fuel economy to increase two percent
to three percent per year after MY 2016, absent more stringent
regulations. And in August 2010, one manufacturer stated its combined
fleet would achieve 50 mpg by MY 2025, supporting that at a minimum
some manufacturers believe that exceeding fuel economy standards will
provide them a competitive advantage. The agency is hopeful that future
vehicle buyers will be better-informed than has historically been the
case, in part because recently-

promulgated requirements regarding vehicle labels will provide clearer
information regarding fuel economy and the dollar value of resulting
fuel savings. The agency is similarly hopeful that future vehicle
buyers will be more willing to pay for fuel economy improvements than
past buyers. In meetings preceding today's proposed standards, many
manufacturers indicated significant shifts in their product plans--
shifts consistent with expectations that compared to past buyers,
future buyers will ``care more'' about fuel economy.
    Nevertheless, considering the uncertainties mentioned above, NHTSA
continues to consider it appropriate to conduct its central rulemaking
analysis in a manner that ignores the possibility that in the future,
manufacturers will voluntarily apply more technology than the minimum
necessary to comply with CAFE standards. Also, in conducting its
sensitivity analysis to simulate voluntary overcompliance with the
proposed standards, the agency has applied the extremely conservative
assumption that when considering whether to employ ``extra''
technology, manufacturers will act as if buyers' value the resulting
savings in fuel costs only during their first year of ownership (i.e.,
as if a 1-year payback period applies).
    Results of the agency's analysis simulating this potential for
voluntary overcompliance are summarized below. Compared to results from
the agencies' central analysis presented above, differences are
greatest for the baseline scenario (i.e., the No-Action Alternative),
under which CAFE standards remain unchanged after MY 2016. These
results also suggest, as the agency would expect, that because
increasingly stringent standards require progressively more technology
than the market will demand, the likelihood of voluntary overcompliance
will decline with increasing stringency. Achieved fuel economy levels
under baseline standards are as follows:
[GRAPHIC] [TIFF OMITTED] TP01DE11.261

    With no change in standards after MY 2016, while combined average
fuel economy is the same in MY 2017 both with and without simulated
voluntary overcompliance, differences grow over time, reaching 0.8 mpg
in MY 2025. In other words, without simulating voluntary
overcompliance, the agency estimated that combined average achieved
fuel economy would reach 35.2 mpg in MY 2025, whereas the agency
estimates that it would reach 36.0 mpg in that year if voluntary
overcompliance occurred.
    In contrast, the effect on achieved fuel economy levels of allowing
voluntary overcompliance with the proposed standards was minimal.
Allowing manufacturers to overcomply with the proposed standards for MY
2025 led to combined average achieved fuel economy levels approximately
equal to levels of values obtained without simulating voluntary
overcompliance:

[GRAPHIC] [TIFF OMITTED] TP01DE11.262

    As a result, NHTSA estimates that, when the potential for voluntary
overcompliance is taken into account, fuel savings attributable to more
stringent standards will total 162 billion gallons--6.4 percent less
than the 173 billion gallons estimated when potential voluntary
overcompliance is not taken into account:

[GRAPHIC] [TIFF OMITTED] TP01DE11.263

    The agency is not projecting, however, that fuel consumption will
be greater when voluntary overcompliance is taken into account. Rather,
under today's proposed standards, the agency's analysis shows virtually
identical fuel consumption (0.2 percent less over the useful lives of
MY 2017-2025 vehicles) when potential voluntary overcompliance is taken
into account. Simulation of voluntary overcompliance, therefore, does
not reduce the agency's estimate of future fuel savings over the
baseline scenario. Rather it changes the attribution of those fuel
savings to the proposed standards, because voluntary overcompliance
attributes some of the fuel savings to the market. The same holds for
the attribution of costs, other effects, and monetized benefits--
inclusion of voluntary overcompliance does not necessarily change their
amounts, but it does attribute some of each cost, effect, or benefit to
the workings of the market, rather than to the proposed standards.
    The agency similarly estimates CO2 emissions reductions
attributable to today's proposed standards will total 1,726 million
metric tons (mmt), 5.8 percent less than the 1,834 mmt estimated when
potential voluntary overcompliance is not taken into account: \779\
---------------------------------------------------------------------------

    \779\ Differences in the application of diesel engines and plug-
in hybrid electric vehicles lead to differences in the incremental
percentage changes in fuel consumption and carbon dioxide emissions.

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

[GRAPHIC] [TIFF OMITTED] TP01DE11.264

    Conversely, this analysis indicates slightly greater outlays for
additional technology under the proposed standards when potential
voluntary overcompliance is taken into account. This increase is
attributable to slight increases in technology application when
potential voluntary overcompliance is taken into account. Tables IV-99
and 100 below show that total technology costs attributable to today's
proposed standards are estimated to increase to $159 billion, or 1.3
percent more than the $157 billion estimated when potential voluntary
overcompliance was not taken into account:

[GRAPHIC] [TIFF OMITTED] TP01DE11.265

    Because NHTSA's analysis indicated that voluntary overcompliance
with baseline standards will slightly reduce the share of fuel savings
attributable to today's standards, the agency's estimate of the present
value of total benefits will be $484 billion when discounted at a 3
percent annual rate, as Tables IV-101 and 102 following report. This
estimate of total benefits is $31 billion, or about 6 percent, lower
than the $515 billion reported previously for the analysis in which
potential voluntary overcompliance was not taken into account:

[GRAPHIC] [TIFF OMITTED] TP01DE11.266

    Similarly, when accounting for potential voluntary overcompliance,
NHTSA estimates that the present value of total benefits will decline
from its previous estimate when future fuel savings and other benefits
are discounted at the higher 7 percent rate. Tables IV-103 and 104
report that the present value of benefits from requiring higher fuel
economy for MY 2017-25 cars and light trucks will total $394 billion
when discounted using a 7 percent rate, about $25 billion (or 6
percent) below the previous $419 billion estimate of total benefits
when potential voluntary overcompliance is not taken into account:

[GRAPHIC] [TIFF OMITTED] TP01DE11.267

    Based primarily on the reduction of benefits attributable to the
proposed standards when voluntary overcompliance is taken into account,
the agency estimates, as shown in Tables IV-105 and 106, that net
benefits from the proposed CAFE standards will be $325 billion--or 9.2
percent--less than the previously-reported estimate of $358 billion,
which did not incorporate the potential for voluntary overcompliance.

[GRAPHIC] [TIFF OMITTED] TP01DE11.268

    Similarly, Tables IV-107 and 108 immediately below show that NHTSA
estimates voluntary overcompliance could reduce net benefits
attributable to today's proposed standards to $235 billion if a 7
percent discount rate is applied to future benefits. This estimate is
$24 billion--or 10.3 percent--lower than the previously-reported $262
billion estimate of net benefits when potential voluntary
overcompliance is not taken into account, using that same discount
rate.

[GRAPHIC] [TIFF OMITTED] TP01DE11.269

    As discussed above, these reductions in fuel savings and avoided
CO2 emissions (and correspondingly, in total and net
benefits) attributable to today's proposed standards, do not indicate
that fuel consumption and CO2 emissions will be higher when
potential voluntary overcompliance with standards is taken into account
than when it is set aside. Rather, these reductions reflect differences
in attribution; when potential voluntary overcompliance is taken into
account, portions of the avoided fuel consumption and CO2
emissions (and, correspondingly, in total and net benefits) are
effectively attributed to the actions of the market, rather than to the
proposed CAFE standards.
    NHTSA invites comment on this sensitivity analysis, in particular
regarding the following questions:
     Is it reasonable to assume that, having achieved
compliance with CAFE standards, a manufacturer might consider further
fuel economy improvements, depending on technology costs and fuel
prices?
     If so, does the agency's approach--comparing technology
costs to the present value of fuel savings over some payback period--
provide a reasonable means to simulate manufacturers' decisions? DOT's
consideration of any alternative methods will be facilitated by
specific suggestions regarding their integration into DOT's CAFE model.
     Is it appropriate to assume different effective payback
periods before and after compliance has been achieved? Why, or why not?
     What payback period is (or, if more than one, are) most
likely to reflect manufacturers' decisions regarding technology
application through MY 2025?
    For more detailed information regarding NHTSA's sensitivity
analyses for this proposed rule, please see Chapter X of NHTSA's PRIA.
    Additionally, due to the uncertainty and difficulty in projecting
technology cost and efficacy through 2025, and consistent with Circular
A-4, NHTSA conducted a full probabilistic uncertainty analysis, which
is included in Chapter XII of the PRIA. Results of the uncertainty
analysis are summarized below for model years 2017-2025 passenger car
and light truck fleets combined:
     Total Benefits at 7% discount rate: Societal benefits will
total $46 billion to $725 billion, with a mean estimate of $373
billion.
     Total Benefits at 3% discount rate: Societal benefits will
total $53 billion to $877 billion, with a mean estimate of $453
billion.
     Total Costs at 7% discount rate: Costs will total between
$125 billion and $247 billion, with a mean estimate of $175 billion.
     Total Costs at 3% discount rate: Costs will total between
$109 billion and $294 billion, with a mean estimate of $175 billion
5. How would these proposed standards impact vehicle sales?
    In past fuel economy analyses, the agency has made estimates of
sales impacts comparing increases in vehicle price to the savings in
fuel over a 5 year period. We chose 5 years because this is

the average length of time of a financing agreement.\780\ As discussed
below, for this analysis we have conducted a fresh search of the
literature for additional estimates of consumer valuation of fuel
savings, in order to determine whether the 5 year assumption was
accurate or whether it should be revised. That search has led us to the
conclusion for this proposed rule that consumer valuation of future
fuel savings is highly uncertain. A negative impact on sales is
certainly possible, because the proposed rule will lead to an increase
in the initial price of vehicles. A positive impact is also possible,
because the proposed rule will lead to a significant decrease in the
lifetime cost of vehicles, and with consumer learning over time, this
effect may produce an increase in sales. In light of the relevant
uncertainties, the agency therefore decided not to include a
quantitative sales estimate and requests comments on all of the
discussion here, including the question whether a quantitative estimate
(or range) is possible.
---------------------------------------------------------------------------

