provide emissions reductions off-cycle and that their use should be
incentivized. One manufacturer suggested that off-cycle credits should
be given for start-stop technologies. EPA does not agree that this
technology, which EPA's modeling projects will be widely used by
manufacturers in meeting the CO2 standards, should qualify
for off-cycle credits. Start-stop technology already achieves a
significant CO2 benefit on the current 2-cycle tests, which
is why many manufacturers have announced plans to adopt it across large
segments of the fleet. EPA recognizes there may be additional benefits
to start-stop technology beyond the 2-cycle tests (e.g., heavy idle
use), and that this is likely the case for other technologies that
manufacturers will rely on to meet the MY 2012-2016 standards. EPA
plans to continue to assess the off-cycle potential for these
technologies in the future. However, EPA does not believe that off-
cycle credits should be granted for technologies which we expect
manufacturers to rely on in widespread use throughout the fleet in
meeting the CO2 standards. Such credits could lead to double
counting, as there is already significant CO2 benefit over
the 2-cycle tests. EPA expects that most if not all technologies that
reduce CO2 emission on the 2-cycle test will also reduce
CO2 emissions during the wide variety of in-use operation
that is not directly captured in the 2-cycle test. This is no different
than what occurs from the control technology on vehicles for criteria
pollutants. We expect that the catalytic converter and other emission
control technology will operate to reduce emissions throughout in-use
driving, and not just when the vehicle is tested on the specified test
procedure. The aim for this off-cycle credit provisions is to provide
an incentive for technologies that normally would not be chosen as a
GHG control strategy, as their GHG benefits are not measured on the
specified 2-cycle test. It is not designed to provide credits for
technology that does provide significant GHG benefits on the 2-cycle
test and as expected will also typically provide GHG benefits in other
kinds of operation. Thus, EPA is finalizing the ``new and innovative''
criteria as proposed. That is, the potential to earn off-cycle credits
will be limited to those technologies that are new and innovative, are
introduced in only a limited number of vehicle models (i.e., not in
widespread use), and are not captured on the current 2-cycle tests.
This approach will encourage future innovation, which may lead to the
opportunity for future emissions reductions.
    As proposed, manufacturers would quantify CO2 reductions
associated with the use of the innovative off-cycle technologies such
that the credits could be applied on a g/mile equivalent basis, as is
the case with A/C system improvements. Credits must be based on real
additional reductions of CO2 emissions and must be
quantifiable and verifiable with a repeatable methodology. As proposed,
the technologies upon which the credits are based would be subject to
full useful life compliance provisions, as with other emissions
controls. Unless the manufacturer can demonstrate that the technology
would not be subject to in-use deterioration over the useful life of
the vehicle, the manufacturer must account for deterioration in the
estimation of the credits in order to ensure that the credits are based
on real in-use emissions reductions over the life of the vehicle.
    As discussed below, EPA is finalizing a two-tiered process for
demonstrating the CO2 reductions of an innovative and novel
technology with benefits not captured by the FTP and HFET test
procedures. First, a manufacturer must determine whether the benefit of
the technology could be captured using the 5-cycle methodology
currently used to determine fuel economy label values. EPA established
the 5-cycle test

methods to better represent real-world factors impacting fuel economy,
including higher speeds and more aggressive driving, colder temperature
operation, and the use of air conditioning. If this determination is
affirmative, the manufacturer must follow the procedures described
below (as codified in today's rules). If the manufacturer finds that
the technology is such that the benefit is not adequately captured
using the 5-cycle approach, then the manufacturer would have to develop
a robust methodology, subject to EPA approval, to demonstrate the
benefit and determine the appropriate CO2 gram per mile
credit. As discussed below, EPA is also providing opportunity for
public comment as part of the approval process for such non-5-cycle
credits.
a. Technology Demonstration Using EPA 5-Cycle Methodology
    As noted above, the CO2 reduction benefit of some
innovative technologies could be demonstrated using the 5-cycle
approach currently used for EPA's fuel economy labeling program. The 5-
cycle methodology was finalized in EPA's 2006 fuel economy labeling
rule,\242\ which provides a more accurate fuel economy label estimate
to consumers starting with 2008 model year vehicles. In addition to the
FTP and HFET test procedures, the 5-cycle approach folds in the test
results from three additional test procedures to determine fuel
economy. The additional test cycles include cold temperature operation,
high temperature, high humidity and solar loading, and aggressive and
high-speed driving; thus these tests could be used to demonstrate the
benefit of a technology that reduces CO2 over these types of
driving and environmental conditions. Using the test results from these
additional test cycles collectively with the 2-cycle data provides a
more precise estimate of the average fuel economy and CO2
emissions of a vehicle for both the city and highway independently. A
significant benefit of using the 5-cycle methodology to measure and
quantify the CO2 reductions is that the test cycles are
properly weighted for the expected average U.S. operation, meaning that
the test results could be used without further adjustments.
---------------------------------------------------------------------------

    \242\ Fuel Economy Labeling of Motor Vehicles: Revisions to
Improve Calculation of Fuel Economy Estimates; Final Rule (71 FR
77872, December 27, 2006).
---------------------------------------------------------------------------

    EPA continues to believe that the use of these supplemental cycles
may provide a method by which technologies not demonstrated on the
baseline 2-cycles can be quantified and is finalizing this approach as
proposed. The cold temperature FTP can capture new technologies that
improve the CO2 performance of vehicles during colder
weather operation. These improvements may be related to warm-up of the
engine or other operation during the colder temperature. An example of
such a new, innovative technology is a waste heat capture device that
provides heat to the cabin interior, enabling additional engine-off
operation during colder weather not previously enabled due to heating
and defrosting requirements. The additional engine-off time would
result in additional CO2 reductions that otherwise would not
have been realized without the heat capture technology.
    Although A/C credits for efficiency improvements will largely be
captured in the A/C credits provisions through the credit menu of known
efficiency improving components and controls, certain new technologies
may be able to use the high temperatures, humidity, and solar load of
the SC03 test cycle to accurately measure their impact. An example of a
new technology may be a refrigerant storage device that accumulates
pressurized refrigerant during driving operation or uses recovered
vehicle kinetic energy during deceleration to pressurize the
refrigerant. Much like the waste heat capture device used in cold
weather, this device would also allow additional engine-off operation
while maintaining appropriate vehicle interior occupant comfort levels.
SC03 test data measuring the relative impact of innovative A/C-related
technologies could be applied to the 5-cycle equation to quantify the
CO2 reductions of the technology.
    The US06 cycle may be used to capture innovative technologies
designed to reduce CO2 emissions during higher speed and
more aggressive acceleration conditions, but not reflected on the 2-
cycle tests. An example of this is an active aerodynamic technology.
This technology recognizes the benefits of reduced aerodynamic drag at
higher speeds and makes changes to the vehicle at those speeds. The
changes may include active front or grill air deflection devices
designed to redirect frontal airflow. Certain active suspension devices
designed primarily to reduce aerodynamic drag by lowering the vehicle
at higher speeds may also be measured on the US06 cycle. To properly
measure these technologies on the US06, the vehicle would require
unique load coefficients with and without the technologies. The
different load coefficient (properly weighted for the US06 cycle) could
effectively result in reduced vehicle loads at the higher speeds when
the technologies are active. Similar to the previously discussed
cycles, the results from the US06 test with and without the technology
could then use the 5-cycle methodology to quantify CO2
reductions.
    If the 5-cycle procedures can be used to demonstrate the innovative
technology, then the regulatory evaluation/approval process will be
relatively simple. The manufacturer will simply test vehicles with and
without the technology installed or operating and compare results. All
5-cycles must be tested with the technology enabled and disabled, and
the test results will be used to calculate a combined city/highway
CO2 value with the technology and without the technology.
These values will then be compared to determine the amount of the
credit; the combined city/highway CO2 value with the
technology operating will be subtracted from the combined city/highway
CO2 value without the technology operating to determine the
gram per mile CO2 credit. It is likely that multiple tests
of each of the five test procedures will need to be performed in order
to achieve the necessary strong degree of statistical significance of
the credit determination results. This will have to be done for each
model type for which a credit is sought, unless the manufacturer could
demonstrate that the impact of the technology was independent of the
vehicle configuration on which it was installed. In this case, EPA may
consider allowing the test to be performed on an engine family basis or
other grouping. At the end of the model year, the manufacturer will
determine the number of vehicles produced subject to each credit amount
and report that to EPA in the final model year report. The gram per
mile credit value determined with the 5-cycle comparison testing will
be multiplied by the total production of vehicles subject to that value
to determine the total number of credits.
    EPA received a few comments regarding the 5-cycle approach. While
not commenting directly on the 5-cycle testing methodology, the
Alliance raised general concerns that the proposed approach did not
offer manufacturers enough certainty with regard to credit applications
and testing in order to take advantage of the credits. The Alliance
further commented that the proposal did not provide a level playing
field to all manufacturers in terms of possible credit availability.
The Alliance recommended that rather than attempting to quantify
CO2 reductions with a prescribed test procedure on unknown
technologies, EPA should

handle credit applications and testing guidelines via future guidance
letters, as technologies emerge and are developed.
    EPA believes that 5-cycle testing methodology is one clear and
objective way to demonstrate certain off-cycle emissions control
technologies, as discussed above. It provides certainty with regard to
testing, and is available for all manufacturers. As discussed below,
there are also other options for manufactures where the 5-cycle test is
not appropriate. EPA is retaining this as a primary methodology for
determining off-cycle credits. For technologies not able to be
demonstrated on the 5-cycle test, EPA is finalizing an approach that
will include a public comment opportunity, as discussed below, which we
believe addresses commenter concerns regarding maintaining a level
playing field.
b. Alternative Off-Cycle Credit Methodologies
    As proposed, in cases where the benefit of a technological approach
to reducing CO2 emissions can not be adequately represented
using existing test cycles, manufacturers will need to develop test
procedures and analytical approaches to estimate the effectiveness of
the technology for the purpose of generating credits. As discussed
above, the first step must be a thorough assessment of whether the 5-
cycle approach can be used to demonstrate a reduction in emissions. If
EPA determines that the 5-cycle process is inadequate for the specific
technology being considered by the manufacturer (i.e., the 5-cycle test
does not demonstrate any emissions reductions), then an alternative
approach may be developed and submitted to EPA for approval. The
demonstration program must be robust, verifiable, and capable of
demonstrating the real-world emissions benefit of the technology with
strong statistical significance.
    The CO2 benefit of some technologies may be able to be
demonstrated with a modeling approach, using engineering principles. An
example would be where a roof solar panel is used to charge the on-
board vehicle battery. The amount of potential electrical power that
the panel could supply could be modeled for average U.S. conditions and
the units of electrical power could be translated to equivalent fuel
energy or annualized CO2 emission rate reduction from the
captured solar energy. The CO2 reductions from other
technologies may be more challenging to quantify, especially if they
are interactive with the driver, geographic location, environmental
condition, or other aspect related to operation on actual roads. In
these cases, manufacturers might have to design extensive on-road test
programs. Any such on-road testing programs would need to be
statistically robust and based on average U.S. driving conditions,
factoring in differences in geography, climate, and driving behavior
across the U.S.
    Whether the approach involves on-road testing, modeling, or some
other analytical approach, the manufacturer will be required to present
a proposed methodology to EPA. EPA will approve the methodology and
credits only if certain criteria are met. Baseline emissions and
control emissions must be clearly demonstrated over a wide range of
real world driving conditions and over a sufficient number of vehicles
to address issues of uncertainty with the data. The analytical approach
must be robust, verifiable, and capable of demonstrating the real-world
emissions benefit with strong statistical significance. Data must be on
a vehicle model-specific basis unless a manufacturer demonstrated model
specific data was not necessary. Approval of the approach to
determining a CO2 benefit will not imply approval of the
results of the program or methodology; when the testing, modeling, or
analyses are complete the results will likewise be subject to EPA
review and approval. EPA believes that manufacturers could work
together to develop testing, modeling, or analytical methods for
certain technologies, similar to the SAE approach used for A/C
refrigerant leakage credits.
    In addition, EPA received several comments recommending that the
approval process include an opportunity for public comment. As noted
above, some manufacturers are concerned that there be a level playing
field in terms of all manufacturers having a reasonable opportunity to
earn credits under an approved approach. Commenters also want an
opportunity for input in the methodology to ensure the accuracy of
credit determinations for these technologies. Commenters point out that
there are a broad number of stakeholders with experience in the issues
pertaining to the technologies that could add value in determining the
most appropriate method to assess these technologies' performance. EPA
agrees with these comments and is including an opportunity for public
comment as part of the approval process. If and when EPA receives an
application for off-cycle credits using an alternative non 5-cycle
methodology, EPA will publish a notice of availability in the Federal
Register with instructions on how to comment on draft off-cycle credit
methodology. The public information available for review will focus on
the methodology for determining credits but the public review obviously
is limited to non-confidential business information. The timing for
final approval will depend on the comments received. EPA also believes
that a public review will encourage manufacturers to be thorough in
their preparation prior to submitting their application for credits to
EPA for approval. EPA will take comments into consideration, and where
appropriate, work with the manufacturer to modify their approach prior
to approving any off-cycle credits methodology. EPA will give final
notice of its determination to the general public as well as the
applicant. Off-cycle credits would be available in the model year
following the final approval. Thus, it will be imperative for a
manufacturer pursuing this option to begin the process as early as
possible.
    EPA also received comments that the off-cycle credits highlights
the inadequacy of current test procedures, and that there is a clear
need for updated certification test procedures. As discussed in Section
III. B., EPA believes the current test procedures are adequate for
implementing the standards finalized today. However, EPA is interested
in improving test procedures in the future and believes that the off-
cycle credits program has the potential to provide useful data and
insights both for the 5-cycle test procedures and also other test
procedures that capture off-cycle emissions.
5. Early Credit Options
    EPA is finalizing a program to allow manufacturers to generate
early credits in model years 2009-2011.\243\ As described below,
credits may be generated through early additional fleet average
CO2 reductions, early A/C system improvements, early
advanced technology vehicle credits, and early off-cycle credits. As
with other credits, early credits are subject to a five year carry-
forward limit based on the model year in which they are generated.
Manufacturers may transfer early credits between vehicle categories
(e.g., between the car and truck fleet). With the exception of MY 2009
early program credits, as discussed below, a manufacturer may trade
other early credits to other manufacturers without limits. The agencies
note that CAFE credits earned in MYs prior to MY 2011 will still be
available to manufacturers

