These updated survival rates suggest that the expected lifetimes of
recent-model passenger cars and light trucks are 13.8 and 14.5
years.
---------------------------------------------------------------------------

    The next step in estimating fuel use is to calculate the total
number of miles that cars and light trucks remaining in use will be
driven each year. To estimate the total number of miles driven by cars
or light trucks produced in a model year during each subsequent year,
the number projected to remain in use during that year is multiplied by
the average number of miles those vehicles are expected to be driven at
the age they will have reached in that year. The agency estimated
annual usage of cars and light trucks of each age using data from the
Federal Highway Administration's 2001 National Household Travel Survey
(NHTS).\652\ Because these estimates reflect the historically low
gasoline prices that prevailed at the time the 2001 NHTS was conducted,
however, NHTSA adjusted them to account for the effect on vehicle use
of the higher fuel prices projected over the lifetimes of model year
2017-25 cars and light trucks. Details of this adjustment are provided
in Chapter VIII of the PRIA and Chapter 4 of the draft Joint TSD.
---------------------------------------------------------------------------

    \652\ For a description of the Survey, see http://nhts.ornl.gov/introduction.shtml#2001 (last accessed September 26, 2011).
---------------------------------------------------------------------------

    The estimates of annual miles driven at different vehicle ages
derived from the 2001 NHTS were also adjusted to reflect projected
future growth in average use for vehicles at every age over their
lifetimes. Increases in average annual use of cars and light trucks,
which have averaged approximately 1 percent annually over the past two
decades, have been an important source of historical growth in the
total number of miles they are driven each year. To estimate future
growth in their average annual use for purposes of this rulemaking,
NHTSA calculated the rate of growth in the adjusted mileage schedules
derived from the 2001 NHTS that would be necessary for total car and
light truck travel to increase at the rate forecast in the AEO 2011
Reference Case.\653\ This rate was calculated to be consistent with
future changes in the overall size and age distributions of the U.S.
passenger car and light truck fleets that result from the agency's
forecasts of total car and light truck sales and updated survival
rates. The resulting growth rate in average annual car and light truck
use is approximately 1.1 percent from 2017 through 2030, and declines
to 0.5 percent per year thereafter. \654\ While the adjustment for
future fuel prices reduces average annual mileage at each age from the
values derived using the 2001 NHTS, the adjustment for expected future
growth in average vehicle use increases it. The net effect of these two
adjustments is to increase expected lifetime mileage for MY 2017-25
passenger cars and light trucks by about 22 percent from the estimates
originally derived from the 2001 NHTS.
---------------------------------------------------------------------------

    \653\ This approach differs from that used in the MY 2011 final
rule, where it was assumed that future growth in the total number of
cars and light trucks in use resulting from projected sales of new
vehicles was adequate by itself to account for growth in total
vehicle use, without assuming continuing growth in average vehicle
use.
    \654\ While the adjustment for future fuel prices reduces
average mileage at each age from the values derived from the 2001
NHTS, the adjustment for expected future growth in average vehicle
use increases it. The net effect of these two adjustments is to
increase expected lifetime mileage by about 18 percent significantly
for both passenger cars and about 16 percent for light trucks.
---------------------------------------------------------------------------

    Finally, the agency estimated total fuel consumption by passenger
cars and light trucks remaining in use each year by dividing the total
number of miles surviving vehicles are driven by the fuel economy they
are expected to achieve under each alternative CAFE standard. Each
model year's total lifetime fuel consumption is the sum of fuel use by
the cars or light trucks produced during that model year over its life
span. In turn, the savings in lifetime fuel use by cars or light trucks
produced during each model year affected by this proposed rule that
will result from each alternative CAFE standard is the difference
between its lifetime fuel use at the fuel economy level it attains
under the Baseline alternative, and its lifetime fuel use at the higher
fuel economy level it is projected to achieve under that alternative
standard.\655\
---------------------------------------------------------------------------

    \655\ To illustrate these calculations, the agency's adjustment
of the AEO 2009 Revised Reference Case forecast indicates that 9.26
million passenger cars will be produced during 2012, and the
agency's updated survival rates show that 83 percent of these
vehicles, or 7.64 million, are projected to remain in service during
the year 2022, when they will have reached an age of 10 years. At
that age, passenger achieving the fuel economy level they are
projected to achieve under the Baseline alternative are driven an
average of about 800 miles, so surviving model year 2012 passenger
cars will be driven a total of 82.5 billion miles (= 7.64 million
surviving vehicles x 10,800 miles per vehicle) during 2022. Summing
the results of similar calculations for each year of their 26-year
maximum lifetime, model year 2012 passenger cars will be driven a
total of 1,395 billion miles under the Baseline alternative. Under
that alternative, they are projected to achieve a test fuel economy
level of 32.4 mpg, which corresponds to actual on-road fuel economy
of 25.9 mpg (= 32.4 mpg x 80 percent). Thus their lifetime fuel use
under the Baseline alternative is projected to be 53.9 billion
gallons (= 1,395 billion miles divided by 25.9 miles per gallon).
---------------------------------------------------------------------------