    \780\ National average financing terms for automobile loans are
available from the Board of Governors of the Federal Reserve System
G.19 ``Consumer Finance'' release. See http://www.federalreserve.gov/releases/g19/ (last accessed August 25,
2011). The average new car loan at an auto finance company in the
first quarter of 2011 is for 62 months at 4.73%.
---------------------------------------------------------------------------

    The effect of this rule on sales of new vehicles depends largely on
how potential buyers evaluate and respond to its effects on vehicle
prices and fuel economy. The rule will make new cars and light trucks
more expensive, as manufacturers attempt to recover their costs for
complying with the rule by raising vehicle prices. At the same time,
the rule will require manufacturers to improve the fuel economy of many
of their models, which will lower their operating costs. The initial
cost of vehicles will increase but the overall cost will decrease. The
net effect on sales will depend on the extent to which consumers are
willing to pay for fuel economy.
    The earlier discussion of consumer welfare suggests that by itself,
a net decrease in overall cost may not produce a net increase in sales,
because many consumers are more affected by upfront cost than by
overall cost, and will not be willing to purchase vehicles with greater
fuel economy even when it appears to be in their economic interest to
do so (assuming standard discount rates). But there is considerable
uncertainty in the economics literature about the extent to which
consumers value fuel savings from increased fuel economy, and there is
still more uncertainty about possible changes in consumer behavior over
time (especially with the likelihood of consumer learning). The effect
of this proposed regulation on vehicle sales will depend upon whether
the overall value that potential buyers place on the increased fuel
economy is greater or less than the increase in vehicle prices and how
automakers factor that into price setting for the various models.
    Two economic concepts bear on how consumers might value fuel
savings. The first relates to the length of time that consumers
consider when valuing fuel savings and the second relates to the
discount rate that consumers apply to future savings. These two
concepts are used together to determine consumer valuation of future
fuel savings. The length of time that consumers consider when valuing
future fuel savings can significantly affect their decision when they
compare their estimates of fuel savings with the increased cost of
purchasing higher fuel economy. There is a significant difference in
fuel savings if you consider the savings over 1 year, 3 years, 5 years,
10 years, or the lifetime of the vehicle. The discount rate that
consumers use to discount future fuel savings to present value can also
have a significant impact. If consumers value fuel savings over a short
period, such as 1 to 2 years, then the discount rate is less important.
If consumers value fuel savings over a long period, then the discount
rate is important.
The Length of Time Consumers Consider When Valuing Fuel Savings
    Information regarding the number of years that consumers value fuel
savings (or undervalue fuel savings) come from several sources. In past
analyses NHTSA has used five years as representing the average new
vehicle loan. A recent paper by David Greene \781\ examined studies
from the past 20 years of consumers' willingness to pay for fuel
economy and found that ``the available literature does not provide a
reasonable consensus.'' In his paper Greene states that ``manufacturers
have repeatedly stated that consumers will pay, in increased vehicle
price, for only 2-4 years in fuel savings.'' These estimates were
derived from manufacturer's own market research. And the National
Research Council \782\ used a 3 year payback period as one of its ways
to compare benefits to a full lifetime discounting. A survey conducted
for the Department of Energy in 2004,\783\ which asked 1,000 households
how much they would pay for a vehicle that saved them $400 or $1,200
per year in fuel costs, found implied payback periods of 1.5 to 2.5
years In reviewing this survey, Greene concluded: ``The striking
similarity of the implied payback periods from the two subsamples would
seem to suggest that consumers understand the questions and are giving
consistent and reliable responses: They require payback in 1.5 to 2.5
years.''
---------------------------------------------------------------------------

    \781\ ``Why the Market for New Passenger Cars Generally
Undervalues Fuel Economy'', David Greene, Oak Ridge National
Laboratory, 2010, Pg. 17, http://www.internationaltransportforum.org/jtrc/DiscussionPapers/DP201006.pdf
    \782\ National Research Council (2002) ``Effectiveness and
Impact of Corporate Average Fuel Economy (CAFE) Standards'',
National Academies Press, Washington DC.
    \783\ Opinion Research Corporation (2004), ``CARAVAN'' ORC study
7132218, for the National Renewable Energy Laboratory
Princeton, New Jersey, May 20, 2004.
---------------------------------------------------------------------------

    However, Turrentine and Kurani's \784\ in-depth interviews of 57
households found almost no evidence that consumers think about fuel
economy in terms of payback periods. When asked such questions, some
consumers became confused while others offered time periods that were
meaningful to them for other reasons, such as the length of their car
loan or lease.
---------------------------------------------------------------------------

    \784\ Turrentine, T.S. and K.S. Kurani, 2007. ``Car Buyers and
Fuel Economy,'' Energy Policy, vol. 35, pp. 1213-1223.
---------------------------------------------------------------------------

The Discount Rate That Consumers Apply to Future Fuel Savings
    The effective discount rate that consumers have used in the past to
value future fuel economy savings has been studied in many different
ways and by many different economists. Greene \785\ examined and
compiled many of these analyses and found: ``Implicit consumer discount
rates were estimated by Greene (1983) based on eight early mutinomial
logit choice models. * * * The estimates range from 0 to 73% * * * Most
fall between 4 and 40%.'' Greene added: ``The more recent studies
exhibit as least a wide a range as the earlier studies.''
---------------------------------------------------------------------------

    \785\ ``Why the Market for New Passenger Cars Generally
Undervalues Fuel Economy'', David Greene, Oak Ridge National
Laboratory, 2010.
---------------------------------------------------------------------------

    With such uncertainty about how consumers value future fuel savings
and the discount rates they might use to determine the present value of
future fuel savings, NHTSA would utilize the standard 3 and 7 percent
discount rates. It is true that some consumers appear to show higher
discount rates, which would affect the analysis of likely sales
consequences; NHTSA invites comments on the nature and extent of that
effect.
    In past analyses, NHTSA assumed that consumers would consider the
fuel savings they would obtain over the first

five years of vehicle ownership, which is consistent with the average
loan rates and the average length of first vehicle ownership. The five-
year span is somewhat longer than the period found to be used by
consumers in some studies, but use of a shorter period may also reflect
a lack of salience or related factors, and as noted, use of the five-
year span has the advantage of tracking the average length of first
vehicle ownership. NHTSA continues to use the five-year period here. As
with discount rates, NHTSA invites comments on this issue and in
particular on the possible use of a shorter period.
    It is true that the payback period and discount rate are conceptual
proxies for consumer decisions that may often be made without any
corresponding explicit quantitative analysis. For example, some buyers
choosing among some set of vehicles may know what they have been paying
recently for gasoline, may know what they are likely to pay to buy each
of the vehicles consider, and may know some of the attributes--
including labeled fuel economies--of those vehicles. Such buyers may
then make a choice without actually trying to estimate how much they
would pay to fuel each of the vehicles they are considering buying. In
other words, for such buyers, the idea of a payback period and discount
rate may have no explicit meaning. This does not, however, limit the
utility of these concepts for the agency's analysis. If, as a group,
buyers behave as if they value fuel consumption considering a payback
period and discount rate, these concepts remain useful as a basis for
estimating the market response to increases in fuel economy accompanied
by increases in price.
NHTSA's Previous Analytical Approach Updated
    There is a broad consensus in the economic literature that the
price elasticity for demand for automobiles is approximately -
1.0.786 787 788 Thus, every one percent increase in the
price of the vehicle would reduce sales by one percent. Elasticity
estimates assume no perceived change in the quality of the product.
However, in this case, vehicle price increases result from adding
technologies that improve fuel economy. This elasticity is generally
considered to be a short-run elasticity, reflecting the immediate
impacts of a price change on vehicle sales.
---------------------------------------------------------------------------

    \786\ Kleit, A.N. (1990). ``The Effect of Annual Changes in
Automobile Fuel Economy Standards,'' Journal of Regulatory
Economics, vol. 2, pp 151-172. Docket EPA-HQ-OAR-2009-0472-0015.
    787 Bordley, R. (1994). ``An Overlapping Choice Set
Model of Automotive Price Elasticities,'' Transportation Research B,
vol 28B, no 6, pp 401-408. Docket NHTSA-2009-0059-0153.
    788 McCarthy, P.S. (1996). ``Market Price and Income
Elasticities of New Vehicle Demands,'' The Review of Economics and
Statistics, vol. LXXVII, no. 3, pp. 543-547. Docket NHTSA-2009-0059-
0039
---------------------------------------------------------------------------

    For a durable good such as an auto, the elasticity may be smaller
in the long run: though people may be able to change the timing of
their purchase when price changes in the short run, they must
eventually make the investment. Using a smaller elasticity would reduce
the magnitude of the estimates presented here for vehicle sales, but it
would not change the direction. A short-run elasticity is more valid
for initial responses to changes in price, but, over time, a long-run
elasticity may better reflect behavior; thus, the results presented for
the initial years of the program may be more appropriate for modeling
with the short-run elasticity than the later years of the program. A
search of the literature has not found studies more recent than the
1970s that specifically investigate long-run elasticities.\789\
---------------------------------------------------------------------------

    \789\ E.g., Hymans, Saul H. ``Consumer Durable Spending:
Explanation and Prediction.'' Brookings Papers on Economic Activity
1 (1970): 173-206.
    http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1970--
2--bpea--papers/1970b--bpea--hymans--ackley--juster.pdf finds a
short-run elasticity of auto expenditures (not sales) with respect
to price of 0.78 to 1.17, and a long-run elasticity of 0.3 to 0.46.
---------------------------------------------------------------------------