for use in the CAFE program in accordance with applicable regulations.
---------------------------------------------------------------------------

    \243\ See final regulations at 40 CFR 86.1867-12.
---------------------------------------------------------------------------

    EPA is not adopting certification, compliance, or in-use
requirements for vehicles generating early credits. Since manufacturers
are already certifying MY 2010 and in some cases even MY 2011 vehicles,
doing so would make certification, compliance, and in-use requirements
unworkable. As discussed below, manufacturers are required to submit an
early credits report to EPA for approval no later than 90 days after
the end of MY 2011. This report must include details on all early
credits the manufacturer generates, why the credits are bona fide, how
they are quantified, and how they can be verified.
a. Credits Based on Early Fleet Average CO2 Reductions
    As proposed, EPA is finalizing opportunities for early credit
generation in MYs 2009-2011 through over-compliance with a fleet
average CO2 baseline established by EPA. EPA is finalizing
four pathways for doing so. In order to generate early CO2
credits, manufacturers must select one of the four paths for credit
generation for the entire three year period and may not switch between
pathways for different model years. For two pathways, EPA is
establishing the baseline equivalent to the California standards for
the relevant model year. Generally, manufacturers that over-comply with
those CARB standards would earn credits. Two additional pathways,
described below, include credits based on over-compliance with CAFE
standards in states that have not adopted the California standards.
    EPA received comments from manufacturers in support of the early
credits program as a necessary compliance flexibility. The Alliance
commented that the early credits reward manufacturers for providing
fleet performance that exceeds California and Federal standards and do
not result in a windfall. AIAM commented that early credits are
essential to assure the feasibility of the proposed standards and the
need for such credits must be evaluated in the context of the dramatic
changes the standards will necessitate in vehicle design and the
current economic environment in which manufacturers are called upon to
make the changes. Manufacturers also supported retaining all four
pathways, commenting that eliminating pathways would diminish the
flexibility of the program. EPA also received comments from many
environmental organizations and states that the program would provide
manufacturers with windfall credits because manufacturers will not have
to take any steps to earn credits beyond those that are already planned
and in some cases implemented. These commenters were particularly
concerned that the California truck standards in MY 2009 are not as
stringent as CAFE, so overcompliance with the California standards
could be a windfall in MY 2009, and possibly even MY 2010. These
commenters supported an early credits program based on overcompliance
with the more stringent of either the CAFE or California standards in
any given year. EPA is retaining the early credits program because EPA
judges that they are not windfall credits, and manufacturers in some
cases have reasonably relied on the availability of these credits, and
have based early model year compliance strategies on their availability
so that the credits are needed to provide adequate lead for the initial
years of the program. However, as discussed below, EPA is restricting
credit trading for MY 2009 credits earned under the California-based
pathways.
    Manufacturers selecting Pathway 1 will generate credits by over-
complying with the California equivalent baseline established by EPA
over the manufacturer's fleet of vehicles sold nationwide.
Manufacturers selecting Pathway 2 will generate credits against the
California equivalent baseline only for the fleet of vehicles sold in
California and the CAA section 177 states.\244\ This approach includes
all CAA 177 states as of the date of promulgation of the Final Rule in
this proceeding. Manufacturers are required to include both cars and
trucks in the program. Under Pathways 1 and 2, EPA is requiring
manufacturers to cover any deficits incurred against the baseline
levels established by EPA during the three year period 2009-2011 before
credits can be carried forward into the 2012 model year. For example, a
deficit in 2011 would have to be subtracted from the sum of credits
earned in 2009 and 2010 before any credits could be applied to 2012 (or
later) model year fleets. EPA is including this provision to help
ensure the early credits generated under this program are consistent
with the credits available under the California program during these
model years. In its comments, California supported such an approach.
---------------------------------------------------------------------------

    \244\ CAA 177 states refers to states that have adopted the
California GHG standards. At present, there are thirteen CAA 177
states: New York, Massachusetts, Maryland, Vermont, Maine,
Connecticut, Arizona, New Jersey, New Mexico, Oregon, Pennsylvania,
Rhode Island, Washington, as well as Washington, DC.
---------------------------------------------------------------------------

    Table III.C.5-1 provides the California equivalent baselines EPA is
finalizing to be used as the basis for CO2 credit generation
under the California-based pathways. These are the California GHG
standards for the model years shown. EPA proposed to adjust the
California standards by 2.0 g/mile to account for the exclusion of
N2O and CH4, which are included in the California
GHG standards, but not included in the credits program. EPA received
comments from one manufacturer that this adjustment is in error and
should not be made. The commenter noted that EPA already includes total
hydrocarbons in the carbon balance determination of carbon related
exhaust emissions and therefore already accounts for CH4.
EPA also includes CO in the carbon related exhaust emissions
determination which acts to offset the need for an N20
adjustment. The commenter noted that THC and CO add about 0.8 to 3.0 g/
mile to the determination of carbon related emissions and therefore EPA
should not make the 2.0g/mile adjustment. The commenter is correct, and
therefore the final levels shown in the table below are 2.0 g/mile
higher than proposed. These comments are further discussed in the
Response to Comments document. Manufacturers will generate
CO2 credits by achieving fleet average CO2 levels
below these baselines. As shown in the table, the California-based
early credit pathways are based on the California vehicle categories.
Also, the California-based baseline levels are not footprint-based, but
universal levels that all manufacturers would use. Manufacturers will
need to achieve fleet levels below those shown in the table in order to
earn credits, using the California vehicle category definitions.

        Table III.C.5-1--California Equivalent Baselines CO2 Emissions Levels for Early Credit Generation
----------------------------------------------------------------------------------------------------------------
                                                                                Light trucks with a LVW  of
                                                          Passenger cars and light    3,751 or more and a  GVWR
                      Model year                         trucks with an LVW of  0-     of up to  8,500 lbs plus
                                                                 3,750 lbs              medium-duty  passenger
                                                                                vehicles
----------------------------------------------------------------------------------------------------------------
2009..................................................                          323                          439
2010..................................................                          301                          420
2011..................................................                          267                          390
----------------------------------------------------------------------------------------------------------------

    Manufacturers using Pathways 1 or 2 above will use year-end car and
truck sales in each category. Although production data is used for the
program starting in 2012, EPA is using sales data for the early credits
program in order to apportion vehicles by State. This is described
further below. Manufacturers must calculate actual fleet average
emissions over the appropriate vehicle fleet, either for vehicles sold
nationwide for Pathway 1, or California plus 177 states sales for
Pathway 2. Early CO2 credits are based on the difference
between the baseline shown in the table above and the actual fleet
average emissions level achieved. Any early A/C credits generated by
the manufacturer, described below in Section III.C.5.b, will be
included in the fleet average level determination. In model year 2009,
the California CO2 standard for cars (323 g/mi
CO2) is equivalent to 323 g/mi CO2, and the
California light-truck standard (437 g/mi CO2) is less
stringent than the equivalent CAFE standard, recognizing that there are
some differences between the way the California program and the CAFE
program categorize vehicles. Manufacturers are required to show that
they over comply over the entire three model year time period, not just
the 2009 model year, to generate early credits under either Pathways 1,
2 or 3. A manufacturer cannot use credits generated in model year 2009
unless they offset any debits from model years 2010 and 2011.
    EPA received comments that this approach will provide windfall
credits to manufacturers because the MY 2009 California light truck
standards are less stringent than the corresponding CAFE standards.
While this could be accurate if credits were based on performance in
just MY 2009, that is not how credits are determined. Credits are based
on the performance over a three model year period, MY 2009-2011. As
noted in the proposal, EPA expects that the requirement to over comply
over the entire time period covering these three model years should
mean that the credits that are generated are real and are in excess of
what would have otherwise occurred. However, because of the
circumstances involving the 2009 model year, in particular for
companies with significant truck sales, there is some concern that
under Pathways 1, 2, and 3, there is a potential for a large number of
credits generated in 2009 against the California standard, in
particular for a number of companies who have significantly over-
achieved on CAFE in recent model years. Some commenters were very
concerned about this issue and commented in support of restricting
credit trading between firms of MY 2009 credits based on the California
program. EPA requested comments on this approach and is finalizing this
credit trading restriction based on continued concerns regarding the
issue of windfall credits. EPA wants to avoid a situation where,
contrary to expectation, some part of the early credits generated by a
manufacturer are in fact not excess, where companies could trade such
credits to other manufacturers, risking a delay in the addition of new
technology across the industry from the 2012 and later EPA
CO2 standards. Therefore, manufacturers selecting Pathways
1, 2, or 3 will not be allowed to trade any MY 2009 credits that they
may generate.
    Commenters also recommended basing credits on the more stringent of
the standards between CAFE and CARB, which for MY 2009, would be the
CAFE standards. However, EPA believes that this would not be necessary
in light of the credit provisions requiring manufacturers choosing the
California based pathways to use the California pathway for all three
MYs 2009-2011, and the credit trading restrictions for MY 2009
discussed above.
    In addition, for Pathways 1 and 2, EPA is allowing manufacturers to
include alternative compliance credits earned per the California
alternative compliance program.\245\ These alternative compliance
credits are based on the demonstrated use of alternative fuels in flex
fuel vehicles. As with the California program, the credits are
available beginning in MY 2010. Therefore, these early alternative
compliance credits are available under EPA's program for the 2010 and
2011 model years. FFVs are otherwise included in the early credit fleet
average based on their emissions on the conventional fuel. This does
not apply to EVs and PHEVs. The emissions of EVs and PHEVs are to be
determined as described in Section III.C.3. Manufacturers may choose to
either include their EVs and PHEVs in one of the four pathways
described in this section or under the early advanced technology
emissions credits described below, but not both due to issues of credit
double counting.
---------------------------------------------------------------------------