g. Accounting for the Fuel Economy Rebound Effect

    The fuel economy rebound effect refers to the fact that some of the
fuel

savings expected to result from higher fuel economy, such as an
increase in fuel economy required by the adoption of higher CAFE
standards, may be offset by additional vehicle use. The increase in
vehicle use occurs because higher fuel economy reduces the fuel cost of
driving, which is typically the largest single component of the
monetary cost of operating a vehicle, and vehicle owners respond to
this reduction in operating costs by driving more. Even with their
higher fuel economy, this additional driving consumes some fuel, so
this effect reduces the fuel savings that result when raising CAFE
standards requires manufacturers to improve fuel economy. The rebound
effect refers to the fraction of fuel savings expected to result from
increased fuel economy that is offset by additional driving.\656\
---------------------------------------------------------------------------

    \656\ Formally, the rebound effect is often expressed as the
elasticity of vehicle use with respect to the cost per mile driven.
Additionally, it is consistently expressed as a positive percentage
(rather than as a negative decimal fraction, as this elasticity is
normally expressed).
---------------------------------------------------------------------------

    The magnitude of the rebound effect is an important determinant of
the actual fuel savings that are likely to result from adopting
stricter CAFE standards. Research on the magnitude of the rebound
effect in light-duty vehicle use dates to the early 1980s, and
generally concludes that a significant rebound effect occurs when
vehicle fuel efficiency improves.\657\ The most common approach to
estimating its magnitude has been to analyze survey data on household
vehicle use, fuel consumption, fuel prices, and other factors affecting
household travel behavior to estimate the response of vehicle use to
differences in the fuel efficiency of individual vehicles. Because this
approach most closely matches the definition of the rebound effect,
which is the response of vehicle use to differences in fuel economy,
the agency regards these studies as likely to produce the most reliable
estimates of the rebound effect. Other studies have relied on
econometric analysis of annual U.S. data on vehicle use, fuel
efficiency, fuel prices, and other variables to estimate the response
of total or average vehicle use to changes in fleet-wide average fuel
economy and its effect on fuel cost per mile driven. More recent
studies have analyzed yearly variation in vehicle ownership and use,
fuel prices, and fuel economy among states over an extended time period
in order to measure the response of vehicle use to changing fuel costs
per mile.\658\
---------------------------------------------------------------------------

    \657\ Some studies estimate that the long-run rebound effect is
significantly larger than the immediate response to increased fuel
efficiency. Although their estimates of the adjustment period
required for the rebound effect to reach its long-run magnitude
vary, this long-run effect is probably more appropriate for
evaluating the fuel savings and emissions reductions resulting from
stricter standards that would apply to future model years.
    \658\ In effect, these studies treat U.S. states as a data
``panel'' by applying appropriate estimation procedures to data
consisting of each year's average values of these variables for the
separate states.
---------------------------------------------------------------------------

    Another important distinction among studies of the rebound effect
is whether they assume that the effect is constant, or allow it to vary
in response to changes in fuel costs, personal income, or vehicle
ownership. Most studies using aggregate annual data for the U.S. assume
a constant rebound effect, although some of these studies test whether
the effect varies as changes in retail fuel prices or average fuel
efficiency alter fuel cost per mile driven. Studies using household
survey data estimate significantly different rebound effects for
households owning varying numbers of vehicles, with most concluding
that the rebound effect is larger among households that own more
vehicles. Finally, recent studies using state-level data conclude that
the rebound effect varies directly in response to changes in personal
income, the degree of urbanization of U.S. cities, and differences in
traffic congestion levels, as well as fuel costs. Some studies conclude
that the long-run rebound effect is significantly larger than the
immediate response of vehicle use to increased fuel efficiency.
Although their estimates of the time required for the rebound effect to
reach its long-run magnitude vary, this long-run effect is probably
more appropriate for evaluating the fuel savings likely to result from
adopting stricter CAFE standards for future model years.
    In order to provide a more comprehensive overview of previous
estimates of the rebound effect, NHTSA has updated its previous review
of published studies of the rebound effect to include those conducted
as recently as 2010. The agency performed a detailed analysis of
several dozen separate estimates of the long-run rebound effect
reported in these studies, which is summarized in Table IV-9
below.\659\ As the table indicates, these estimates range from as low
as 7 percent to as high as 75 percent, with a mean value of 23 percent.
Both the type of data used and authors' assumption about whether the
rebound effect varies over time have important effects on its estimated
magnitude. The 34 estimates derived from analysis of U.S. annual time-
series data produce a mean estimate of 18 percent for the long-run
rebound effect, while the mean of 23 estimates based on household
survey data is considerably larger (31 percent), and the mean of 15
estimates based on pooled state data (23 percent) is close to that for
the entire sample. The 37 estimates assuming a constant rebound effect
produce a mean of 23 percent, identical to the mean of the 29 estimates
reported in studies that allowed the rebound effect to vary in response
to fuel prices and fuel economy levels, vehicle ownership, or household
income. Updated to reflect the most recent available information on
these variables, the mean of these estimates is 19 percent, as Table
IV-9 reports.
---------------------------------------------------------------------------