    One approach to determine the breakeven point between vehicle
prices and fuel savings is to look at the payback periods shown earlier
in this analysis. For example at a 3 percent discount rate, the payback
period for MY 2025 vehicles is 2 years for light trucks and 4 years for
passenger cars.
    In determining the payback period we make several assumptions. For
example, we follow along with the calculations that are used for a 5
year payback period, as we have used in previous analyses. For the fuel
savings part of the equation, we assumed as a starting point that the
average purchaser considers the fuel savings they would receive over a
5 year timeframe. The present values of these savings were calculated
using a 3 and 7 percent discount rate. We used a fuel price forecast
(see Table VIII-3) that included taxes, because this is what consumers
must pay. Fuel savings were calculated over the first 5 years and
discounted back to a present value.
    The agency believes that consumers may consider several other
factors over the 5 year horizon when contemplating the purchase of a
new vehicle. The agency added these factors into the calculation to
represent how an increase in technology costs might affect consumers'
buying considerations.
    First, consumers might consider the sales taxes they have to pay at
the time of purchasing the vehicle. We took sales taxes in 2010 by
state and weighted them by population by state to determine a national
weighted-average sales tax of 5.5 percent.\790\
---------------------------------------------------------------------------

    \790\ Based on data found in http://www.api.org/statistics/fueltaxes/
---------------------------------------------------------------------------

    Second, we considered insurance costs over the 5 year period. More
expensive vehicles will require more expensive collision and
comprehensive (e.g., theft) car insurance. The increase in insurance
costs is estimated from the average value of collision plus
comprehensive insurance as a proportion of average new vehicle price.
Collision plus comprehensive insurance is the portion of insurance
costs that depend on vehicle value. The Insurance Information Institute
\791\ provides the average value of collision plus comprehensive
insurance in 2006 as $448, which is $480 in 2009$. The average consumer
expenditure for a new passenger car in 2010, according to the Bureau of
Economic Analysis was $24,092 and the average price of a new light
truck $30,641 in $2009.\792\ Using sales volumes from the Bureau, we
determined an average passenger car and an average light truck price
was $27,394 in $2009 dollars. Average prices and estimated sales
volumes are needed because price elasticity is an estimate of how a
percent increase in price affects the percent decrease in sales.
---------------------------------------------------------------------------

    \791\ Insurance Information Institute, 2008, ``Average
Expenditures for Auto Insurance By State, 2005-2006,'' available at
http://www.iii.org/media/facts/statsbyissue/auto/ (last accessed
March 4, 2010).
    \792\ U.S. Department of Commerce, Bureau of Economic Analysis,
Table 7.2.5S. Auto and Truck Unit Sales, Production, Inventories,
Expenditures, and Price, available at http://www.bea.gov/national/nipaweb/nipa_underlying/TableView.asp?SelectedTable=55&ViewSeries=NO&Java=.
---------------------------------------------------------------------------

    Dividing the insurance cost by the average price of a new vehicle
gives the proportion of comprehensive plus collision insurance as 1.75%
of the price of a vehicle. If we assume that this premium is
proportional to the new vehicle price, it represents about 1.75 percent
of the new vehicle price and insurance is paid each year for the five
year period we are considering for payback. Discounting that stream of
insurance costs back to present value indicates that the present value
of the component of insurance costs that vary with vehicle price is
equal to 8.0 percent of the vehicle's price at a 3 percent discount
rate.
    Third, we considered that 70 percent of new vehicle purchasers take
out loans

to finance their purchase. The average new vehicle loan in the first
quarter of 2011 is 5.3 percent.\793\ At these terms the average person
taking a loan will pay 14 percent more for their vehicle over the 5
years than a consumer paying cash for the vehicle at the time of
purchase.\794\ Discounting the additional 2.8 percent (14 percent/5
years) per year over the 5 years using a 3 percent mid-year discount
rate \795\ results in a discounted present value of 12.73 percent
higher for those taking a loan. Multiplying that by the 70 percent that
take a loan, means that the average consumer would pay 8.9 percent more
than the retail price for loans the consumer discounted at a 3 percent
discount rate.
---------------------------------------------------------------------------

    \793\ New car loan rates in the first quarter of 2011 averaged
5.86 percent at commercial banks and 4.73 percent at auto finance
companies, so their average is close to 5.3 percent.
    \794\ Based on www.bankrate.com auto loan calculator for a 5
year loan at 5.3 percent.
    \795\ For a 3 percent discount rate, the summation of 2.8
percent x 0.9853 in year one, 2.8 x 0.9566 in year two, 2.8 x 0.9288
in year three, 2.8 x 0.9017 in year 4, and 2.8 x 0.8755 in year
five.
---------------------------------------------------------------------------

    Fourth, we considered the residual value (or resale value) of the
vehicle after 5 years and expressed this as a percentage of the new
vehicle price. If the price of the vehicle increases due to fuel
economy technologies, the resale value of the vehicle will go up
proportionately. The average resale price of a vehicle after 5 years is
about 35% \796\ of the original purchase price. Discounting the
residual value back 5 years using a 3 percent discount rate (35 percent
* .8755) gives an effective residual value of 30.6 percent. Note that
added CAFE technology could also result in more expensive or more
frequent repairs. However, we do not have data to verify the extent to
which this would be a factor during the first 5 years of vehicle life.
---------------------------------------------------------------------------

    \796\ Consumer Reports, August 2008,''What That Car Really Costs
to Own,'' available at http://www.consumerreports.org/cro/cars/pricing/what-that-car-really-costs-to-own-4-08/overview/what-that-car-really-costs-to-own-ov.htm (last accessed March 4, 2010).
---------------------------------------------------------------------------

    We add these four factors together. At a 3 percent discount rate,
the consumer considers he could get 30.6 percent back upon resale in 5
years, but will pay 5.5 percent more for taxes, 8.1 percent more in
insurance, and 8.9 percent more for loans, results in a 8.1 percent
return on the increase in price for fuel economy technology (30.6
percent - 5.5 percent - 8.1 percent - 8.9 percent). Thus, the increase
in price per vehicle would be multiplied by 0.919 (1 - 0.081) before
subtracting the fuel savings to determine the overall net consumer
valuation of the increase of costs on this purchase decision. This
process results in estimates of the payback period for MY 2025 vehicles
of 2 years for light trucks and 4 years for passenger cars at a 3
percent discount rate.
A General Discussion of Consumer Considerations
    If consumers do not value improved fuel economy at all, and
consider nothing but the increase in price in their purchase decisions,
then the estimated impact on sales from price elasticity could be
applied directly. However, the agency anticipates that consumers will
place some value improved fuel economy, because they reduce the
operating cost of the vehicles, and because, based on recently-
promulgated EPA and DOT regulations, vehicles sold during through 2025
will display labels that more clearly communicate to buyers the fuel
savings, economic, and environmental benefits of more efficient
vehicles. The magnitude of this effect remains unclear, and how much
consumers value fuel economy is an ongoing debate. We know that
different consumers value different aspects of their vehicle
purchase,\797\ but we do not have reliable evidence of consumer
behavior on this issue. Several past consumer surveys lead to different
conclusions (and surveys themselves, as opposed to actual behavior, may
not be entirely informative). We also expect that consumers will
consider other factors that affect their costs, and have included these
in the analysis.
---------------------------------------------------------------------------

    \797\ For some consumers there will be a cash-flow problem in
that the vehicle is purchased at a higher price on day 1 and fuel
savings occur over the lifetime of the vehicle. Increases in prices
have sometimes led to longer loan periods, which would lead to
higher overall costs of the loan.
---------------------------------------------------------------------------

    One issue that significantly affects this sales analysis is: How
much of the retail price increase needed to cover the fuel economy
technology investments will manufacturers be able to pass on to
consumers? NHTSA typically assumes that manufacturers will be able to
pass all of their costs to improve fuel economy on to consumers.
Consumer valuation of fuel economy improvements often depends upon the
price of gasoline, which has recently been very volatile.
    Sales losses would occur only if consumers fail to value fuel
economy improvements at least as much as they pay in higher prices. If
manufacturers are unable to raise prices beyond the level of consumer's
valuation of fuel savings, then manufacturer's profit levels would fall
but there would be no impact on sales. Likewise, if fuel prices rise
beyond levels used in this analysis, consumer's valuation of improved
fuel economy could increase to match or exceed their initial
investment, resulting in no impact or even an increase in sales levels.
    The agency has been exploring the question why there is not more
consumer demand for higher fuel economy today when linked with our
methodology that results in projecting increasing sales for the future
when consumers are faced with rising vehicle prices and rising fuel
economy. Some of the discussion of salience, focus on the short-term,
loss aversion, and related factors (see above) bears directly on that
question. It is possible, in that light, that consumers will not demand
increased fuel economy even when such increases would produce net
benefits for them.
    Nonetheless, some current vehicle owners, including those who
currently drive gas guzzlers, will undoubtedly realize the net benefits
to be gained by purchasing a more efficient vehicle. Some vehicle
owners may also react to persistently higher vehicle costs by owning
fewer vehicles, and keeping existing vehicles in service for somewhat
longer. For these consumers, the possibility exists that there may be
permanent sales losses, compared with a situation in which vehicle
prices are lower.
    There is a wide variety in the number of miles that owners drive
per year. Some drivers only drive 5,000 miles per year and others drive
25,000 miles or more. Rationally those that drive many miles have more
incentive to buy vehicles with high fuel economy levels
    In summary, there are a variety of types of consumers that are in
different financial situations and drive different mileages per year.
Since consumers are different and use different reasoning in purchasing
vehicles, and we do not yet have an account of the distribution of
their preferences or how that may change over time as a result of this
rulemaking -- in other words, the answer is quite ambiguous. Some may
be induced by better fuel economy to purchase vehicles more often to
keep up with technology, some may purchase no new vehicles because of
the increase in vehicle price, and some may purchase fewer vehicles and
hold onto their vehicles longer. There is great uncertainty about how
consumers value fuel economy, and for this reason, the impact of this
fuel economy proposal on sales is uncertain.
    For years, consumers have been learning about the benefits that
accrue to them from owning and operating vehicles with greater fuel
efficiency. Consumer demand has thus shifted towards such vehicles, not
only because of higher fuel prices but also because