    \245\ See Section 6.6.E, California Environmental Protection
Agency Air Resources Board, Staff Report: Initial Statement of
Reasons For Proposed Rulemaking, Public Hearing to Consider Adoption
of Regulations to Control Greenhouse Gas Emissions From Motor
Vehicles, August 6, 2004.
---------------------------------------------------------------------------

    EPA is also finalizing two additional early credit pathways
manufacturers could select. Pathways 3 and 4 incorporate credits based
on over-compliance with CAFE standards for vehicles sold outside of
California and CAA 177 states in MY 2009-2011. Pathway 3 allows
manufacturers to earn credits as under Pathway 2, plus earn CAFE-based
credits in other states. Credits may not be generated for cars sold in
California and CAA 177 states unless vehicle fleets in those states are
performing better than the standards which otherwise would apply in
those states, i.e., the baselines shown in Table III.C.5-1 above.
    Pathway 4 is for manufacturers choosing to forego California-based
early credits entirely and earn only CAFE-based credits outside of
California and CAA 177 states. Manufacturers may not include FFV
credits under the CAFE-based early credit pathways since those credits
do not automatically reflect actual reductions in CO2
emissions.
    The baselines for CAFE-based early pathways are provided in Table
III.C.5-2 below. They are based on the CAFE standards for the 2009-2011
model years. For CAFE standards in 2009-2011 model years that are
footprint-based, the baseline would vary by manufacturer. Footprint-
based standards are in effect for the 2011 model year CAFE

standards.\246\ Additionally, for Reform CAFE truck standards,
footprint standards are optional for the 2009-2010 model years. Where
CAFE footprint-based standards are in effect, manufacturers will
calculate a baseline using the footprints and sales of vehicles outside
of California and CAA 177 states. The actual fleet CO2
performance calculation will also only include the vehicles sold
outside of California and CAA 177 states, and as mentioned above, may
not include FFV credits.
---------------------------------------------------------------------------

    \246\ 74 FR 14196, March 30, 2009.

   Table III.C.5-2--CAFE Equivalent Baselines CO2 Emissions Levels for
                         Early Credit Generation
------------------------------------------------------------------------
         Model year                   Cars                 Trucks
------------------------------------------------------------------------
2009........................  323.................  381 *
2010........................  323.................  376 *
2011........................  Footprint-based       Footprint-based
                               standard.             standard.
------------------------------------------------------------------------
* Must be footprint-based standard for manufacturers selecting footprint
  option under CAFE.

    For the CAFE-based pathways, EPA is using the NHTSA car and truck
definitions that are in place for the model year in which credits are
being generated. EPA understands that the NHTSA definitions change
starting in the 2011 model year, and therefore changes part way through
the early credits program. EPA further recognizes that medium-duty
passenger vehicles (MDPVs) are not part of the CAFE program until the
2011 model year, and therefore are not part of the early credits
calculations for 2009-2010 under the CAFE-based pathways.
    Pathways 2 through 4 involve splitting the vehicle fleet into two
groups, vehicles sold in California and CAA 177 states and vehicles
sold outside of these states. This approach requires a clear accounting
of location of vehicle sales by the manufacturer. EPA believes it will
be reasonable for manufacturers to accurately track sales by State,
based on its experience with the National Low Emissions Vehicle (NLEV)
Program. NLEV required manufacturers to meet separate fleet average
standards for vehicles sold in two different regions of the
country.\247\ As with NLEV, the determination is to be based on where
the completed vehicles are delivered as a point of first sale, which in
most cases would be the dealer.\248\
---------------------------------------------------------------------------

    \247\ 62 FR 31211, June 6, 1997.
    \248\ 62 FR 31212, June 6, 1997.
---------------------------------------------------------------------------

    As noted above, manufacturers choosing to generate early
CO2 credits must select one of the four pathways for the
entire early credits program and would not be able to switch among
them. Manufacturers must submit their early credits report to EPA when
they submit their final CAFE report for MY 2011 (which is required to
be submitted no later than 90 days after the end of the model year).
Manufacturers will have until then to decide which pathway to select.
This gives manufacturers enough time to determine which pathway works
best for them. This timing may be necessary in cases where
manufacturers earn credits in MY 2011 and need time to assess data and
prepare an early credits submittal for final EPA approval.
    The table below provides a summary of the four fleet average-based
CO2 early credit pathways EPA is finalizing:

   Table III.C.5-3--Summary of Early Fleet Average CO2 Credit Pathways
------------------------------------------------------------------------

------------------------------------------------------------------------
Common Elements...................  --Manufacturers select a pathway.
                                     Once selected, may not switch among
                                     pathways.
                                    --All credits subject to 5 year
                                     carry-forward restrictions.
                                    --For Pathways 2-4, vehicles
                                     apportioned by State based on point
                                     of first sale.
Pathway 1: California-based         --Manufacturers earn credits based
 Credits for National Fleet.         on fleet average emissions compared
                                     with California equivalent baseline
                                     set by EPA.
                                    --Based on nationwide CO2 sales-
                                     weighted fleet average.
                                    --Based on use of California vehicle
                                     categories.
                                    --FFV alternative compliance credits
                                     per California program may be
                                     included.
                                    --Once in the program, manufacturers
                                     must make up any deficits that are
                                     incurred prior to 2012 in order to
                                     carry credits forward to 2012 and
                                     later.
Pathway 2: California-based         --Same as Pathway 1, but
 Credits for vehicles sold in        manufacturers only includes
 California plus CAA 177 States.     vehicles sold in California and CAA
                                     177 states in the fleet average
                                     calculation.
Pathway 3: Pathway 2 plus CAFE-     --Manufacturer earns credits as
 based Credits outside of            provided by Pathway 2: California-
 California plus CAA 177 States.     based credits for vehicles sold in
                                     California plus CAA 177 States,
                                     plus:
                                    --CAFE-based credits allowed for
                                     vehicles sold outside of California
                                     and CAA 177 states.
                                    --For CAFE-based credits,
                                     manufacturers earn credits based on
                                     fleet average emissions compared
                                     with baseline set by EPA.
                                    --CAFE-based credits based on NHTSA
                                     car and truck definitions.
                                    --FFV credits not allowed to be
                                     included for CAFE-based credits.
Pathway 4: Only CAFE-based Credits  --Manufacturer elects to only earn
 outside of California plus CAA      CAFE-based credits for vehicles
 177 States.                         sold outside of California and CAA
                                     177 states. Earns no California and
                                     177 State credits.
                                    --For CAFE-based credits,
                                     manufacturers earn credits based on
                                     fleet average emissions compared
                                     with baseline set by EPA.
                                    --CAFE-based credits based on NHTSA
                                     car and truck definitions.
                                    --FFV credits not allowed to be
                                     included for CAFE-based credits.
------------------------------------------------------------------------

b. Early A/C Credits
    As proposed, EPA is finalizing provisions allowing manufacturers to
earn early A/C credits in MYs 2009-2011 using the same A/C system
design-based EPA provisions being finalized for MYs commencing in 2012,
as described in Section III.C.1, above. Manufacturers will be able to
earn early A/C CO2-equivalent credits by demonstrating
improved A/C system performance, for both direct and indirect
emissions. To earn credits for vehicles sold in California and CAA 177
states, the vehicles must be included in one of the California-based
early credit pathways described above in III.C.5.a. EPA is finalizing
this constraint in order to avoid credit double counting with the
California program in place in those states, which also allows A/C
system credits in this time frame. Manufacturers must fold the A/C
credits into the fleet average CO2 calculations under the
California-based pathway. For example, the MY 2009 California-based
program car baseline would be 323 g/mile (see Table III.C.5-1). If a
manufacturer under Pathway 1 had a MY 2009 car fleet average
CO2 level of 320 g/mile and then earned an additional 12 g/
mile CO2-equivalent A/C credit, the manufacturers would earn
a total of 10 g/mile of credit. Vehicles sold outside of California and
177 states would be eligible for the early A/C credits whether or not
the manufacturers participate in other aspects of the early credits
program. The early A/C credits for vehicles sold outside of California
and 177 states are based on the NHTSA vehicle categories established
for the model year in which early A/C credits are being earned.
c. Early Advanced Technology Vehicle Incentive
    As discussed in Section III.C.3, above, EPA is finalizing an
incentive for sales of advanced technology vehicles including EVs,
PHEVs, and fuel cell vehicles. EPA is not including a multiplier for
these vehicles. However, EPA is allowing the use of the 0 g/mile value
for electricity operation for up to 200,000 vehicles per manufacturer
(or 300,000 vehicles for any manufacturer that sells 25,000 or more
advanced technology vehicles in MY 2012). EPA believes that providing
an incentive for the sales of such vehicles prior to MY 2012 is
consistent with the goal encouraging the introduction of such vehicles
as early as possible. Therefore, manufacturers may use the 0 g/mile
value for vehicles sold in MY 2009-2011 consistent with the approach
being finalized for MY 2012-2016. Any vehicles sold prior to MY 2012
under these provisions must be counted against the cumulative sales cap
of 200,000 (or 300,000, if applicable) vehicles. Manufacturers selling
such vehicles in MY 2009-2011 have the option of either folding them
into the early credits calculation under Pathways 1 through 4 described
in III.C.5.a above, or tracking the sales of these vehicles separately
for use in their fleetwide average compliance calculation in MY 2012 or
later years, but may not do both as this would lead to double counting.
Manufacturers tracking the sales of vehicles not folded into Pathways
1-4, may choose to use the vehicle counts along with the 0 g/mi
emissions value (up to the applicable vehicle sales cap) to comply with
2012 or later standards. For example, if a manufacturer sells 1,000 EVs
in MY 2011, the manufacturer would then be able to include 1,000
vehicles at 0 g/mile in their MY 2012 fleet to decrease the fleet
average for that model year. Again, these 1,000 vehicles would be
counted against the cumulative cap of 200,000 or 300,000, as
applicable, vehicles. Also, these 1,000 EVs would not be included in
the early credit pathways discussed above in Section III.C.5.a,
otherwise the vehicles would be double counted. As with early credits,
these early advanced technology vehicles will be tracked by model year
(2009, 2010, or 2011) and subject to the 5-year carry-forward
restrictions.
d. Early Off-Cycle Credits
    EPA's is finalizing off-cycle innovative technology credit
provisions, as described in Section III.C.4. EPA requested comment on
beginning these credits in the 2009-2011 time frame, provided
manufacturers are able to make the necessary demonstrations outlined in
Section III.C.4, above. EPA is finalizing this approach for early off-
cycle credits as a way to encourage innovation to lower emissions as
early as possible, including the requirements for public review
described in Section III.C.4. Upon EPA approval of a manufacturer's
application for credits, the credits may be earned retroactively. EPA
did not receive comments specifically on early off-cycle credits.