    \659\ In some cases, NHTSA derived estimates of the overall
rebound effect from more detailed results reported in the studies.
For example, where studies estimated different rebound effects for
households owning different numbers of vehicles but did not report
an overall value, the agency computed a weighted average of the
reported values using the distribution of households among vehicle
ownership categories.
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    Some recent studies provide evidence that the rebound effect has
been declining over time. This result appears plausible for two
reasons: First, the responsiveness of vehicle use to variation in fuel
costs would be expected to decline as they account for a smaller
proportion of the total monetary cost of driving, which has been the
case until recently. Second, rising personal incomes would be expected
to reduce the sensitivity of vehicle use to fuel costs as the time
component of driving costs--which is likely to be related to income
levels--accounts for a larger fraction the total cost of automobile
travel. At the same time, however, rising incomes are strongly
associated with higher auto ownership levels, which increase
households' opportunities to substitute among vehicles in response to
varying fuel prices and differences in their fuel economy levels. This
is likely to increase the sensitivity of households' overall vehicle
use to differences in the fuel economy levels of individual vehicles.
    Small and Van Dender combined time series data for states to
estimate the rebound effect, allowing its magnitude to vary in response
to fuel prices, fleet-wide average fuel economy, the degree of
urbanization of U.S. cities, and personal income levels.\660\ The
authors employ a model that allows the effect of fuel cost per mile on
vehicle use to vary in response to changes in personal income levels
and increasing urbanization of U.S. cities. For the time period 1966-
2001, their analysis implied a long-run rebound effect of 22 percent,
which is consistent with previously published studies. Continued growth
in personal incomes over this period reduces their estimate of the
long-run rebound effect during its last five years (1997-2001) to 11
percent, and an unpublished update through 2004 prepared by the authors
reduced their estimate of the long-run rebound effect for the period
2000-2004 to 6 percent.\661\
---------------------------------------------------------------------------

    \660\ Small, K. and K. Van Dender, 2007a. ``Fuel Efficiency and
Motor Vehicle Travel: The Declining Rebound Effect'', The Energy
Journal, vol. 28, no. 1, pp. 25-51.
    \661\ Small, K. and K. Van Dender, 2007b. ``Long Run Trends in
Transport Demand, Fuel Price Elasticities and Implications of the
Oil Outlook for Transport Policy,'' OECD/ITF Joint Transport
Research Centre Discussion Papers 2007/16, OECD, International
Transport Forum.
---------------------------------------------------------------------------

    More recently, Hymel, Small and Van Dender extended the previous
analysis to include traffic congestion levels in urbanized areas.\662\
Although controlling for the effect of congestion on vehicle use
increased their estimates of the rebound effect, these authors also
found that the rebound effect appeared to be declining over time. For
the time period 1966-2004, their estimate of the long-run rebound
effect was 24 percent, while for the last year of that period their
estimate was 13 percent, significantly above the previous Small and Van
Dender estimate of a 6 percent

rebound effect for the period 2000-2004.
---------------------------------------------------------------------------

    \662\ Hymel, Kent M., Kenneth A. Small, and Kurt Van Dender,
``Induced demand and rebound effects in road transport,''
Transportation Research Part B: Methodological, Volume 44, Issue 10,
December 2010, Pages 1220-1241, ISSN 0191-2615, DOI: 10.1016/
j.trb.2010.02.007.
---------------------------------------------------------------------------