many consumers are learning about the value of purchases based not only
on initial costs but also on the total cost of owning and operating a
vehicle over its lifetime. This type of learning is expected to
continue before and during the model years affected by this rule,
particularly given the new fuel economy labels that clarify potential
economic effects and should therefore reinforce that learning.
Therefore, some increase in the demand for, and production of, more
fuel efficient vehicles is incorporated in the alternative baseline
(i.e., without these rules) developed by NHTSA. The agency requests
comment on the appropriateness of using a flat or rising baseline after
2016.
    Today's proposed rule, combined with the new and easier-to-
understand fuel economy label required to be on all new vehicles
beginning in 2012, may increase sales above baseline levels by
hastening this very type of consumer learning. As more consumers
experience, as a result of the rule, the savings in time and expense
from owning more fuel efficient vehicles, demand may shift yet further
in the direction of the vehicles mandated under the rule. This social
learning can take place both within and across households, as consumers
learn from one another.
    First and most directly, the time and fuel savings associated with
operating more fuel efficient vehicles will be more salient to
individuals who own them, causing their subsequent purchase decisions
to shift closer to minimizing the total cost of ownership over the
lifetime of the vehicle. Second, this appreciation may spread across
households through word of mouth and other forms of communications.
Third, as more motorists experience the time and fuel savings
associated with greater fuel efficiency, the price of used cars will
better reflect such efficiency, further reducing the cost of owning
more efficient vehicles for the buyers of new vehicles (since the
resale price will increase).
    If these induced learning effects are strong, the rule could
potentially increase total vehicle sales over time. These increased
sales would not occur in the model years first affected by the rule,
but they could occur once the induced learning takes place. It is not
possible to quantify these learning effects years in advance and that
effect may be speeded or slowed by other factors that enter into a
consumer's valuation of fuel efficiency in selecting vehicles.
    The possibility that the rule will (after a lag for consumer
learning) increase sales need not rest on the assumption that
automobile manufacturers are failing to pursue profitable opportunities
to supply the vehicles that consumers demand. In the absence of the
rule, no individual automobile manufacturer would find it profitable to
move toward the more efficient vehicles mandated under the rule. In
particular, no individual company can fully internalize the future
boost to demand resulting from the rule. If one company were to make
more efficient vehicles, counting on consumer learning to enhance
demand in the future, that company would capture only a fraction of the
extra sales so generated, because the learning at issue is not specific
to any one company's fleet. Many of the extra sales would accrue to
that company's competitors.
    In the language of economics, consumer learning about the benefits
of fuel efficient vehicles involves positive externalities (spillovers)
from one company to the others.\798\ These positive externalities may
lead to benefits for manufacturers as a whole.
---------------------------------------------------------------------------

    \798\ Industry-wide positive spillovers of this type are hardly
unique to this situation. In many industries, companies form trade
associations to promote industry-wide public goods. For example,
merchants in a given locale may band together to promote tourism in
that locale. Antitrust law recognizes that this type of coordination
can increase output.
---------------------------------------------------------------------------

    We emphasize that this discussion has been tentative and qualified.
To be sure, social learning of related kinds has been identified in a
number of contexts.\799\ Comments are invited on the discussion offered
here, with particular reference to any relevant empirical findings.
---------------------------------------------------------------------------

    \799\ See Hunt Alcott, Social Norms and Energy Conservation,
Journal of Public Economics (forthcoming 2011), available at http://web.mit.edu/allcott/www/Allcott%202011%20JPubEc%20-%20Social%20Norms%20and%20Energy%20Conservation.pdf; Christophe
Chamley, Rational Herds: Economic Models of Social Learning
(Cambridge, 2003).
---------------------------------------------------------------------------

How does NHTSA plan to address this issue for the final rule?
    NHTSA seeks comment on how to attempt to quantify sales impacts of
the proposed MYs 2017-2025 CAFE standards in light of the uncertainty
discussed above. The agency is currently sponsoring work to develop a
vehicle choice model for potential use in the agency's future
rulemaking analysis--this work may help to better estimate the market's
effective valuation of future fuel economy improvements. The agency
hopes to evaluate those potential impacts through use of a ``market
shift'' or ``consumer vehicle choice'' model, discussed in Section IV
of the NPRM preamble. With an integrated market share model, the CAFE
model would then estimate how the sales volumes of individual vehicle
models would change in response to changes in fuel economy levels and
prices throughout the light vehicle market, possibly taking into
account interactions with the used vehicle market. Having done so, the
model would replace the sales estimates in the original market forecast
with those reflecting these model-estimated shifts, repeating the
entire modeling cycle until converging on a stable solution. We seek
comment on the potential for this approach to help the agency estimate
sales effects for the final rule.
Others Studies of the Sales Effect of This CAFE Proposal
    We outline here other relevant studies and seek comment on their
assumptions and projections.
    A recent study on the effects on sales, attributed to regulatory
programs, including the fuel economy program was undertaken by the
Center for Automotive Research (CAR).\800\ CAR examined the impacts of
alternative fuel economy increases of 3%, 4%, 5%, and 6% per year on
the general outlook for the U.S. motor vehicle market, the likely
increase in costs for fuel economy (based on the NAS report, which
estimates higher costs than NHTSA's current estimates) and required
safety features, the technologies used and how they would affect the
market, production, and automotive manufacturing employment in the year
2025. The required safety mandates were assumed to cost $1,500 per
vehicle in 2025, but CAR did not value the safety benefits from those
standards. NHTSA does not believe that the assumed safety mandates
should be a part of this analysis without estimating the benefits
achieved by the safety mandates.
---------------------------------------------------------------------------

    \800\ ``The U.S. Automotive Market and Industry in 2025'',
Center for Automotive Research, June 2011. http://www.cargroup.org/pdfs/ami.pdf.
---------------------------------------------------------------------------

    There are many factors that go into the CAR analysis of sales. CAR
assumes a 22.0 mpg baseline, two gasoline price scenarios of $3.50 and
$6.00 per gallon, VMT schedules by age, and a rebound rate of 10
percent (although it appears that the CAR report assumes a rebound
effect even for the baseline and thus negates the impact of the rebound
effect). Fuel savings are assumed to be valued by consumers over a 5
year period at a 10 percent discount rate. The impact on sales varies
by scenario, the estimates of the cost of technology, the price of
gasoline, etc. At $3.50 per gallon, the net change in consumer savings
(costs minus the fuel savings

valued by consumers) is a net cost to consumers of $359 for the 3%
scenario, a net cost of $1,644 for the 4% scenario, a net cost of
$2,858 for the 5% scenario, and a net consumer cost of $6,525 for the
6% scenario. At $6.00 per gallon, the net change in consumer savings
(costs minus the fuel savings valued by consumers) is a net savings to
consumers of $2,107 for the 3% scenario, a net savings of $1,131 for
the 4% scenario, a net savings of $258 for the 5% scenario, and a net
consumer cost of $3,051 for the 6% scenario. Thus, the price of
gasoline can be a significant factor in affecting how consumers view
whether they are getting value for their expenditures on technology.
    Table 14 on page 42 of the CAR report presents the results of their
estimates of the 4 alternative mpg scenarios and the 2 prices of
gasoline on light vehicle sales and automotive employment. The table
below shows these estimates. The baseline for the CAR report is 17.9
million sales and 877,075 employees. The price of gasoline at $6.00 per
gallon, rather than $3.50 per gallon results in about 2.1 million
additional sales per year and 100,000 more employees in year 2025.
[GRAPHIC] [TIFF OMITTED] TP01DE11.270

    Figure 13 on page 44 of the CAR report shows a graph of historical
automotive labor productivity, indicating that there has been a long
term 0.4 percent productivity growth rate from 1960-2008, to indicate
that there will be 12.26 vehicles produced in the U.S. per worker in
2025 (which is higher than NHTSA's estimate--see below). In addition,
the CAR report discusses the jobs multiplier. For every one automotive
manufacturing job, they estimate the economic contribution to the U.S.
economy of 7.96 jobs \801\ stating ``In 2010, about 1 million direct
U.S. jobs were located at an auto and auto parts manufacturers; these
jobs generated an additional 1.966 million supplier jobs, largely in
non-manufacturing sectors of the economy. The combined total of 2.966
million jobs generated a further spin-off of 3.466 million jobs that
depend on the consumer spending of direct and supplier employees, for a
total jobs contribution from U.S. auto manufacturing of 6.432 million
jobs in 2010. The figure actually rises to 7.96 million when direct
jobs located at new vehicle dealerships (connected to the sale and
service of new vehicles) are considered.''
---------------------------------------------------------------------------

    \801\ Kim Hill, Debbie Menk, and Adam Cooper, ``Contribution of
the Automotive Industry to the Economies of All Fifty States and the
United States'', The Center for Automotive Research, Ann Arbor MI,
April 2010.
---------------------------------------------------------------------------