D. Feasibility of the Final CO2 Standards

    This final rule is based on the need to obtain significant GHG
emissions reductions from the transportation sector, and the
recognition that there are cost-effective technologies to achieve such
reductions for MY 2012-2016 vehicles. As in many prior mobile source
rulemakings, the decision on what standard to set is largely based on
the effectiveness of the emissions control technology, the cost and
other impacts of implementing the technology, and the lead time needed
for manufacturers to employ the control technology. The standards
derived from assessing these factors are also evaluated in terms of the
need for reductions of greenhouse gases, the degree of reductions
achieved by the standards, and the impacts of the standards in terms of
costs, quantified benefits, and other impacts of the standards. The
availability of technology to achieve reductions and the cost and other
aspects of this technology are therefore a central focus of this
rulemaking.
    EPA is taking the same basic approach in this rulemaking, although
the technological problems and solutions involved in this rulemaking
differ in some ways from prior mobile source rulemakings. Here, the
focus of the emissions control technology is on reducing CO2
and other greenhouse gases. Vehicles combust fuel to perform two basic
functions: (1) To transport the vehicle, its passengers and its
contents (and any towed loads), and (2) to operate various accessories
during the operation of the vehicle such as the air conditioner.
Technology can reduce CO2 emissions by either making more
efficient use of the energy that is produced through combustion of the
fuel or reducing the energy needed to perform either of these
functions.
    This focus on efficiency calls for looking at the vehicle as an
entire system, and the proposed and now final standards reflect this
basic paradigm. In addition to fuel delivery, combustion, and
aftertreatment technology, any aspect of the vehicle that affects the
need to produce energy must also be considered. For example, the
efficiency of the transmission system, which takes the energy produced
by the engine and transmits it to the wheels, and the resistance of the
tires to rolling both have major impacts on the amount of fuel that is
combusted while operating the vehicle. The braking system, the
aerodynamics of the vehicle, and the efficiency of accessories, such as
the air conditioner, all affect how much fuel is combusted as well.
    In evaluating vehicle efficiency, we have excluded fundamental
changes in vehicles' size and utility. For example, we did not evaluate
converting minivans and SUVs to station wagons, converting vehicles
with four wheel drive to two wheel drive, or reducing headroom in order
to lower the roofline and reduce aerodynamic drag. We have

limited our assessment of technical feasibility and resultant vehicle
cost to technologies which maintain vehicle utility as much as
possible. Manufacturers may decide to alter the utility of the vehicles
which they sell in response to this rule, but this is not a necessary
consequence of the rule but rather a matter of automaker choice.
    This need to focus on the efficient use of energy by the vehicle as
a system leads to a broad focus on a wide variety of technologies that
affect almost all the systems in the design of a vehicle. As discussed
below, there are many technologies that are currently available which
can reduce vehicle energy consumption. These technologies are already
being commercially utilized to a limited degree in the current light-
duty fleet. These technologies include hybrid technologies that use
higher efficiency electric motors as the power source in combination
with or instead of internal combustion engines. While already
commercialized, hybrid technology continues to be developed and offers
the potential for even greater efficiency improvements. Finally, there
are other advanced technologies under development, such as lean burn
gasoline engines, which offer the potential of improved energy
generation through improvements in the basic combustion process. In
addition, the available technologies are not limited to powertrain
improvements but also include mass reduction, electrical system
efficiencies, and aerodynamic improvements.
    The large number of possible technologies to consider and the
breadth of vehicle systems that are affected mean that consideration of
the manufacturer's design and production process plays a major role in
developing the final standards. Vehicle manufacturers typically develop
many different models by basing them on a limited number of vehicle
platforms. The platform typically consists of a common set of vehicle
architecture and structural components. This allows for efficient use
of design and manufacturing resources. Given the very large investment
put into designing and producing each vehicle model, manufacturers
typically plan on a major redesign for the models approximately every 5
years. At the redesign stage, the manufacturer will upgrade or add all
of the technology and make most other changes supporting the
manufacturer's plans for the next several years, including plans
related to emissions, fuel economy, and safety regulations.
    This redesign often involves a package of changes designed to work
together to meet the various requirements and plans for the model for
several model years after the redesign. This often involves significant
engineering, development, manufacturing, and marketing resources to
create a new product with multiple new features. In order to leverage
this significant upfront investment, manufacturers plan vehicle
redesigns with several model years' of production in mind. Vehicle
models are not completely static between redesigns as limited changes
are often incorporated for each model year. This interim process is
called a refresh of the vehicle and generally does not allow for major
technology changes although more minor ones can be done (e.g., small
aerodynamic improvements, valve timing improvements, etc.). More major
technology upgrades that affect multiple systems of the vehicle thus
occur at the vehicle redesign stage and not in the time period between
redesigns. The Center for Biological Diversity commented on EPA's
assumptions on redesign cycles, and these comments are addressed in
Section III.D.7 below.
    As discussed below, there are a wide variety of CO2
reducing technologies involving several different systems in the
vehicle that are available for consideration. Many can involve major
changes to the vehicle, such as changes to the engine block and
cylinder heads, redesign of the transmission and its packaging in the
vehicle, changes in vehicle shape to improve aerodynamic efficiency and
the application of aluminum (and other lightweight materials) in body
panels to reduce mass. Logically, the incorporation of emissions
control technologies would be during the periodic redesign process.
This approach would allow manufacturers to develop appropriate packages
of technology upgrades that combine technologies in ways that work
together and fit with the overall goals of the redesign. It also allows
the manufacturer to fit the process of upgrading emissions control
technology into its multi-year planning process, and it avoids the
large increase in resources and costs that would occur if technology
had to be added outside of the redesign process.
    This final rule affects five years of vehicle production, model
years 2012-2016. Given the now-typical five year redesign cycle, nearly
all of a manufacturer's vehicles will be redesigned over this period.
However, this assumes that a manufacturer has sufficient lead time to
redesign the first model year affected by this final rule with the
requirements of this final rule in mind. In fact, the lead time
available for the start of model year 2012 (January 2011) is relatively
short, less than a year. The time between this final rule and the start
of 2013 model year (January 2012) production is under two years. At the
same time, manufacturer product plans indicate that they are planning
on introducing many of the technologies EPA projects could be used to
show compliance with the final CO2 standards in both 2012
and 2013. In order to account for the relatively short lead time
available prior to the 2012 and 2013 model years, albeit mitigated by
their existing plans, EPA has factored this reality into how the
availability is modeled for much of the technology being considered for
model years 2012-2016 as a whole. If the technology to control
greenhouse gas emissions is efficiently folded into this redesign
process, then EPA projects that 85 percent of each manufacturer's sales
will be able to be redesigned with many of the CO2 emission
reducing technologies by the 2016 model year, and as discussed below,
to reduce emissions of HFCs from the air conditioner.
    In determining the level of this first ever GHG emissions standard
under the CAA for light-duty vehicles, EPA uses an approach that
accounts for and builds on this redesign process. This provides the
opportunity for several control technologies to be incorporated into
the vehicle during redesign, achieving significant emissions reductions
from the model at one time. This is in contrast to what would be a much
more costly approach of trying to achieve small increments of
reductions over multiple years by adding technology to the vehicle
piece by piece outside of the redesign process.
    As described below, the vast majority of technology required by
this final rule is commercially available and already being employed to
a limited extent across the fleet (although the final rule will
necessitate far wider penetration of these technologies throughout the
fleet). The vast majority of the emission reductions which will result
from this final rule will be produced from the increased use of these
technologies. EPA also believes that this final rule will encourage the
development and limited use of more advanced technologies, such as
PHEVs and EVs, and the final rule is structured to facilitate this
result.
    In developing the final standard, EPA built on the technical work
performed by the State of California during its development of its
statewide GHG program. EPA began by evaluating a nationwide CAA
standard for MY 2016 that would require the levels of technology
upgrade, across the country, which California standards would

require for the subset of vehicles sold in California under Pavley 1.
In essence, EPA developed an assessment of an equivalent national new
vehicle fleet-wide CO2 performance standards for model year
2016 which would result in the new vehicle fleet in the State of
California having CO2 performance equal to the performance
from the California Pavley 1 standards. This assessment is documented
in Chapter 3.1 of the RIA. The results of this assessment predicts that
a national light-duty vehicle fleet which adopts technology that
achieves performance of 250 g/mile CO2 for model year 2016
will result in vehicles sold in California that would achieve the
CO2 performance equivalent to the Pavley 1 standards.
    EPA then analyzed a level of 250 g/mi CO2 in 2016 using
the OMEGA model (described in more detail below), and the car and truck
footprint curves' relative stringency discussed in Section II to
determine what technology will be needed to achieve a fleet wide
average of 250 g/mi CO2. As discussed later in this section
we believe this level of technology application to the light-duty
vehicle fleet can be achieved in this time frame, that such standards
will produce significant reductions in GHG emissions, and that the
costs for both the industry and the costs to the consumer are
reasonable. EPA also developed standards for the model years 2012
through 2015 that lead up to the 2016 level.
    EPA's independent technical assessment of the technical feasibility
of the final MY 2012-2016 standards is described below. EPA has also
evaluated a set of alternative standards for these model years, one
that is more stringent than the final standards and one that is less
stringent. The technical feasibility of these alternative standards is
discussed at the end of this section.
    Evaluating the feasibility of these standards primarily includes
identifying available technologies and assessing their effectiveness,
cost, and impact on relevant aspects of vehicle performance and
utility. The wide number of technologies which are available and likely
to be used in combination requires a more sophisticated assessment of
their combined cost and effectiveness. An important factor is also the
degree that these technologies are already being used in the current
vehicle fleet and thus, unavailable for use to improve energy
efficiency beyond current levels. Finally, the challenge for
manufacturers to design the technology into their products, and the
appropriate lead time needed to employ the technology over the product
line of the industry must be considered.
    Applying these technologies efficiently to the wide range of
vehicles produced by various manufacturers is a challenging task. In
order to assist in this task, EPA has developed a computerized model
called the Optimization Model for reducing Emissions of Greenhouse
gases from Automobiles (OMEGA) model. Broadly, the model starts with a
description of the future vehicle fleet, including manufacturer, sales,
base CO2 emissions, footprint and the extent to which
emission control technologies are already employed. For the purpose of
this analysis, over 200 vehicle platforms were used to capture the
important differences in vehicle and engine design and utility of
future vehicle sales of roughly 16 million units in the 2016 timeframe.
The model is then provided with a list of technologies which are
applicable to various types of vehicles, along with their cost and
effectiveness and the percentage of vehicle sales which can receive
each technology during the redesign cycle of interest. The model
combines this information with economic parameters, such as fuel prices
and a discount rate, to project how various manufacturers would apply
the available technology in order to meet various levels of emission
control. The result is a description of which technologies are added to
each vehicle platform, along with the resulting cost. While OMEGA can
apply technologies which reduce CO2 emissions and HFC
refrigerant emissions associated with air conditioner use, this task is
currently handled outside of the OMEGA model. The model can be set to
account for various types of compliance flexibilities, such as FFV
credits.
    The remainder of this section describes the technical feasibility
analysis in greater detail. Section III.D.1 describes the development
of our projection of the MY 2012-2016 fleet in the absence of this
final rule. Section III.D.2 describes our estimates of the
effectiveness and cost of the control technologies available for
application in the 2012-2016 timeframe. Section III.D.3 combines these
technologies into packages likely to be applied at the same time by a
manufacturer. In this section, the overall effectiveness of the
technology packages vis-[agrave]-vis their effectiveness when combined
individually is described. Section III.D.4 describes the process which
manufacturers typically use to apply new technology to their vehicles.
Section III.D.5 describes EPA's OMEGA model and its approach to
estimating how manufacturers will add technology to their vehicles in
order to comply with CO2 emission standards. Section III.D.6
presents the results of the OMEGA modeling, namely the level of
technology added to manufacturers' vehicles and its cost. Section
III.D.7 discusses the feasibility of the alternative 4-percent-per-year
and 6-percent-per-year standards. Further detail on all of these issues
can be found in EPA and NHTSA's Joint Technical Support Document as
well as EPA's Regulatory Impact Analysis.
1. How did EPA develop a reference vehicle fleet for evaluating further
CO2 reductions?
    In order to calculate the impacts of this final rule, it is
necessary to project the GHG emissions characteristics of the future
vehicle fleet absent this regulation. This is called the ``reference''
fleet. EPA and NHTSA develop this reference fleet using a three step
process. Step one develops a set of detailed vehicle characteristics
and sales for a specific model year (in this case, 2008). This is
called the baseline fleet. Step two adjusts the sales of these vehicles
using projections made by AEO and CSM to account for expected changes
in market conditions. Step three applies fuel saving and emission
control technology to these vehicles to the extent necessary for
manufacturers to comply with the MY 2011 CAFE standards. Thus, the
reference fleet differs from the MY 2008 baseline fleet in both the
level of technology utilized and in terms of the sales of any
particular vehicle.
    EPA and NHTSA perform steps one and two in an identical manner. The
development of the characteristics of the baseline 2008 fleet and the
adjustment of sales to match AEO and CSM forecasts is described in
detail in Section II.B above. The two agencies perform step three in a
conceptually identical manner, but each agency utilizes its own vehicle
technology and emission model to project the technology needed to
comply with the 2011 CAFE standards. The agencies use the same two
models to project the technology and cost of the 2012-2016 standards.
Use of the same model for both pre-control and post-control costs
ensures consistency.
    The agencies received one comment from the Center for Biological
Diversity that the use of 2008 vehicles in our baseline and reference
fleets inherently includes vehicle models which already have or will be
discontinued by the time this rule takes effect and will be replaced by
more advanced vehicle models. This is true. However, we believe that
the use of 2008 vehicle designs is still the most appropriate