    Recent research by Greene (under contract to EPA) using U.S.
national time-series data for the period 1966-2007 lends further
support to the hypothesis that the rebound effect is declining over
time.\663\ Greene found that fuel prices had a statistically
significant impact on VMT, yet fuel efficiency did not, and statistical
testing rejected the hypothesis of equal elasticities of vehicle use
with respect to gasoline prices and fuel efficiency. Greene also tested
model formulations that allowed the effect of fuel cost per mile on
vehicle use to decline with rising per capita income; his preferred
form of this model produced estimates of the rebound effect that
declined to 12 percent in 2007.
---------------------------------------------------------------------------

    \663\ Greene, David, ``Rebound 2007: Analysis of National Light-
Duty Vehicle Travel Statistics,'' February 9, 2010. This paper has
been accepted for an upcoming special issue of Energy Policy,
although the publication date has not yet been determined.
---------------------------------------------------------------------------

    In light of findings from recent research, the agency's judgment is
that the apparent decline over time in the magnitude of the rebound
effect justifies using a value for future analysis that is lower than
many historical estimates, which average 15-25 percent. Because the
lifetimes of vehicles affected by the alternative CAFE standards
considered in this rulemaking will extend from 2017 until 2060, a value
that is at the low end of historical estimates appears to be
appropriate. Thus as it elected to do in its previous analysis of the
effects of raising CAFE standards for MY 2012-16 cars and light trucks,
NHTSA uses a 10 percent rebound effect in its analysis of fuel savings
and other benefits from higher CAFE standards for MY 2017-25 vehicles.
Recognizing the wide range of uncertainty surrounding its correct
value, however, the agency also employs estimates of the rebound effect
ranging from 5 to 20 percent in its sensitivity testing. The 10 percent
figure is at the low end of those reported in almost all previous
research, and it is also below most estimates of the historical and
current magnitude of the rebound effect developed by NHTSA. However,
other recent research--particularly that conducted by Small and Van
Dender and by Greene--suggests that the magnitude of the rebound effect
has declined over time, and is likely to continue to do so. As a
consequence, NHTSA concluded that a value at the low end of the
historical estimates reported here is likely to provide a more reliable
estimate of its magnitude during the future period spanned by NHTSA's
analysis of the impacts of this rule. The 10 percent estimate lies
between the 10-30 percent range of estimates for the historical rebound
effect reported in most previous research, and is at the upper end of
the 5-10 percent range of estimates for the future rebound effect
reported in recent studies. In summary, the 10 percent value was not
derived from a single estimate or particular study, but instead
represents a compromise between historical estimates and projected
future estimates. Chapter 4.2.5 of the Joint TSD reviews the relevant
literature and discusses in more depth the reasoning for the rebound
value used here.
h. Benefits From Increased Vehicle Use
    The increase in vehicle use from the rebound effect provides
additional benefits to their users, who make more frequent trips or
travel farther to reach more desirable destinations. This additional
travel provides benefits to drivers and their passengers by improving
their access to social and economic opportunities away from home. As
evidenced by their decisions to make more frequent or longer trips when
improved fuel economy reduces their costs for driving, the benefits
from this additional travel exceed the costs drivers and passengers
incur in traveling these additional distances.
    The agency's analysis estimates the economic benefits from
increased rebound-effect driving as the sum of fuel costs drivers incur
plus the consumer surplus they receive from the additional
accessibility it provides.\664\ NHTSA estimates the value of the
consumer surplus provided by added travel as one-half of the product of
the decline in fuel cost per mile and the resulting increase in the
annual number of miles driven, a standard approximation for changes in
consumer surplus resulting from small changes in prices. Because the
increase in travel depends on the extent of improvement in fuel
economy, the value of benefits it provides differs among model years
and alternative CAFE standards.
---------------------------------------------------------------------------

    \664\ The consumer surplus provided by added travel is estimated
as one-half of the product of the decline in fuel cost per mile and
the resulting increase in the annual number of miles driven.
---------------------------------------------------------------------------

i. The Value of Increased Driving Range
    Improving vehicles' fuel economy may also increase their driving
range before they require refueling. By extending the upper limit of
the range vehicles can travel before refueling is needed, the per-
vehicle average number of refueling trips per year is expected to
decline. This reduction in refueling frequency provides a time savings
benefit to owners.\665\
---------------------------------------------------------------------------

    \665\ If manufacturers respond to improved fuel economy by
reducing the size of fuel tanks to maintain a constant driving
range, the resulting cost saving will presumably be reflected in
lower vehicle sales prices.
---------------------------------------------------------------------------