    CAR uses econometric estimates of the sensitivity of new vehicle
purchases to prices and consumer incomes and forecasts of income growth
through 2025 to translate these estimated changes in net vehicle prices
to estimates of changes in sales of MY 2025 vehicles; higher net
prices--which occur when increases in vehicle prices exceeds the value
of fuel savings--reduce vehicle sales, while lower net prices increase
new vehicle sales in 2025. We do not have access to the statistical
models that CAR develops to estimate the effects of price and income
changes on vehicle sales. CAR's analysis assumes continued increases in
labor productivity over time and then translates the estimated impacts
of higher CAFE standards on net vehicle prices into estimated impacts
on sales and employment in the automobile production and related
industries. The agency disagrees with the cost estimates in the CAR
report for new technologies, the addition of safety mandates into the
costs, and various other assumptions.
    An analysis conducted by Ceres and Citigroup Global Markets
Inc.\802\ examined the impact on automotive sales in 2020, with a
baseline assumption of an industry fuel economy standard of 42 mpg, a
$4.00 price of

gasoline, a 12.2 percent discount rate and an assumption that buyers
value 48% of fuel savings over seven years in purchasing vehicles. The
main finding on sales was that light vehicle sales were predicted to
increase by 6% from 16.3 million to 17.3 million in 2020. Elasticity is
not provided in the report but it states that they use a complex model
of price elasticity and cross elasticities developed by GM. A fuel
price risk factor \803\ was utilized. Little rationale was provided for
the baseline assumptions, but sensitivity analyses were examined around
the price of fuel ($2, $4, and $7 per gallon), the discount rate (5.2%,
12.2%, 17.2%), purchasers consider fuel savings over (3, 7, or 15
years), fuel price risk factor of (30%, 70%, or 140%), and VMT of
(10,000, 15,000, and 20,000 in the first year and declining
thereafter).
---------------------------------------------------------------------------

    \802\ ``U.S. Autos, CAFE and GHG Emissions'', March 2011, Citi
Ceres, UMTRI, Baum and Associates, Meszler Engineering Services, and
the Natural Resources Defense Council. http://www.ceres.org/resources/reports/fuel-economy-focus.
    \803\ Fuel price risk factor measures the rate at which
consumers are willing to trade reductions in fuel costs for
increases in purchase price. For example, a fuel price risk factor
of 1.0 would indicate the consumers would be willing to pay $1 for
an improvement in fuel economy that resulted in reducing by $1 the
present value of the savings in fuel costs.
---------------------------------------------------------------------------

6. Social Benefits, Private Benefits, and Potential Unquantified
Consumer Welfare Impacts of the Proposed Standards
    There are two viewpoints for evaluating the costs and benefits of
the increase in CAFE standards: the private perspective of vehicle
buyers themselves on the higher fuel economy levels that the rule would
require, and the economy-wide or ``social'' perspective on the costs
and benefits of requiring higher fuel economy. In order to appreciate
how these viewpoints may diverge, it is important to distinguish
between costs and benefits that are ``private'' and costs and benefits
that are ``social,'' The agency's analysis of benefits and costs from
requiring higher fuel efficiency, presented above, includes several
categories of benefits (identified as ``social benefits'') that are not
limited to automobile purchasers, and that extend throughout the U.S.
economy. Examples of these benefits include reductions in the energy
security costs associated with U.S. petroleum imports, and in the
economic damages expected to result from air pollution (including, but
not limited to, climate change). In contrast, other categories of
benefits--principally future fuel savings projected to result from
higher fuel economy, but also, for example, time savings--will be
experienced exclusively by the initial purchasers and subsequent owners
of vehicle models whose fuel economy manufacturers elect to improve
(``private benefits'').
    The economy-wide or ``social'' benefits from requiring higher fuel
economy represent an important share of the total economic benefits
from raising CAFE standards. At the same time, NHTSA estimates that
benefits to vehicle buyers themselves will significantly exceed vehicle
manufacturers' costs for complying with the stricter fuel economy
standards this rule establishes. In short, consumers will benefit on
net. Since the agency also assumes that the costs of new technologies
manufacturers will employ to improve fuel economy will ultimately be
borne by vehicle buyers in the form of higher purchase prices, NHTSA
concludes that the benefits to potential vehicle buyers from requiring
higher fuel efficiency will far outweigh the costs they will be
required to pay to obtain it. NHTSA also recognizes that this
conclusion raises certain issues, addressed directly below; NHTSA also
seeks public comment on its discussion here.
    As an illustration, Tables IV-110 and 111 report the agency's
estimates of the average lifetime values of fuel savings for MY 2017-
2025 passenger cars and light trucks calculated using projected future
retail fuel prices. The table compares NHTSA's estimates of the average
lifetime value of fuel savings for cars and light trucks to the price
increases it expects to occur as manufacturers attempt to recover their
costs for complying with increased CAFE standards. As the table shows,
the agency's estimates of the present value of lifetime fuel savings
(discounted using the OMB-recommended 3% rate) substantially outweigh
projected vehicle price increases for both cars and light trucks in
every model year, even under the assumption that all of manufacturers'
technology outlays are passed on to buyers in the form of higher
selling prices for new cars and light trucks. By model year 2025, NHTSA
projects that average lifetime fuel savings will exceed the average
price increase by more than $2,900 for cars, and by more than $5,200
for light trucks.

[GRAPHIC] [TIFF OMITTED] TP01DE11.271

    The comparisons above immediately raise the question of why current
vehicle purchasing patterns do not already result in average fuel
economy levels approaching those that this rule would require, and why
raising CAFE standards should be necessary to increase the fuel economy
of new cars and light trucks. They also raise the question of whether
it is appropriate to assume that manufacturers would not elect to
provide higher fuel economy even in the absence of increases in CAFE
standards, since the comparisons in Tables IV-109 and 110 suggest that
doing so would increase the market value (and thus the selling prices)
of many new vehicle models by far more than it would raise the cost of
producing them. Thus, increasing fuel economy would be expected to
increase sales of new vehicles and manufacturers' profits. More
specifically, why would potential buyers of new vehicles

hesitate to purchase models offering higher fuel economy, when doing so
would produce the substantial economic returns illustrated by the
comparisons presented in Tables IV-109 and 110? And why would
manufacturers voluntarily forego opportunities to increase the
attractiveness, value, and competitive positioning of their car and
light truck models--and thus their own profits--by improving their fuel
economy?
    One explanation for why this situation might persist is that the
market for vehicle fuel economy does not appear to work perfectly, in
which case properly designed CAFE standards would be expected to
increase consumer welfare. Some of these imperfections might stem from
standard market failures, such as limited availability of information
to consumers about the value of higher fuel economy. It is true, of
course, that such information is technically available and that new
fuel economy and environment vehicle labels, emphasizing economic
effects, will provide a wide range of relevant information. Other
explanations would point to phenomena observed elsewhere in the field
of behavioral economics, including loss aversion, inadequate consumer
attention to long-term savings, or a lack of salience of relevant
benefits (such as fuel savings, or time savings associated with
refueling) to consumers at the time they make purchasing decisions.
Both theoretical and empirical research suggests that many consumers
are unwilling to make energy-efficient investments even when those
investments appear to pay off in the relatively short-term.\804\ This
research is in line with related findings that consumers may undervalue
benefits or costs that are less salient, or that they will realize only
in the future.\805\
---------------------------------------------------------------------------

    \804\ Jaffe, A. B., and Stavins, R. N. (1994). The Energy
Paradox and the Diffusion of Conservation Technology. Resource and
Energy Economics, 16(2); see Hunt Alcott and Nathan Wozny, Gasoline
Prices, Fuel Economy, and the Energy Paradox (2009), available at
http://web.mit.edu/allcott/www/Allcott%20and%20Wozny%202010%20-%20Gasoline%20Prices,%20Fuel%20Economy,%20and%20the%20Energy%20Paradox.pdf (last accessed Sept. 26, 2011). For relevant background, with
an emphasis on the importance of salience and attention, see
Kahneman, D. Thinking, Fast and Slow (2011).
    \805\ Mutulinggan, S., C. Corbett, S. Benzarti, and B.
Oppenheim. ``Investment in Energy Efficiency by Small and Medium-
Size Firms: An Empirical Analysis of the Adoption of Process
Improvement Recommendations'' (2011), available at http://papers.ssrn.com/sol3/papers/cfm?abstract_id=1947330. Hossain,
Janjim, and John Morgan (2009). '' * * * Plus Shipping and Handling:
Revenue (Non)Equivalence in Field Experiments on eBay,'' Advances in
Economic Analysis and Policy vol. 6; Barber, Brad, Terrence Odean,
and Lu Zheng (2005). ``Out of Sight, Out of Mind: The Effects of
Expenses on Mutual Fund Flows,'' Journal of Business vol. 78, no. 6,
pp. 2095-2020.
---------------------------------------------------------------------------

    Previous research provides some support for the agency's conclusion
that the benefits buyers will receive from requiring manufacturers to
increase fuel economy outweigh the costs they will pay to acquire those
benefits, even if private markets have not provided that amount of fuel
economy. This research identifies aspects of normal behavior that may
explain the market not providing vehicles whose higher fuel economy
appears to offer an attractive economic return. For example, consumers'
aversion to the prospect of losses (``loss aversion'') and especially
immediate, certain losses, may affect their decisions when they also
have a sense of uncertainty about the value of future fuel savings.
Loss aversion, accompanied with a sense of uncertainty about gains, may
make purchasing a more fuel-efficient vehicle seem unattractive to some
potential buyers, even when doing so is likely to be a sound economic
decision. As an illustration, Greene et al. (2009) calculate that the
expected net present value of increasing the fuel economy of a
passenger car from 28 to 35 miles per gallon falls from $405 when
calculated using standard net present value calculations, to nearly
zero when uncertainty regarding future cost savings and buyers'
reluctance to accept the risk of losses are taken into account.\806\
---------------------------------------------------------------------------