approach available. First, as discussed in Section II.B above, the
designs of these new vehicles at the level of detail required for
emission and cost modeling are not publically available. Even the
confidential descriptions of these vehicle designs are usually not of
sufficient detail to facilitate the level of technology and emission
modeling performed by both agencies. Second, steps two and three of the
process used to create the reference fleet adjust both the sales and
technology of the 2008 vehicles. Thus, our reference fleet reflects the
extent that completely new vehicles are expected to shift the light
vehicle market in terms of both segment and manufacturer. Also, by
adding technology to facilitate compliance with the 2011 CAFE
standards, we account for the vast majority of ways in which these new
vehicles will differ from their older counterparts.
    The agencies also received a comment that some manufacturers have
already announced plans to introduce technology well beyond that
required by the 2011 MY CAFE standards. This commenter indicated that
the agencies' approach over-estimated the technology and cost required
by the proposed standards and resulted in less stringent standards
being proposed than a more realistic reference fleet would have
supported. First, the agencies agree that limiting the application of
additional technology beyond that already on 2008 vehicles to only that
required by the 2011 CAFE standards could under-estimate the use of
such technology absent this rule. However, it is difficult, if not
impossible, to separate future fuel economy improvements made for
marketing purposes from those designed to facilitate compliance with
anticipated CAFE or CO2 emission standards. For example,
EISA was signed over two years ago, which contained specific minimum
limits on light vehicle fuel economy in 2020, while also requiring
ratable improvements in the interim. NHTSA proposed fuel economy
standards for the 2012-2015 model years under the EISA provisions in
April of 2008, although NHTSA finalized only 2011 standards for
passenger vehicles. It is also true that manufacturers can change their
plans based on market conditions and other factors. Thus, announcements
of future plans are not certain. As mentioned above, these plans do not
include specific vehicle characteristics. Thus, in order to avoid
under-estimating the cost associated with this rule, the agencies have
limited the fuel economy improvements in the reference fleet to those
projected to result from the existing CAFE standards. We disagree with
the commenter that this has caused the standards being promulgated
today to be less stringent than would have been the case had we been
able to confidently predict additional fuel economy and CO2
emission improvements which will occur absent this rule. The inclusion
of such technology in the reference fleet would certainly have reduced
the cost of this final rule, as well as the benefits, but would not
have changed the final level of technology required to meet the final
standards. Also, we believe that the same impacts would apply to our
evaluations of the two alternative sets of standards, the 4% per year
and 6% per year standards. We are confident that the vast majority of
manufacturers would not comply with the least stringent of these
standards (the 4% per year standards) in the absence of this rule.
Thus, changes to the reference fleet would not have affected the
differences in technology, cost or benefits between the final standards
and the two alternatives. As described below, our rejection of the two
alternatives in favor of the final standards is based primarily on the
relative technology, cost and benefits associated with the three sets
of standards than the absolute cost or benefit relative to the
reference fleet. Thus, we do not agree with the commenter that our
choice of reference fleet adversely impacted the development of the
final standards being promulgated today.
    The addition of technology to the baseline fleet so that it
complies with the MY 2011 CAFE standards is described later in Section
III.D.4, as this uses the same methodology used to project compliance
with the final CO2 emission standards. In summary, the
reference fleet represents vehicle characteristics and sales in the
2012 and later model years absent this final rule. Technology is then
added to these vehicles in order to reduce CO2 emissions to
achieve compliance with the final CO2 standards. As noted
above, EPA did not factor in any changes to vehicle utility or
characteristics, or sales in projecting manufacturers' compliance with
this final rule.
    After the reference fleet is created, the next step aggregates
vehicle sales by a combination of manufacturer, vehicle platform, and
engine design. As discussed in Section III.D.4 below, manufacturers
implement major design changes at vehicle redesign and tend to
implement these changes across a vehicle platform. Because the cost of
modifying the engine depends on the valve train design (such as SOHC,
DOHC, etc.), the number of cylinders and in some cases head design, the
vehicle sales are broken down beyond the platform level to reflect
relevant engine differences. The vehicle groupings are shown in Table
III.D.1-1. These groupings are the same as those used in the NPRM.

                                      Table III.D.1-1--Vehicle Groupings a
----------------------------------------------------------------------------------------------------------------
              Vehicle description                Vehicle type          Vehicle description         Vehicle type
----------------------------------------------------------------------------------------------------------------
Large SUV (Car) V8+ OHV.......................              13  Subcompact Auto I4..............               1
Large SUV (Car) V6 4v.........................              16  Large Pickup V8+ DOHC...........              19
Large SUV (Car) V6 OHV........................              12  Large Pickup V8+ SOHC 3v........              14
Large SUV (Car) V6 2v SOHC....................               9  Large Pickup V8+ OHV............              13
Large SUV (Car) I4 and I5.....................               7  Large Pickup V8+ SOHC...........              10
Midsize SUV (Car) V6 2v SOHC..................               8  Large Pickup V6 DOHC............              18
Midsize SUV (Car) V6 S/DOHC 4v................               5  Large Pickup V6 OHV.............              12
Midsize SUV (Car) I4..........................               7  Large Pickup V6 SOHC 2v.........              11
Small SUV (Car) V6 OHV........................              12  Large Pickup I4 S/DOHC..........               7
Small SUV (Car) V6 S/DOHC.....................               4  Small Pickup V6 OHV.............              12
Small SUV (Car) I4............................               3  Small Pickup V6 2v SOHC.........               8
Large Auto V8+ OHV............................              13  Small Pickup I4.................               7
Large Auto V8+ SOHC...........................              10  Large SUV V8+ DOHC..............              17
Large Auto V8+ DOHC, 4v SOHC..................               6  Large SUV V8+ SOHC 3v...........              14
Large Auto V6 OHV.............................              12  Large SUV V8+ OHV...............              13
Large Auto V6 SOHC 2/3v.......................               5  Large SUV V8+ SOHC..............              10
Midsize Auto V8+ OHV..........................              13  Large SUV V6 S/DOHC 4v..........              16

Midsize Auto V8+ SOHC.........................              10  Large SUV V6 OHV................              12
Midsize Auto V7+ DOHC, 4v SOHC................               6  Large SUV V6 SOHC 2v............               9
Midsize Auto V6 OHV...........................              12  Large SUV I4....................               7
Midsize Auto V6 2v SOHC.......................               8  Midsize SUV V6 OHV..............              12
Midsize Auto V6 S/DOHC 4v.....................               5  Midsize SUV V6 2v SOHC..........               8
Midsize Auto I4...............................               3  Midsize SUV V6 S/DOHC 4v........               5
Compact Auto V7+ S/DOHC.......................               6  Midsize SUV I4 S/DOHC...........               7
Compact Auto V6 OHV...........................              12  Small SUV V6 OHV................              12
Compact Auto V6 S/DOHC 4v.....................               4  Minivan V6 S/DOHC...............              16
Compact Auto I5...............................               7  Minivan V6 OHV..................              12
Compact Auto I4...............................               2  Minivan I4......................               7
Subcompact Auto V8+ OHV.......................              13  Cargo Van V8+ OHV...............              13
Subcompact Auto V8+ S/DOHC....................               6  Cargo Van V8+ SOHC..............              10
Subcompact Auto V6 2v SOHC....................               8  Cargo Van V6 OHV................              12
Subcompact Auto I5/V6 S/DOHC 4v...............               4
----------------------------------------------------------------------------------------------------------------
\a\ I4 = 4 cylinder engine, I5 = 5 cylinder engine, V6, V7, and V8 = 6, 7, and 8 cylinder engines, respectively,
  DOHC = Double overhead cam, SOHC = Single overhead cam, OHV = Overhead valve, v = number of valves per
  cylinder, ``/'' = and, ``+'' = or larger.

    As mentioned above, the second factor which needs to be considered
in developing a reference fleet against which to evaluate the impacts
of this final rule is the impact of the 2011 MY CAFE standards. Since
the vehicles which comprise the above reference fleet are those sold in
the 2008 MY, when coupled with our sales projections, they do not
necessarily meet the 2011 MY CAFE standards.
    The levels of the 2011 MY CAFE standards are straightforward to
apply to future sales fleets, as is the potential fine-paying
flexibility afforded by the CAFE program (i.e., $55 per mpg of
shortfall). However, projecting some of the compliance flexibilities
afforded by EISA and the CAFE program are less clear. Two of these
compliance flexibilities are relevant to EPA's analysis: (1) The credit
for FFVs, and (2) the limit on the transferring of credits between car
and truck fleets. The FFV credit is limited to 1.2 mpg in 2011 and EISA
gradually reduces this credit, to 1.0 mpg in 2015 and eventually to
zero in 2020. In contrast, the limit on car-truck transfer is limited
to 1.0 mpg in 2011, and EISA increases this to 1.5 mpg beginning in
2015 and then to 2.0 mpg beginning in 2020. The question here is
whether to hold the 2011 MY CAFE provisions constant in the future or
incorporate the changes in the FFV credit and car-truck credit trading
limits contained in EISA.
    As was done for the NPRM, EPA has decided to hold the 2011 MY
limits on FFV credit and car-truck credit trading constant in
projecting the fuel economy and CO2 emission levels of
vehicles in our reference case. This approach treats the changes in the
FFV credit and car-truck credit trading provisions consistently with
the other EISA-mandated changes in the CAFE standards themselves. All
EISA provisions relevant to 2011 MY vehicles are reflected in our
reference case fleet, while all post-2011 MY provisions are not.
Practically, relative to the alternative, this increases both the cost
and benefit of the final standards. In our analysis of this final rule,
any quantified benefits from the presence of FFVs in the fleet are not
considered. Thus, the only impact of the FFV credit is to reduce onroad
fuel economy. By assuming that the FFV credit stays at 1.2 mpg in the
future absent this rule, the assumed level of onroad fuel economy that
would occur absent this final rule is reduced. As this final rule
eliminates the FFV credit (for purposes of CO2 emission
compliance) starting in 2016, the net result is to increase the
projected level of fuel savings from our final standards. Similarly,
the higher level of FFV credit reduces projected compliance cost for
manufacturers to meet the 2011 MY standards in our reference case. This
increases the projected cost of meeting the final 2012 and later
standards.
    As just implied, EPA needs to project the technology (and resultant
costs) required for the 2008 MY vehicles to comply with the 2011 MY
CAFE standards in those cases where they do not automatically do so.
The technology and costs are projected using the same methodology that
projects compliance with the final 2012 and later CO2
standards. The description of this process is described in the
following four sections and is essentially the same process used for
the NPRM.
    A more detailed description of the methodology used to develop
these sales projections can be found in the Joint TSD. Detailed sales
projections by model year and manufacturer can also be found in the
TSD.
2. What are the effectiveness and costs of CO2-reducing
technologies?
    EPA and NHTSA worked together to jointly develop information on the
effectiveness and cost of the CO2-reducing technologies, and
fuel economy-improving technologies, other than A/C related control
technologies. This joint work is reflected in Chapter 3 of the Joint
TSD and in Section II of this preamble. A summary of the effectiveness
and cost of A/C related technology is contained here. For more detailed
information on the effectiveness and cost of A/C related technology,
please refer to Section III.C of this preamble and Chapter 2 of EPA's
RIA.
    A/C improvements are an integral part of EPA's technology analysis
and have been included in this section along with the other technology
options. While discussed in Section III.C as a credit opportunity, air
conditioning-related improvements are included in Table III.D.2-1.
because A/C improvements are a very cost-effective technology at
reducing CO2 (or CO2-equivalent) emissions. EPA
expects most manufacturers will choose to use AC improvement credit
opportunities as a strategy for meeting compliance with the
CO2 standards. Note that the costs shown in Table III.D.2-1
do not include maintenance savings that would be expected from the new
AC systems. Further, EPA does not include AC-related maintenance
savings in our cost and benefit analysis presented in Section III.H.
EPA discusses the likely maintenance savings in Chapter 2 of the RIA,
though these savings are not included in our final cost estimates for
the final rule. The EPA approximates that the level of the credits
earned will increase from 2012 to 2016 as more vehicles in the fleet
are redesigned. The

penetrations and average levels of credit are summarized in Table
III.D.2-2, though the derivation of these numbers (and the breakdown of
car vs. truck credits) is described in the RIA. As demonstrated in the
IMAC study (and described in Section III.C as well as the RIA), these
levels are feasible and achievable with technologies that are available
and cost-effective today.
    These improvements are categorized as either leakage reduction,
including use of alternative refrigerants, or system efficiency
improvements. Unlike the majority of the technologies described in this
section, A/C improvements will not be demonstrated in the test cycles
used to quantify CO2 reductions in this final rule. As
described earlier, for this analysis A/C-related CO2
reductions are handled outside of OMEGA model and therefore their
CO2 reduction potential is expressed in grams per mile
rather than a percentage used by the OMEGA model. See Section III.C.1
for the method by which potential reductions are calculated or
measured. Further discussion of the technological basis for these
improvements is included in Chapter 2 of the RIA.