    \806\ Greene, D., J. German, and M. Delucchi (2009). ``Fuel
Economy: The Case for Market Failure'' in Reducing Climate Impacts
in the Transportation Sector, Sperling, D., and J. Cannon, eds.
Springer Science. Surprisingly, the authors find that uncertainty
regarding the future price of gasoline appears to be less important
than uncertainty surrounding the expected lifetimes of new vehicles.
(Docket NHTSA-2009-0059-0154). On loss aversion in general, and its
relationship to prospect theory (which predicts that certain losses
will loom larger than probabilistic gains of higher expected value),
see Kahneman.
---------------------------------------------------------------------------

    The well-known finding that as gas prices rise, consumers show more
willingness to pay for fuel-efficient vehicles is not necessarily
inconsistent with the possibility that many consumers undervalue
potential savings in gasoline costs and fuel economy when purchasing
new vehicles. In ordinary circumstances, such costs may be a relatively
``shrouded'' attribute in consumers' decisions, in part because the
savings from purchasing a more fuel efficient vehicle are cumulative
and extend over a significant period of time. At the same time, it may
be difficult for potential buyers to disentangle the cost of purchasing
a more fuel-efficient vehicle from its overall purchase price, or to
isolate the value of higher fuel economy form accompanying differences
in other vehicle attributes. This possibility is consistent with recent
evidence to the effect that many consumers are willing to pay less than
$1 upfront to obtain a $1 reduction in the discounted present value of
future gasoline costs.\807\
---------------------------------------------------------------------------

    \807\ See, e.g., Alcott and Wozny. On shrouded attributes and
their importance, see Gabaix, Xavier, and David Laibson, 2006.
``Shrouded Attributes, Consumer Myopia, and Information Suppression
in Competitive Markets.'' Quarterly Journal of Economics 121(2):
505-540.
---------------------------------------------------------------------------

    Some research suggests that the market's apparent unwillingness to
provide more fuel efficient vehicles stems from consumers' inability to
value future fuel savings correctly. For example, Larrick and Soll
(2008) find evidence that consumers do not understand how to translate
changes in fuel economy, which is denominated in miles per gallon
(MPG), into resulting changes in fuel consumption, measured for example
in gallons 100 miles traveled or per month or year.\808\ It is true
that the recently redesigned fuel economy and environment label should
help overcome this difficulty, because it draws attention to purely
economic effects of fuel economy, but MPG remains a prominent measure.
Sanstad and Howarth (1994) argue that consumers often resort to
imprecise but convenient rules of thumb to compare vehicles that offer
different fuel economy ratings, and that this can cause many buyers to
underestimate the value of fuel savings, particularly from significant
increases in fuel economy.\809\ If the behavior identified in these
studies is widespread, then the agency's estimates suggesting that the
benefits to vehicle owners from requiring higher fuel economy
significantly exceed the costs of providing it may be consistent with
private markets not providing that fuel economy level.
---------------------------------------------------------------------------

    \808\ Larrick, R. P., and J. B. Soll (2008). ``The MPG
illusion'' Science 320: 1593-1594.
    \809\ Sanstad, A., and R. Howarth (1994). `` `Normal' Markets,
Market Imperfections, and Energy Efficiency.'' Energy Policy 22(10):
811-818.
---------------------------------------------------------------------------

    The agency projects that the typical vehicle buyer will experience
net savings from the proposed standards, yet it is not simple to
reconcile this projection with the fact that the average fuel economy
of new vehicles sold currently falls well short of the level those
standards would require. The foregoing discussion offers several
possible explanations. One possible explanation for this apparent
inconsistency is that many of the technologies projected by the agency
to be available through MY 2025 offer significantly improved efficiency
per unit of cost, but were not available for application to new
vehicles sold currently. Another is that the perceived and real values
of future savings resulting from the proposed standards will vary
widely among potential

vehicle buyers. When they purchase a new vehicle, some buyers value
fuel economy very highly, and others value fuel economy very little, if
at all. These differences undoubtedly reflect variation in the amount
they drive, differences in their driving styles affect the fuel economy
they expect to achieve, and varying expectations about future fuel
prices, but they may also partly reflect differences in buyers'
understanding of what increased fuel economy is likely to mean to them
financially, or in buyers' preferences for paying lower prices today
versus anticipated savings over the future.
    Unless the agency has overestimated their average value, however,
the fact that the value of fuel savings varies among potential buyers
cannot explain why typical buyers do not currently purchase what appear
to be cost-saving increases in fuel economy. A possible explanation for
this situation is that the effects of differing fuel economy levels are
relatively modest when compared to those provided by other, more
prominent features of new vehicles, such as passenger and cargo-
carrying capacity, performance, or safety. In this situation, it may
simply not be in many shoppers' interest to spend the time and effort
necessary to determine the economic value of higher fuel economy, to
isolate the component of a new vehicle's selling price that is related
to its fuel economy, and compare these two. (This possibility is
consistent with the view that fuel economy is a relatively ``shrouded''
attribute.) In this case, the agency's estimates of the average value
of fuel savings that will result from requiring cars and light trucks
to achieve higher fuel economy may be correct, yet those savings may
not be large enough to lead a sufficient number of buyers to purchase
vehicles with higher fuel economy to raise average fuel economy above
its current levels.
    Defects in the market for cars and light trucks could also lead
manufacturers to undersupply fuel economy, even in cases where many
buyers were willing to pay the increased prices necessary to compensate
manufacturers for providing it. To be sure, the market for new
automobiles as a whole exhibits a great deal of competition. But this
apparently vigorous competition among manufacturers may not extend to
the provision of some individual vehicle attributes. Incomplete or
``asymmetric'' access to information about vehicle attributes such as
fuel economy--whereby manufacturers of new cars and light trucks or
sellers of used models have more complete knowledge about vehicles'
actual fuel economy performance than is available to their potential
buyers--may also prevent sellers of new or used vehicles from being
able to capture its full value. In this situation, the level of fuel
efficiency provided in the markets for new or used vehicles might
remain persistently lower than that demanded by well-informed potential
buyers.
    Constraints on the combinations of fuel economy, carrying capacity,
and performance that manufacturers can offer in individual vehicle
models using current technologies undoubtedly limit the range of fuel
economy available within certain vehicle classes, particularly those
including larger vehicles. However, it is also possible that deliberate
decisions by manufacturers of cars and light trucks further limit the
range of fuel economy available to buyers within individual vehicle
market segments, such as large automobiles, SUVs, or minivans.
Manufacturers may deliberately limit the range of fuel economy levels
they offer in those market segments (by choosing not to invest in fuel
economy and investing instead in providing a range of other vehicle
attributes) because they underestimate the premiums that prospective
buyers of those models are willing to pay for improved fuel economy,
and thus mistakenly believe it will be unprofitable for them to offer
more fuel-efficient models within those segments. Of course, this
possibility is most realistic if it is also assumed that buyers are
imperfectly informed, or if fuel economy savings are not sufficiently
salient to shoppers in those particular market segments. As an
illustration, once a potential buyer has decided to purchase a minivan,
the range of highway fuel economy ratings among current models extends
from 22 to 28 mpg, while their combined city and highway ratings extend
only from 18 to 20 mpg.\810\ If this phenomenon is widespread, the
average fuel efficiency of their entire new vehicle fleet could remain
below the levels that potential buyers demand and are willing to pay
for.
---------------------------------------------------------------------------

    \810\ This is the range of combined city and highway fuel
economy levels from lowest (Toyota Sienna AWD) to highest (Honda
Odyssey) available for model year 2010; http://www.fueleconomy.gov/feg/bestworstEPAtrucks.htm (last accessed September 26, 2011).
---------------------------------------------------------------------------

    Another possible explanation for the paradox posed by buyers'
apparent unwillingness to invest in higher fuel economy when it appears
to offer such large financial returns is that NHTSA's estimates of
benefits and costs from requiring manufacturers to improve fuel
efficiency do not match potential buyers' assessment of the likely
benefits and costs from purchasing models with higher fuel economy
ratings. This could occur because the agency's underlying assumptions
about some of the factors that affect the value of fuel savings differ
from those made by potential buyers, because NHTSA has used different
estimates for some components of the benefits from saving fuel from
those of buyers, or simply because the agency has failed to account for
some potential costs of achieving higher fuel economy.
    For example, buyers may not value increased fuel economy as highly
as the agency's calculations suggest, because they have shorter time
horizons than the full vehicle lifetimes NHTSA uses in these
calculations, or because they discount future fuel savings using higher
rates than those prescribed by OMB for evaluating Federal regulations.
Potential buyers may also anticipate lower fuel prices in the future
than those forecast by the Energy Information Administration, or may
expect larger differences between vehicles' MPG ratings and their own
actual on-road fuel economy than the 20 percent gap (30 percent for
HEVs) the agency estimates.
    To illustrate the first of these possibilities, Table IV-111 shows
the effect of differing assumptions about vehicle buyers' time horizons
on their assessment of the value of future fuel savings. Specifically,
the table reports the value of fuel savings consumers might consider
when purchasing a MY 2025 car or light truck that features the higher
fuel economy levels required by the proposed rule, when those fuel
savings are evaluated over different time horizons. The table then
compares these values to the agency's estimates of the increases in
these vehicles' prices that are likely to result from the standards
proposed for MY 2025. This table shows that when fuel savings are
evaluated over the average lifetime of a MY 2025 car (approximately 14
years) or light truck (about 16 years), their present value (discounted
at 3 percent) exceeds the estimated average price increase by more than
$2,500 for cars and by over $4,500 for light trucks.
    If buyers are instead assumed to consider fuel savings over only a
10-year time horizon, Table IV-112 shows that this reduces the
difference between the present value of fuel savings and the projected
price increase for a MY 2025 car to about $1,800, and to about $3,350
for a MY 2025 light truck. Finally, Table IV-112 shows that if buyers
consider fuel savings only over the length of time for which they
typically finance new car

purchases (slightly more than 5 years during 2011), the value of fuel
savings exceeds the estimated increase in the price of a MY 2025 car by
only about $200, while the corresponding difference is reduced to
slightly more than $1,200 for a MY 2025 light truck.
[GRAPHIC] [TIFF OMITTED] TP01DE11.158

    Potential vehicle buyers may also discount future fuel savings
using higher rates than those typically used to evaluate Federal
regulations. OMB guidance prescribes that future benefits and costs of
regulations that mainly affect private consumption decisions, as will
be the case if manufacturers' costs for complying with higher fuel
economy standards are passed on to vehicle buyers, should be discounted
using a consumption rate of time preference.\811\ OMB estimates that
savers currently discount future consumption at an average real or
inflation-adjusted rate of about 3 percent when they face little risk
about its likely level, which makes it a reasonable estimate of the
consumption rate of time preference.
---------------------------------------------------------------------------

    \811\ Office of Management and Budget, Circular A-4,
``Regulatory Analysis,'' September 17, 2003, 33. Available at http://www.whitehouse.gov/omb/assets/regulatory_matters_pdf/a-4.pdf
(last accessed Sept. 26, 2010).
---------------------------------------------------------------------------

    However, vehicle buyers may view the value of future fuel savings
that results from purchasing a vehicle with higher fuel economy as
risky or uncertain, or they may instead discount future consumption at
rates reflecting their costs for financing the higher capital outlays
required to purchase more fuel-efficient models. In either case, buyers
comparing models with different fuel economy ratings are likely to
discount the future fuel savings from purchasing one that offers higher
fuel economy at rates well above the 3% assumed in NHTSA's evaluation.
    Table IV-113 shows the effects of higher discount rates on vehicle
buyers' evaluation of the fuel savings projected to result from the
CAFE standards proposed in this NPRM, again using MY 2025 passenger
cars and light trucks as an example. As Table IV-112 showed previously,
average future fuel savings discounted at the OMB 3 percent consumer
rate exceed the agency's estimated price increases by more than $2,500
for MY 2025 passenger cars and by about $4,500 for MY 2025 light
trucks. If vehicle buyers instead discount future fuel savings at the
typical new-car loan rate prevailing during 2010 (approximately 5.2
percent), however, these differences decline to slightly more than
$2,000 for cars and $3,900 for light trucks, as Table IV-113
illustrates. This is a plausible alternative assumption, because buyers
are likely to finance the increases in purchase prices resulting from
compliance with higher CAFE standards as part of the process of
financing the vehicle purchase itself.
    Finally, as the table also shows, discounting future fuel savings
using a consumer credit card rate (which averaged almost 14 percent
during 2010) reduces these differences to less than $900 for a MY 2025
passenger car and about $2,250 for the typical MY 2025 light truck.
Even at these significantly higher discount rates, however, the table
shows that the private net benefits from purchasing new vehicles with
the levels of fuel economy this rule would

require--rather than those that would result from simply extending the
MY 2016 CAFE standards to apply to future model years--remain large.
[GRAPHIC] [TIFF OMITTED] TP01DE11.000

    Some evidence also suggests that vehicle buyers may employ
combinations of high discount rates and short time horizons in their
purchase decisions. For example, consumers surveyed by Kubik (2006)
reported that fuel savings would have to be adequate to pay back the
additional purchase price of a more fuel-efficient vehicle in less than
3 years to persuade them to purchase it, and that even over this short
time horizon they were likely to discount fuel savings using credit
card-like rates.\814\ Combinations of a shorter time horizon and a
higher discount rate could further reduce--or potentially even
eliminate--the difference between the value of fuel savings and the
agency's estimates of increases in vehicle prices. One plausible
combination would be for buyers to discount fuel savings over the term
of a new car loan, using the interest rate on that loan as a discount
rate. Doing so would reduce the amount by which future fuel savings
exceed the estimated increase in the prices of MY 2025 vehicles
considerably further, to about $117 for passenger cars and $1,250 for
light trucks.
---------------------------------------------------------------------------

    \812\ Interest rates on 48-month new vehicle loans made by
commercial banks during 2010 averaged 6.21%, while new car loan
rates at auto finance companies averaged 4.26%; See Board of
Governors of the Federal Reserve System, Federal Reserve Statistical
Release G.19, Consumer Credit. Available at http://www.federalreserve.gov/releases/g19/Current (last accessed September
27, 2011).
    \813\ The average rate on consumer credit card accounts at
commercial banks during 2010 was 13.78%; See Board of Governors of
the Federal Reserve System, Federal Reserve Statistical Release
G.19, Consumer Credit. Available at http://www.federalreserve.gov/releases/g19/Current (last accessed September 27, 2011).
    \814\ Kubik, M. (2006). Consumer Views on Transportation and
Energy. Second Edition. Technical Report: National Renewable Energy
Laboratory. Available at Docket No. NHTSA-2009-0059-0038.
---------------------------------------------------------------------------

    As these comparisons illustrate, reasonable alternative assumptions
about how consumers might evaluate future fuel savings, the major
private benefit from requiring higher fuel economy, can significantly
affect the benefits they consider when deciding whether to purchase
more fuel-efficient vehicles. Readily imaginable combinations of
shorter time horizons, higher discount rates, and lower expectations
about future fuel prices or annual vehicle use and fuel savings could
make potential buyers hesitant--or perhaps even unwilling--to purchase
vehicles offering the increased fuel economy levels this proposed rule
would require manufacturers to provide in future model years. Thus,
vehicle buyers' assessment of the benefits and costs of this proposal
in their purchase decisions may differ markedly from NHTSA's estimates.

    If consumers' views about critical variables such as future fuel
prices or the appropriate discount rate differ sufficiently from the
assumptions used by the agency, some or perhaps many potential vehicle
buyers might conclude that the value of fuel savings and other benefits
from higher fuel economy they are considering are not sufficient to
justify the increase in purchase prices they expect to pay. In
conjunction with the possibility that manufacturers misinterpret
potential buyers' willingness to pay for improved fuel economy, this
might explain why the current choices among available models do not
result in average fuel economy levels approaching those this rule would
require.
    Another possibility is that achieving the fuel economy improvements
required by stricter fuel economy standards might lead manufacturers to
forego planned future improvements in performance, carrying capacity,
safety, or other features of their vehicle models that provide
important sources of utility to their owners, even if it is
technologically feasible to have both improvements in those other
features and improved fuel economy. Although the specific economic
values that vehicle buyers attach to individual vehicle attributes such
as fuel economy, performance, passenger- and cargo-carrying capacity,
or other features are difficult to infer from vehicle prices or buyers'
choices among competing models, changes in vehicle attributes can
significantly affect the overall utility that vehicles offer to
potential buyers. Thus if requiring manufacturers to provide higher
fuel economy leads them to sacrifice improvements in these or other
highly-valued attributes, potential buyers are likely to view these
sacrifices as an additional cost of improving fuel economy. If those
attributes are of sufficient value, or if the range of vehicles offered
ensures that vehicles with those attributes will continue to be
offered, then vehicle buyers will still have the opportunity to choose
those attributes, though at increased cost compared to models without
the fuel economy improvements.
    As indicated in its previous discussion of technology costs, NHTSA
has approached this potential problem by attempting to develop cost
estimates for fuel economy-improving technologies that include
allowances for any additional costs that would be necessary to maintain
the reference fleet (or baseline) levels of performance, comfort,
capacity, or safety of light-duty vehicle models to which those
technologies are applied. In doing so, the agency followed the
precedent established by the 2002 NAS Report on improving fuel economy,
which estimated ``constant performance and utility'' costs for
technologies that manufacturers could employ to increase the fuel
efficiency of cars or light trucks. Although NHTSA has revised its
estimates of manufacturers' costs for some technologies significantly
for use in this rulemaking, these revised estimates are still intended
to represent costs that would allow manufacturers to maintain the
performance, safety, carrying capacity, and utility of vehicle models
while improving their fuel economy, in the majority of cases. The
agency's continued specification of footprint-based CAFE standards also
addresses this concern, by establishing less demanding fuel economy
targets for larger cars and light trucks.
    Finally, vehicle buyers may simply prefer the choices of vehicle
models they now have available to the combinations of price, fuel
economy, and other attributes that manufacturers are likely to offer
when required to achieve the higher overall fuel economy levels
proposed in this NPRM. This explanation assumes that auto makers decide
to change vehicle attributes other than price and fuel economy in
response to this rule. If this is the case, their choices among
models--and even some buyers' decisions about whether to purchase a new
vehicle--will respond accordingly, and their responses to these new
choices will reduce their overall welfare. Some may buy models with
combinations of price, fuel efficiency, and other attributes that they
consider less desirable than those they would otherwise have purchased,
while others may simply postpone buying a new vehicle. It leaves open
the question, though, why auto makers would change those other vehicle
characteristics if consumers liked them as they were; as noted, the
assumption of ``constant performance and utility'' built into the cost
estimates means that these changes are not necessary.
    As the foregoing discussion makes clear, the agency cannot offer a
complete answer to the question of why the apparently large differences
between its estimates of private benefits from requiring higher fuel
economy and the costs of supplying it would not result in higher fuel
economy for new cars and light trucks in the absence of this rule. One
explanation is that these estimates are reasonable, but that for the
reasons outlined above, the market for fuel economy is not operating
efficiently. NHTSA believes the existing literature offers some support
for the view that various failures in the market for fuel economy
prevent it from providing an economically desirable outcome, which
implies that on balance there are likely to be substantial private
gains from the proposed rule. The agency will continue to investigate
new empirical literature addressing this question as it becomes
available, and seeks comment on all of the relevant questions.
    NHTSA acknowledges the possibility that it has incorrectly
characterized the impact on the market of the CAFE standards this rule
proposes, and that this could cause its estimates of benefits and costs
to misrepresent the effects of the proposed rule. To recognize this
possibility, this section presents an alternative accounting of the
benefits and costs of CAFE standards for MYs 2017-2025 passenger cars
and light trucks and discusses its implications. Table IV-114 displays
the economic impacts of the rule as viewed from the perspective of
potential buyers.
    As the table shows, the proposed rule's total benefits to vehicle
buyers (line 4) consist of the value of fuel savings over vehicles'
full lifetimes at retail fuel prices (line 1), the economic value of
vehicle occupants' savings in refueling time (line 2), and the economic
benefits from added rebound-effect driving (line 3). As the zero
entries in line 5 of the table suggest, no losses in consumer welfare
from changes in vehicle attributes (other than those from increases in
vehicle prices) are assumed to occur. Thus there is no reduction in the
total private benefits to vehicle owners, so that net private benefits
to vehicle buyers (line 6) are equal to total private benefits
(reported previously in line 4).
    As Table IV-114 also shows, the decline in fuel tax revenues (line
7) that results from reduced fuel purchases is a transfer of funds
between consumers and government and is thus not a social cost.\815\
(Thus the sum of lines 1 and 7 equals the savings in fuel production
costs that were reported previously as the value of fuel savings at
pre-tax prices in the agency's previous accounting of benefits and
costs.) Lines 8 and 9 of Table IV-114 report the value of reductions in
air pollution and climate-related externalities resulting from lower
emissions of criteria air