  Table III.D.2-1--Total CO2 Reduction Potential and 2016 Cost for A/C
              Related Technologies for all Vehicle Classes
                         [Costs in 2007 dollars]
------------------------------------------------------------------------
                                    CO2 reduction         Incremental
                                      potential         compliance costs
------------------------------------------------------------------------
A/C refrigerant leakage         7.5 g/mi \249\.......                $17
 reduction.
A/C efficiency improvements...  5.7 g/mi.............                 53
------------------------------------------------------------------------

           Table III.D.2-2--A/C Related Technology Penetration and Credit Levels Expected To Be Earned
----------------------------------------------------------------------------------------------------------------
                                          Technology                 Average credit over entire fleet
                                         penetration    --------------------------------------------------------
                                          (percent)             Car               Truck          Fleet average
----------------------------------------------------------------------------------------------------------------
2012................................           \250\ 28                3.4                3.8                3.5
2013................................                 40                4.8                5.4                5.0
2014................................                 60                7.2                8.1                7.5
2015................................                 80                9.6               10.8               10.0
2016................................                 85               10.2               11.5               10.6
----------------------------------------------------------------------------------------------------------------

3. How can technologies be combined into ``packages'' and what is the
cost and effectiveness of packages?
    Individual technologies can be used by manufacturers to achieve
incremental CO2 reductions. However, as mentioned in Section
III.D.1, EPA believes that manufacturers are more likely to bundle
technologies into ``packages'' to capture synergistic aspects and
reflect progressively larger CO2 reductions with additions
or changes to any given package. In addition, manufacturers typically
apply new technologies in packages during model redesigns that occur
approximately once every five years, rather than adding new
technologies one at a time on an annual or biennial basis. This way,
manufacturers can more efficiently make use of their redesign resources
and more effectively plan for changes necessary to meet future
standards.
---------------------------------------------------------------------------

    \249\ This represents 50% improvement in leakage and thus 50% of
the A/C leakage impact potential compared to a maximum of 15 g/mi
credit that can be achieved through the incorporation of a low very
GWP refrigerant.
    \250\ We assume slightly higher A/C penetration in 2012 than was
assumed in the proposal to correct for rounding that occurred in the
curve setting process.
---------------------------------------------------------------------------

    Therefore, as explained at proposal, the approach taken here is to
group technologies into packages of increasing cost and effectiveness.
EPA determined that 19 different vehicle types provided adequate
representation to accurately model the entire fleet. This was the
result of analyzing the existing light duty fleet with respect to
vehicle size and powertrain configurations. All vehicles, including
cars and trucks, were first distributed based on their relative size,
starting from compact cars and working upward to large trucks. Next,
each vehicle was evaluated for powertrain, specifically the engine
size, I4, V6, and V8, and finally by the number of valves per cylinder.
Note that each of these 19 vehicle types was mapped into one of the
five classes of vehicles mentioned in Section III.D.2. While the five
classes provide adequate representation for the cost basis associated
with most technology application, they do not adequately account for
all existing vehicle attributes such as base vehicle powertrain
configuration and mass reduction. As an example, costs and
effectiveness estimates for engine friction reduction for the small car
class were used to represent cost and effectiveness for three vehicle
types: Subcompact cars, compact cars, and small multi-purpose vehicles
(MPV) equipped with a 4-cylinder engine, however the mass reduction
associated for each of these vehicle types was based on the vehicle
type sales-weighted average. In another example, a vehicle type for V8
single overhead cam 3-valve engines was created to properly account for
the incremental cost in moving to a dual overhead cam 4-valve
configuration. Note also that these 19 vehicle types span the range of
vehicle footprint (smaller footprints for smaller vehicles and larger
footprints for larger vehicles) which serve as the basis for the
standards being promulgated today. A complete list of vehicles and
their associated vehicle types is shown above in Table III.D.1-1.
    Within each of the 19 vehicle types, multiple technology packages
were created in increasing technology content resulting in increasing
effectiveness. Important to note that the effort in creating the
packages attempted to maintain a constant utility for each package as
compared to the baseline package. As such, each package is meant to
provide equivalent driver-perceived performance to the baseline
package. The initial packages represent what a manufacturer will most
likely implement on all vehicles, including low rolling resistance
tires, low friction lubricants, engine friction reduction, aggressive
shift logic, early torque converter lock-up, improved electrical

accessories, and low drag brakes.\251\ Subsequent packages include
advanced gasoline engine and transmission technologies such as turbo/
downsizing, GDI, and dual-clutch transmission. The most technologically
advanced packages within a segment included HEV, PHEV and EV designs.
The end result is a list of several packages for each of 19 different
vehicle types from which a manufacturer could choose in order to modify
its fleet such that compliance could be achieved.
---------------------------------------------------------------------------

    \251\ When making reference to low friction lubricants, the
technology being referred to is the engine changes and possible
durability testing that would be done to accommodate the low
friction lubricants, not the lubricants themselves.
---------------------------------------------------------------------------

    Before using these technology packages as inputs to the OMEGA
model, EPA calculated the cost and effectiveness for the package. The
first step was to apply the scaling class for each technology package
and vehicle type combination. The scaling class establishes the cost
and effectiveness for each technology with respect to the vehicle size
or type. The Large Car class was provided as an example in Section
III.D.2. Additional classes include Small Car, Minivan, Small Truck,
and Large Truck and each of the 19 vehicle types was mapped into one of
those five classes. In the next step, the cost for a particular
technology package was determined as the sum of the costs of the
applied technologies. The final step, determination of effectiveness,
requires greater care due to the synergistic effects mentioned in
Section III.D.2. This step is described immediately below.
    Usually, the benefits of the engine and transmission technologies
can be combined multiplicatively. For example, if an engine technology
reduces CO2 emissions by five percent and a transmission
technology reduces CO2 emissions by four percent, the
benefit of applying both technologies is 8.8 percent (100%-(100%-4%) *
(100%-5%)). In some cases, however, the benefit of the transmission-
related technologies overlaps with many of the engine technologies.
This occurs because the primary goal of most of the transmission
technologies is to shift operation of the engine to more efficient
locations on the engine map. This is accomplished by incorporating more
ratio selections and a wider ratio span into the transmissions. Some of
the engine technologies have the same goal, such as cylinder
deactivation, advanced valvetrains, and turbocharging. In order to
account for this overlap and avoid over-estimating emissions reduction
effectiveness, EPA has developed a set of adjustment factors associated
with specific pairs of engine and transmission technologies.
    The various transmission technologies are generally mutually
exclusive. As such, the effectiveness of each transmission technology
generally supersedes each other. For example, the 9.5-14.5 percent
reduction in CO2 emissions associated with the automated
manual transmission includes the 4.5-6.5 percent benefit of a 6-speed
automatic transmission. Exceptions are aggressive shift logic and early
torque converter lock-up that can be applied to vehicles with several
types of automatic transmissions.
    EPA has chosen to use an engineering approach known as the lumped-
parameter technique to determine these adjustment factors. The results
from this approach were then applied directly to the vehicle packages.
The lumped-parameter technique is well documented in the literature,
and the specific approach developed by EPA is detailed in Chapter 1 of
the RIA.
    Table III.D.3-1 presents several examples of the reduction in the
effectiveness of technology pairs. A complete list and detailed
discussion of these synergies is presented in Chapter 3 of the Joint
TSD.

   Table III.D.3-1--Reduction in Effectiveness for Selected Technology
                                  Pairs
------------------------------------------------------------------------
                                                          Reduction in
                                     Transmission           combined
       Engine technology              technology         effectiveness
                                                           (percent)
------------------------------------------------------------------------
Intake cam phasing............  5 speed automatic....                0.5
Coupled cam phasing...........  5 speed automatic....                0.5
Coupled cam phasing...........  Aggressive shift                     0.5
                                 logic.
Cylinder deactivation.........  5 speed automatic....                1.0
Cylinder deactivation.........  Aggressive shift                     0.5
                                 logic.
------------------------------------------------------------------------

    Table III.D.3-2 presents several examples of the CO2-
reducing technology vehicle packages used in the OMEGA model for the
large car class. Similar packages were generated for each of the 19
vehicle types and the costs and effectiveness estimates for each of
those packages are discussed in detail in Chapter 3 of the Joint TSD.

    Table III.D.3-2--CO2 Reducing Technology Vehicle Packages for a Large Car Effectiveness and Costs in 2016
                                             [Costs in 2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                         Transmission
         Engine technology                technology       Additional technology   CO2 reduction   Package cost
----------------------------------------------------------------------------------------------------------------
3.3L V6...........................  4 speed automatic....  None.................             Baseline
                                   -----------------------------------------------------------------------------
3.0L V6 + GDI + CCP...............  6 speed automatic....  3% Mass Reduction....           17.9%            $985
3.0L V6 + GDI + CCP + Deac........  6 speed automatic....  5% Mass Reduction....           20.6%           1,238
2.2L I4 + GDI + Turbo + DCP.......  6 speed DCT..........  10% Mass Reduction              34.3%           1,903
                                                            Start-Stop.
----------------------------------------------------------------------------------------------------------------

4. Manufacturer's Application of Technology
    Vehicle manufacturers often introduce major product changes
together, as a package. In this manner the manufacturers can optimize
their available resources, including engineering, development,
manufacturing and marketing activities to create a product with
multiple new features. In addition, manufacturers recognize that a
vehicle will need to remain competitive over its intended life, meet
future regulatory requirements, and contribute to a manufacturer's CAFE
requirements. Furthermore, automotive manufacturers are largely focused
on creating vehicle platforms to limit the development of entirely new
vehicles and to realize economies of scale with regard to variable
cost. In very limited cases, manufacturers may implement an individual
technology outside of a vehicle's redesign cycle.\252\ In following
with these industry practices, EPA has created set of vehicle
technology packages that represent the entire light duty fleet.
---------------------------------------------------------------------------

    \252\ The Center for Biological Diversity submitted comments
disputing this distinction as well as the need for lead time. These
comments are addressed in Section III.D.7.
---------------------------------------------------------------------------

    In evaluating needed lead time, EPA has historically authorized
manufacturers of new vehicles or nonroad equipment to phase in
available emission control technology over a number of years. Examples
of this are EPA's Tier 2 program for cars and light trucks and its 2007
and later PM and NOX emission standards for heavy-duty
vehicles. In both of these rules, the major modifications expected from
the rules were the addition of exhaust aftertreatment control
technologies. Some changes to the engine were expected as well, but
these were not expected to affect engine size, packaging or
performance. The CO2 reduction technologies described above
potentially involve much more significant changes to car and light
truck designs. Many of the engine technologies involve changes to the
engine block and heads. The transmission technologies could change the
size and shape of the transmission and thus, packaging. Improvements to
aerodynamic drag could involve body design and therefore, the dies used
to produce body panels. Changes of this sort potentially involve new
capital investment and the obsolescence of existing investment.
    At the same time, vehicle designs are not static, but change in
major ways periodically. The manufacturers' product plans indicate that
vehicles are usually redesigned every 5 years on average.\253\ Vehicles
also tend to receive a more modest ``refresh'' between major redesigns,
as discussed above. Because manufacturers are already changing their
tooling, equipment and designs at these times, further changes to
vehicle design at these times involve a minimum of stranded capital
equipment. Thus, the timing of any major technological changes is
projected to coincide with changes that manufacturers are already
making to their vehicles. This approach effectively avoids the need to
quantify any costs associated with discarding equipment, tooling,
emission and safety certification, etc. when CO2-reducing
equipment is incorporated into a vehicle.
---------------------------------------------------------------------------

    \253\ See discussion in Section III.D.7 with references.
---------------------------------------------------------------------------

    This final rule affects five years of vehicle production, model
years 2012-2016. Given the now-typical five year redesign cycle, nearly
all of a manufacturer's vehicles will be redesigned over this period.
However, this assumes that a manufacturer has sufficient lead time to
redesign the first model year affected by this final rule with the
requirements of this final rule in mind. In fact, the lead time
available for model year 2012 is relatively short. The time between a
likely final rule and the start of 2013 model year production is likely
to be just over two years. At the same time, the manufacturer product
plans indicate that they are planning on introducing many of the
technologies projected to be required by this final rule in both 2012
and 2013. In order to account for the relatively short lead time
available prior to the 2012 and 2013 model years, albeit mitigated by
their existing plans, EPA projects that only 85 percent of each
manufacturer's sales will be able to be redesigned with major
CO2 emission-reducing technologies by the 2016 model year.
Less intrusive technologies can be introduced into essentially all of a
manufacturer's sales. This resulted in three levels of technology
penetration caps, by manufacturer. Common technologies (e.g., low
friction lubes, aerodynamic improvements) had a penetration cap of
100%. More advanced powertrain technologies (e.g., stoichiometric GDI,
turbocharging) had a penetration cap of 85%. The most advanced
technologies considered in this analysis (e.g., diesel engines,\254\ as
well as IMA, powersplit and 2-mode hybrids) had a 15% penetration cap.
---------------------------------------------------------------------------

    \254\ While diesel engines are a mature technology and not
``advanced'', the aftertreatment systems necessary for them in the
U.S. market are advanced.
---------------------------------------------------------------------------

    This is the same approach as was taken in the NPRM. EPA received
several comments commending it on its approach to establishing
technical feasibility via its use of the OMEGA model. The only adverse
comment received regarding the application of technology was from the
Center for Biological Diversity (CBD), which criticized EPA's use of
the 5-year redesign cycle. CBD argued that manufacturers occasionally
redesign vehicles sooner than 5 years and that EPA did not quantify the
cost of shortening the redesign cycle to less than 5 years and compare
this cost to the increased benefit of reduced CO2 emissions.
CBD also noted that manufacturers have been recently dropping vehicle
lines and entire divisions with very little leadtime, indicating their
ability to change product plans much quicker than projected above.
    EPA did not explicitly evaluate the cost of reducing the average
redesign cycle to less than 5 years for two reasons. One, in the past,
manufacturers have usually shortened the redesign cycle to address
serious problems with the current design, usually lower than
anticipated sales. However, the amortized cost of the capital necessary
to produce a new vehicle design will increase by 23%, from one-fifth of
the capital cost to one-fourth (and assuming a 3% discount rate). This
would be on top of the cost of the emission control equipment itself.
The only benefit of this increase in societal cost will be earlier
CO2 emission reductions (and the other benefits associated
with CO2 emission control). The capital costs associated
with vehicle redesign go beyond CO2 emission control and
potentially involve every aspect of the vehicle and can represent
thousands of dollars. We believe that it would be an inefficient use of
societal resources to incur such costs when they can be obtained much
more cost effectively just one year later.
    Two, the examples of manufacturers dropping vehicle lines and
divisions with very short lead time is not relevant to the redesign of
vehicles. There is no relationship between a manufacturer's ability to
stop selling a vehicle model or to close a vehicle division and a
manufacturer's ability to redesign a vehicle. A company could decide to
stop selling all of its products within a few weeks--but it would still
take a firm approximately 5 years to introduce a major new vehicle
line. It is relatively easy to stop the manufacture of a particular
product (though this too can

incur some cost--such as plant wind-down costs, employee layoff or
relocation costs, and dealership related costs). It is much more
difficult to perform the required engineering design and development,
design, purchase, and install the necessary capital equipment and
tooling for components and vehicle manufacturing and develop all the
processes associated with the application of a new technology. Further
discussion of the CBD comments can be found in III.D.7 below.
5. How is EPA projecting that a manufacturer decides between options to
improve CO2 performance to meet a fleet average standard?
    EPA is generally taking the same approach to projecting the
application of technology to vehicles as it did for the NPRM. With the
exception of two comments, all commenters agreed with the modeling
approach taken in the NPRM. One of these two comments is addressed is
Section III.D.1 above, while the other is addressed in Section III.D.3.
above.
    There are many ways for a manufacturer to reduce CO2-
emissions from its vehicles. A manufacturer can choose from a myriad of
CO2 reducing technologies and can apply one or more of these
technologies to some or all of its vehicles. Thus, for a variety of
levels of CO2 emission control, there are an almost infinite
number of technology combinations which produce the desired
CO2 reduction. As noted earlier, EPA developed a new vehicle
model, the OMEGA model in order to make a reasonable estimate of how
manufacturers will add technologies to vehicles in order to meet a
fleet-wide CO2 emissions level. EPA has described OMEGA's
specific methodologies and algorithms in a memo to the docket for this
rulemaking (Docket EPA-HQ-OAR-2009-0472).
    The OMEGA model utilizes four basic sets of input data. The first
is a description of the vehicle fleet. The key pieces of data required
for each vehicle are its manufacturer, CO2 emission level,
fuel type, projected sales and footprint. The model also requires that
each vehicle be assigned to one of the 19 vehicle types, which tells
the model which set of technologies can be applied to that vehicle.
(For a description of how the 19 vehicle types were created, reference
Section III.D.3.) In addition, the degree to which each vehicle already
reflects the effectiveness and cost of each available technology must
also be input. This avoids the situation, for example, where the model
might try to add a basic engine improvement to a current hybrid
vehicle. Except for this type of information, the development of the
required data regarding the reference fleet was described in Section
III.D.1 above and in Chapter 1 of the Joint TSD.
    The second type of input data used by the model is a description of
the technologies available to manufacturers, primarily their cost and
effectiveness. Note that the five vehicle classes are not explicitly
used by the model, rather the costs and effectiveness associated with
each vehicle package is based on the associated class. This information
was described in Sections III.D.2 and III.D.3 above as well as Chapter
3 of the Joint TSD. In all cases, the order of the technologies or
technology packages for a particular vehicle type is determined by the
model user prior to running the model. Several criteria can be used to
develop a reasonable ordering of technologies or packages. These are
described in the Joint TSD.
    The third type of input data describes vehicle operational data,
such as annual scrap rates and mileage accumulation rates, and economic
data, such as fuel prices and discount rates. These estimates are
described in Section II.F above, Section III.H below and Chapter 4 of
the Joint TSD.
    The fourth type of data describes the CO2 emission
standards being modeled. These include the CO2 emission
equivalents of the 2011 MY CAFE standards and the final CO2
standards for 2016. As described in more detail below, the application
of A/C technology is evaluated in a separate analysis from those
technologies which impact CO2 emissions over the 2-cycle
test procedure. Thus, for the percent of vehicles that are projected to
achieve A/C related reductions, the CO2 credit associated
with the projected use of improved A/C systems is used to adjust the
final CO2 standard which will be applicable to each
manufacturer to develop a target for CO2 emissions over the
2-cycle test which is assessed in our OMEGA modeling.
    As mentioned above for the market data input file utilized by
OMEGA, which characterizes the vehicle fleet, our modeling must and
does account for the fact that many 2008 MY vehicles are already
equipped with one or more of the technologies discussed in Section
III.D.2 above. Because of the choice to apply technologies in packages,
and 2008 vehicles are equipped with individual technologies in a wide
variety of combinations, accounting for the presence of specific
technologies in terms of their proportion of package cost and
CO2 effectiveness requires careful, detailed analysis. The
first step in this analysis is to develop a list of individual
technologies which are either contained in each technology package, or
would supplant the addition of the relevant portion of each technology
package. An example would be a 2008 MY vehicle equipped with variable
valve timing and a 6-speed automatic transmission. The cost and
effectiveness of variable valve timing would be considered to be
already present for any technology packages which included the addition
of variable valve timing or technologies which went beyond this
technology in terms of engine related CO2 control
efficiency. An example of a technology which supplants several
technologies would be a 2008 MY vehicle which was equipped with a
diesel engine. The effectiveness of this technology would be considered
to be present for technology packages which included improvements to a
gasoline engine, since the resultant gasoline engines have a lower
CO2 control efficiency than the diesel engine. However, if
these packages which included improvements also included improvements
unrelated to the engine, like transmission improvements, only the
engine related portion of the package already present on the vehicle
would be considered. The transmission related portion of the package's
cost and effectiveness would be allowed to be applied in order to
comply with future CO2 emission standards.
    The second step in this process is to determine the total cost and
CO2 effectiveness of the technologies already present and
relevant to each available package. Determining the total cost usually
simply involves adding up the costs of the individual technologies
present. In order to determine the total effectiveness of the
technologies already present on each vehicle, the lumped parameter
model described above is used. Because the specific technologies
present on each 2008 vehicle are known, the applicable synergies and
dis-synergies can be fully accounted for.
    The third step in this process is to divide the total cost and
CO2 effectiveness values determined in step 2 by the total
cost and CO2 effectiveness of the relevant technology
packages. These fractions are capped at a value of 1.0 or less, since a
value of 1.0 causes the OMEGA model to not change either the cost or
CO2 emissions of a vehicle when that technology package is
added.
    As described in Section III.D.3 above, technology packages are
applied to groups of vehicles which generally represent a single
vehicle platform and which are equipped with a single engine size
(e.g., compact cars with four cylinder engine produced by Ford). These
grouping are described in Table III.D.1-1. Thus, the fourth step is to