pollutants and GHGs during fuel production and consumption, while line
10 reports the savings in energy security externalities to the U.S.
economy from reduced consumption and imports of petroleum and refined
fuel. Line 12 reports the costs of increased congestion delays,
accidents, and noise that result from additional driving due to the
fuel economy rebound effect. Net external benefits from the proposed
CAFE standards (line 13) are thus the sum of the change in fuel tax
revenues, the reduction in environmental and energy security
externalities, and increased external costs from added driving.
---------------------------------------------------------------------------

    \815\ Strictly speaking, fuel taxes represent a transfer of
resources from consumers of fuel to government agencies and not a
use of economic resources. Reducing the volume of fuel purchases
simply reduces the value of this transfer, and thus cannot produce a
real economic cost or benefit. Representing the change in fuel tax
revenues in effect as an economy-wide cost is necessary to offset
the portion of fuel savings included in line 1 that represents
savings in fuel tax payments by consumers. This prevents the savings
in tax revenues from being counted as a benefit from the economy-
wide perspective.
---------------------------------------------------------------------------

    Line 14 of Table IV-114 shows manufacturers' technology outlays for
meeting higher CAFE standards for passenger cars and light trucks,
which represent the principal private and social cost of requiring
higher fuel economy. The net social benefits (line 15 of the table)
resulting from the proposed rule consist of the sum of private (line 6)
and external (line 13) benefits, minus technology costs (line 14). As
expected, the figures reported in line 15 of the table are identical to
those reported previously in Table IV-63.
    Table IV-114 highlights several important features of this rule's
economic impacts. First, comparing the rule's net private (line 6) and
external (line 13) benefits makes it clear that a very large proportion
of the proposed rule's benefits would be experienced by vehicle buyers,
while the small remaining fraction would be experienced throughout the
remainder of the U.S. economy. In turn, the vast majority of private
benefits resulting from the higher fuel economy levels the proposed
rule would require stem from fuel savings to vehicle buyers. Net
external benefits from the proposed rule are expected to be small,
because the value of reductions in environmental and energy security
externalities is likely almost exactly offset by the increased costs
associated with added vehicle use. As a consequence, the net social
benefits of the rule mirror almost exactly its net private benefits to
vehicle buyers, under the assumption that manufacturers will recover
their technology outlays for achieving higher fuel economy by raising
new car and light truck prices. Once again, this result highlights the
extreme importance of accounting for any other effects of the rule on
the economic welfare of vehicle buyers.

[GRAPHIC] [TIFF OMITTED] TP01DE11.274

[GRAPHIC] [TIFF OMITTED] TP01DE11.275

    As discussed in detail previously, NHTSA believes that the
aggregate benefits from this proposed rule amply justify its total
costs, but it remains possible that the agency has overestimated the
role of fuel savings to

buyers and subsequent owners of the cars and light trucks to which the
higher CAFE standards it proposes would apply. It is also possible that
the agency has failed to develop cost estimates that do not require
manufacturers to make changes in vehicle attributes as part of their
efforts to achieve higher fuel economy. To acknowledge these
possibilities, NHTSA has examined their potential impact on its
estimates of the proposed rule's benefits and costs. This analysis,
which appears in Chapter VIII of the Preliminary RIA accompanying this
proposed rule, shows the rule's economic impacts under alternative
assumptions about the private benefits from higher fuel economy, and
the value of potential changes in other vehicle attributes. One
conclusion is that even if the private savings are significantly
overstated, the benefits of the proposed standards continue to exceed
the costs. We seek comment on that analysis and the discussion above.
7. What other impacts (quantitative and unquantifiable) will these
proposed standards have?
    In addition to the quantified benefits and costs of fuel economy
standards, the final standards will have other impacts that we have not
quantified in monetary terms. The decision on whether or not to
quantify a particular impact depends on several considerations:
     How likely is it to occur, and can the magnitude of the
impact reasonably be attributed to the outcome of this rulemaking?
     Would quantification of its physical magnitude or economic
value help NHTSA and the public evaluate the CAFE standards that may be
set in rulemaking?
     Is the impact readily quantifiable in physical terms?
     If so, can it readily be translated into an economic
value?
     Is this economic value likely to be material?
     Can the impact be quantified with a sufficiently narrow
range of uncertainty so that the estimate is useful?
    NHTSA expects that this rulemaking will have a number of genuine,
material impacts that have not been quantified due to one or more of
these considerations. In some cases, further research may yield
estimates that are useful for future rulemakings.
Technology Forcing
    The proposed rule will improve the fuel economy of the U.S. new
vehicle fleet, but it will also increase the cost (and presumably, the
price) of new passenger cars and light trucks built during MYs 2017-
2025. We anticipate that the cost, scope, and duration of this rule, as
well as the steadily rising standards it requires, will cause
automakers and suppliers to devote increased attention to methods of
improving vehicle fuel economy.
    This increased attention will stimulate additional research and
engineering, and we anticipate that, over time, innovative approaches
to reducing the fuel consumption of light duty vehicles will emerge.
These innovative approaches may reduce the cost of the proposed rule in
its later years, and also increase the set of feasible technologies in
future years. We have attempted to estimate the effect of learning
effects on the costs of producing known technologies within the period
of the rulemaking, which is one way that technologies become cheaper
over time, and may reflect innovations in application and use of
existing technologies to meet the proposed future. However, we have not
attempted to estimate the extent to which not-yet-invented technologies
will appear, either within the time period of the current rulemaking or
that might be available after MY 2016, or whether technologies
considered but not applied in the current rulemaking, due to concern
about the likelihood of their commercialization in the rulemaking
timeframe, will in fact be helped towards commercialization as a result
of the proposed standards. NHTSA seeks comment on whether there are
quantifiable costs and benefits associated with the potential
technology forcing effects of the proposed standards, and if so, how
the agency should consider attempting to account for them in the final
rule analysis.
Effects on Vehicle Costs
    Actions that increases the cost of new vehicles could subsequently
make such vehicles more costly to maintain, repair, and insure. In
general, NHTSA expects that this effect to be a positive linear
function of vehicle costs. In its central analysis, NHTSA estimates
that the proposed rule could raise average vehicle technology costs by
over $1,800 by 2025, and for some manufacturers, average costs will
increase by more than $3,000 (for some specific vehicle models, we
estimate that the proposed rule could increase technology costs by more
than $10,000). Depending on the retail price of the vehicle, this could
represent a significant increase in the overall vehicle cost and
subsequently increase insurance rates, operation costs, and maintenance
costs. Comprehensive and collision insurance costs are likely to be
directly related to price increases, but liability premiums will go up
by a smaller proportion because the bulk of liability coverage reflects
the cost of personal injury. Also, although they represent economic
transfers, sales and excise taxes would also increase with increases in
vehicle prices (unless rates are reduced). The impact on operation and
maintenance costs is less clear, because the maintenance burden and
useful life of each technology are not known. However, one of the
common consequences of using more complex or innovative technologies is
a decline in vehicle reliability and an increase in maintenance costs.
These costs are borne in part by vehicle manufacturers (through
warranty costs, which are included in the indirect costs of
production), and in part by vehicle owners. NHTSA believes that this
effect is difficult to quantify for purposes of this proposed rule, but
we seek comment on how we might attempt to do so for the final rule.
    Related, to the extent that the proposed standards require
manufacturers to build and sell more PHEVs and EVs, vehicle
manufacturers and owners may face additional costs for charging
infrastructure and battery disposal. While Chapter 3 of the draft Joint
TSD discusses the costs of charging infrastructure, neither of these
costs have been incorporated into the rulemaking analysis due to time
constraints. We intend to attempt to quantify these additional costs
for the final rule stage, but we believe that doing so will be
difficult and we seek comment on how we might go about it. We also seek
comment on other costs or cost savings that are not accounted for in
this analysis and how we might go about quantifying them for the final
rule.
    And finally on the subject of vehicle operation, NHTSA has received
comments in the past that premium (higher octane) fuel may be necessary
if certain advanced fuel economy-improving technologies are required by
stringent CAFE standards. The agencies have not assumed in our
development of technology costs that premium fuel would be required. We