combine the fractions of the cost and effectiveness of each technology
package already present on the individual 2008 vehicles models for each
vehicle grouping. For cost, percentages of each package already present
are combined using a simple sales-weighting procedure, since the cost
of each package is the same for each vehicle in a grouping. For
effectiveness, the individual percentages are combined by weighting
them by both sales and base CO2 emission level. This
appropriately weights vehicle models with either higher sales or
CO2 emissions within a grouping. Once again, this process
prevents the model from adding technology which is already present on
vehicles, and thus ensures that the model does not double count
technology effectiveness and cost associated with complying with the
2011 MY CAFE standards and the final CO2 standards.
    Conceptually, the OMEGA model begins by determining the specific
CO2 emission standard applicable for each manufacturer and
its vehicle class (i.e., car or truck). Since the final rule allows for
averaging across a manufacturer's cars and trucks, the model determines
the CO2 emission standard applicable to each manufacturer's
car and truck sales from the two sets of coefficients describing the
piecewise linear standard functions for cars and trucks in the inputs,
and creates a combined car-truck standard. This combined standard
considers the difference in lifetime VMT of cars and trucks, as
indicated in the final regulations which govern credit trading between
these two vehicle classes. For both the 2011 CAFE and 2016
CO2 standards, these standards are a function of each
manufacturer's sales of cars and trucks and their footprint values.
When evaluating the 2011 MY CAFE standards, the car-truck trading was
limited to 1.2 mpg. When evaluating the final CO2 standards,
the OMEGA model was run only for MY 2016. OMEGA is designed to evaluate
technology addition over a complete redesign cycle and 2016 represents
the final year of a redesign cycle starting with the first year of the
final CO2 standards, 2012. Estimates of the technology and
cost for the interim model years are developed from the model
projections made for 2016. This process is discussed in Chapter 6 of
EPA's RIA to this final rule. When evaluating the 2016 standards using
the OMEGA model, the final CO2 standard which manufacturers
will otherwise have to meet to account for the anticipated level of A/C
credits generated was adjusted. On an industry wide basis, the
projection shows that manufacturers will generate 11 g/mi of A/C credit
in 2016. Thus, the 2016 CO2 target for the fleet evaluated
using OMEGA was 261 g/mi instead of 250 g/mi.
    As noted above, EPA estimated separately the cost of the improved
A/C systems required to generate the 11 g/mi credit. This is consistent
with our final A/C credit procedures, which will grant manufacturers A/
C credits based on their total use of improved A/C systems, and not on
the increased use of such systems relative to some base model year
fleet. Some manufacturers may already be using improved A/C technology.
However, this represents a small fraction of current vehicle sales. To
the degree that such systems are already being used, EPA is over-
estimating both the cost and benefit of the addition of improved A/C
technology relative to the true reference fleet to a small degree.
    The model then works with one manufacturer at a time to add
technologies until that manufacturer meets its applicable standard. The
OMEGA model can utilize several approaches to determining the order in
which vehicles receive technologies. For this analysis, EPA used a
``manufacturer-based net cost-effectiveness factor'' to rank the
technology packages in the order in which a manufacturer is likely to
apply them. Conceptually, this approach estimates the cost of adding
the technology from the manufacturer's perspective and divides it by
the mass of CO2 the technology will reduce. One component of
the cost of adding a technology is its production cost, as discussed
above. However, it is expected that new vehicle purchasers value
improved fuel economy since it reduces the cost of operating the
vehicle. Typical vehicle purchasers are assumed to value the fuel
savings accrued over the period of time which they will own the
vehicle, which is estimated to be roughly five years. It is also
assumed that consumers discount these savings at the same rate as that
used in the rest of the analysis (3 or 7 percent). Any residual value
of the additional technology which might remain when the vehicle is
sold is not considered. The CO2 emission reduction is the
change in CO2 emissions multiplied by the percentage of
vehicles surviving after each year of use multiplied by the annual
miles travelled by age, again discounted to the year of vehicle
purchase.
    Given this definition, the higher priority technologies are those
with the lowest manufacturer-based net cost-effectiveness value
(relatively low technology cost or high fuel savings leads to lower
values). Because the order of technology application is set for each
vehicle, the model uses the manufacturer-based net cost-effectiveness
primarily to decide which vehicle receives the next technology
addition. Initially, technology package 1 is the only one
available to any particular vehicle. However, as soon as a vehicle
receives technology package 1, the model considers the
manufacturer-based net cost-effectiveness of technology package
2 for that vehicle and so on. In general terms, the equation
describing the calculation of manufacturer-based cost effectiveness is
as follows:
[GRAPHIC] [TIFF OMITTED] TR07MY10.018

Where

ManufCostEff = Manufacturer-Based Cost Effectiveness (in dollars per
kilogram CO2),
TechCost = Marked up cost of the technology (dollars),
PP = Payback period, or the number of years of vehicle use over
which consumers value fuel savings when evaluating the value of a
new vehicle at time of purchase,
dFSi = Difference in fuel consumption due to the addition
of technology times fuel price in year i,
dCO2 = Difference in CO2 emissions due to the
addition of technology,
VMTi = product of annual VMT for a vehicle of age i and the
percentage of vehicles of age i still on the road, and
1- Gap = Ratio of onroad fuel economy to two-cycle (FTP/HFET) fuel
economy.

    The OMEGA model does not currently allow for the VMT used in
determining the various technology ranking factors to be a function of
the rebound factor. If the user believed that the consideration of
rebound VMT was important, they could increase their estimate of the
payback period to simulate the impact of the rebound VMT.
    EPA describes the technology ranking methodology and manufacturer-
based cost effectiveness metric in greater detail in a technical memo
to the Docket for this final rule (Docket EPA-HQ-OAR-2009-0472).
    When calculating the fuel savings, the full retail price of fuel,
including taxes is used. While taxes are not generally included when
calculating the cost or benefits of a regulation, the net cost
component of the manufacturer-based net cost-effectiveness equation is
not a measure of the social cost of this final rule, but a measure of
the private cost, (i.e., a measure of the vehicle purchaser's
willingness to pay more for a vehicle with higher fuel efficiency).
Since vehicle operators pay the full price of fuel, including taxes,
they value fuel costs or savings at this level, and the manufacturers
will consider this when choosing among the technology options.
    This definition of manufacturer-based net cost-effectiveness
ignores any change in the residual value of the vehicle due to the
additional technology when the vehicle is five years old. As discussed
in Chapter 1 of the RIA, based on historic used car pricing, applicable
sales taxes, and insurance, vehicles are worth roughly 23% of their
original cost after five years, discounted to year of vehicle purchase
at 7% per annum. It is reasonable to estimate that the added technology
to improve CO2 level and fuel economy will retain this same
percentage of value when the vehicle is five years old. However, it is
less clear whether first purchasers, and thus, manufacturers consider
this residual value when ranking technologies and making vehicle
purchases, respectively. For this final rule, this factor was not
included in our determination of manufacturer-based net cost-
effectiveness in the analyses performed in support of this final rule.
    The values of manufacturer-based net cost-effectiveness for
specific technologies will vary from vehicle to vehicle, often
substantially. This occurs for three reasons. First, both the cost and
fuel-saving component cost, ownership fuel-savings, and lifetime
CO2 effectiveness of a specific technology all vary by the
type of vehicle or engine to which it is being applied (e.g., small car
versus large truck, or 4-cylinder versus 8-cylinder engine). Second,
the effectiveness of a specific technology often depends on the
presence of other technologies already being used on the vehicle (i.e.,
the dis-synergies). Third, the absolute fuel savings and CO2
reduction of a percentage on incremental reduction in fuel consumption
depends on the CO2 level of the vehicle prior to adding the
technology. Chapter 1 of the RIA of this final rule contains further
detail on the values of manufacturer-based net cost-effectiveness for
the various technology packages.
6. Why are the final CO2 standards feasible?
    The finding that the final standards are technically feasible is
based primarily on two factors. One is the level of technology needed
to meet the final standards. The other is the cost of this technology.
The focus is on the final standards for 2016, as this is the most
stringent standard and requires the most extensive use of technology.
    With respect to the level of technology required to meet the
standards, EPA established technology penetration caps. As described in
Section III.D.4, EPA used two constraints to limit the model's
application of technology by manufacturer. The first was the
application of common fuel economy enablers such as low rolling
resistance tires and transmission logic changes. These were allowed to
be used on all vehicles and hence had no penetration cap. The second
constraint was applied to most other technologies and limited their
application to 85% with the exception of the most advanced technologies
(e.g., power-split hybrid and 2-mode hybrid) and diesel,\255\ whose
application was limited to 15%.
---------------------------------------------------------------------------

    \255\ While diesel engines are not an ``advanced technology''
per se, diesel engines that can meet EPA's light duty Tier 2 Bin 5
NOX standards have advanced (and somewhat costly)
aftertreatment systems on them that make this technology penetration
cap appropriate in addition to their relatively high incremental
costs.
---------------------------------------------------------------------------

    EPA used the OMEGA model to project the technology (and resultant
cost) required for manufacturers to meet the current 2011 MY CAFE
standards and the final 2016 MY CO2 emission standards. Both
sets of standards were evaluated using the OMEGA model. The 2011 MY
CAFE standards were applied to cars and trucks separately with the
transfer of credits from one category to the other allowed up to an
increase in fuel economy of 1.0 mpg as allowed under the applicable MY
2011 CAFE regulations. Chrysler, Ford and General Motors are assumed to
utilize FFV credits up to the maximum of 1.2 mpg for both their car and
truck sales. Nissan is assumed to utilize FFV credits up to the maximum
of 1.2 mpg for only their truck sales. The use of any banked credits
from previous model years was not considered. The modification of the
reference fleet to comply with the 2011 CAFE standards through the
application of technology by the OMEGA model is the final step in
creating the final reference fleet. This final reference fleet forms
the basis for comparison for the model year 2016 standards.
    Table III.D.6-1 shows the usage level of selected technologies in
the 2008 vehicles coupled with 2016 sales prior to projecting their
compliance with the 2011 MY CAFE standards. These technologies include
converting port fuel-injected gasoline engines to direct injection
(GDI), adding the ability to deactivate certain engine cylinders during
low load operation to overhead cam engines (OHC-DEAC), adding a
turbocharger and downsizing the engine (Turbo), diesel engine
technology, increasing the number of transmission speeds to 6, or
converting automatic transmissions to dual-clutch automated manual
transmissions (Dual-Clutch Trans), adding 42 volt start-stop capability
(Start-Stop), and converting a vehicle to an intermediate or strong
hybrid design. This last category includes three current hybrid
designs: Integrated motor assist (IMA), power-split (PS), 2-mode
hybrids and electric vehicles.\256\
---------------------------------------------------------------------------

    \256\ EPA did not project reliance on the use of any plug-in
hybrid or battery electric vehicles when projecting manufacturers'
compliance with the 2016 standards. However, BMW did sell a battery
electric vehicle in the 2008 model year, so these sales are included
in the technology penetration estimates for the reference case and
the final and alternative standards evaluated for 2016.

                              Table III.D.6-1--Penetration of Technology in 2008 Vehicles With 2016 Sales: Cars and Trucks
                                                                   [Percent of sales]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                6 Speed    Dual clutch
                                                      GDI        OHC-DEAC      Turbo        Diesel     auto trans     trans      Start-stop     Hybrid
--------------------------------------------------------------------------------------------------------------------------------------------------------
BMW.............................................          7.5          0.0          6.1          0.0           86          0.9            0          0.1
Chrysler........................................          0.0          0.0          0.5          0.1           14          0.0            0          0.0
Daimler.........................................          0.0          0.0          6.5          5.6           76          7.5            0          0.0
Ford............................................          0.4          0.0          2.2          0.0           29          0.0            0          0.0
General Motors..................................          3.1          0.0          1.4          0.0           15          0.0            0          0.3
Honda...........................................          1.4          7.1          1.4          0.0            0          0.0            0          2.1
Hyundai.........................................          0.0          0.0          0.0          0.0            3          0.0            0          0.0
Kia.............................................          0.0          0.0          0.0          0.0            0          0.0            0          0.0
Mazda...........................................         13.6          0.0         13.6          0.0           26          0.0            0          0.0
Mitsubishi......................................          0.0          0.0          0.0          0.0           10          0.0            0          0.0
Nissan..........................................          0.0          0.0          0.0          0.0            0          0.0            0          0.8
Porsche.........................................         58.6          0.0         14.9          0.0           49          0.0            0          0.0
Subaru..........................................          0.0          0.0          9.8          0.0            0          0.0            0          0.0
Suzuki..........................................          0.0          0.0          0.0          0.0            0          0.0            0          0.0
Tata............................................          0.0          0.0         17.3          0.0           99          0.0            0          0.0
Toyota..........................................          6.8          0.0          0.0          0.0           21          0.0            0         11.6
Volkswagen......................................         50.6          0.0         39.5          0.0           69         13.1            0          0.0
Overall.........................................          3.8          0.8          2.6          0.1         19.1          0.5          0.0          2.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As can be seen, all of these technologies were already being used
on some 2008 MY vehicles, with the exception of direct injection
gasoline engines with either cylinder deactivation or turbocharging and
downsizing. Transmissions with more gearsets were the most prevalent,
with some manufacturers (e.g., BMW, Suzuki) using them on essentially
all of their vehicles. Both Daimler and VW equip many of their vehicles
with automated manual transmissions, while VW makes extensive use of
direct injection gasoline engine technology. Toyota has converted a
significant percentage of its 2008 vehicles to strong hybrid design.
    Table III.D.6-2 shows the usage level of the same technologies in
the reference case fleet after projecting their compliance with the