    NHTSA estimated a number of parameters regarding consumers'
refueling habits using newly-available observational and interview data
from a 2010-2011 NASS study conducted at fueling stations throughout
the nation. A (non-exhaustive) list of key parameters derived from this
study is as follows: Average number of gallons of fuel purchased,
length of time to refuel and pay, length of time to drive to the
fueling station, primary reason for refueling, and number of adult
vehicle occupants.
    Using these and other parameters (detailed explanation of
parameters and methodology provided in Chapter VIII of NHTSA's PRIA),
NHTSA estimated the decrease in number of refueling cycles for each
model year's fleet attributable to improvements in actual on-road MPG
resulting from the proposed CAFE standards. NHTSA acknowledges--and
adjusts for--the fact that many refueling trips occur for reasons other
than a low reading on the gas gauge (for example, many consumers refuel
on a fixed schedule). NHTSA separately estimated the value of vehicle-
hour refueling time and applied this to the projected decrease in
number of refueling cycles to estimate the aggregate fleet-wide value
of refueling time savings for each year that a given model year's
vehicles are expected to remain in service.
    As noted in the PRIA, NHTSA assumed a constant fuel tank size in
estimating the impact of higher CAFE requirements on the frequency of
refueling. NHTSA seeks comment regarding this assumption. Specifically,
NHTSA seeks comment from manufacturers regarding their intention to
retain fuel tank size or driving range in their redesigned vehicles.
Will fuel economy improvements translate into increased driving range,
or will fuel tanks be reduced in size to maintain current driving
range?
j. Added Costs From Congestion, Crashes and Noise
    Increased vehicle use associated with the rebound effect also
contributes to increased traffic congestion, motor vehicle accidents,
and highway noise. To estimate the economic costs associated with these
consequences of added driving, NHTSA applies estimates of per-mile
congestion, accident, and noise costs caused by

increased use of automobiles and light trucks developed previously by
the Federal Highway Administration.\666\ These values are intended to
measure the increased costs resulting from added congestion and the
delays it causes to other drivers and passengers, property damages and
injuries in traffic accidents, and noise levels contributed by
automobiles and light trucks. NHTSA previously employed these estimates
in its analysis accompanying the MY 2011 final CAFE rule, as well as in
its analysis of the effects of higher CAFE standards for MY 2012-16.
After reviewing the procedures used by FHWA to develop them and
considering other available estimates of these values, the agency
continues to find them appropriate for use in this proposal. The agency
multiplies FHWA's estimates of per-mile costs by the annual increases
in automobile and light truck use from the rebound effect to yield the
estimated increases in congestion, accident, and noise externality
costs during each future year.
---------------------------------------------------------------------------

    \666\ These estimates were developed by FHWA for use in its 1997
Federal Highway Cost Allocation Study; See http://www.fhwa.dot.gov/policy/hcas/final/index.htm (last accessed March 1, 2010).
---------------------------------------------------------------------------

k. Petroleum Consumption and Import Externalities
i. Changes in Petroleum Imports
    Based on a detailed analysis of differences in fuel consumption,
petroleum imports, and imports of refined petroleum products among
alternative scenarios presented in AEO 2011, NHTSA estimates that
approximately 50 percent of the reduction in fuel consumption resulting
from adopting higher CAFE standards is likely to be reflected in
reduced U.S. imports of refined fuel, while the remaining 50 percent
would reduce domestic fuel refining.\667\ Of this latter figure, 90
percent is anticipated to reduce U.S. imports of crude petroleum for
use as a refinery feedstock, while the remaining 10 percent is expected
to reduce U.S. domestic production of crude petroleum.\668\ Thus on
balance, each 100 gallons of fuel saved as a consequence of higher CAFE
standards is anticipated to reduce total U.S. imports of crude
petroleum or refined fuel by 95 gallons.\669\
---------------------------------------------------------------------------

    \667\ Differences in forecast annual U.S. imports of crude
petroleum and refined products among the Reference, High Oil Price,
and Low Oil Price scenarios analyzed in EIA's Annual Energy Outlook
2011 range from 35-74 percent of differences in projected annual
gasoline and diesel fuel consumption in the U.S. These differences
average 53 percent over the forecast period spanned by AEO 2011.
    \668\ Differences in forecast annual U.S. imports of crude
petroleum among the Reference, High Oil Price, and Low Oil Price
scenarios analyzed in EIA's Annual Energy Outlook 2011 range from
67-104 percent of differences in total U.S. refining of crude
petroleum, and average 90 percent over the forecast period spanned
by AEO 2011.
    \669\ This figure is calculated as 50 gallons + 50 gallons * 90%
= 50 gallons + 45 gallons = 95 gallons.
---------------------------------------------------------------------------

ii. Benefits From Reducing U.S. Petroleum Imports
    U.S. consumption and imports of petroleum products impose costs on
the domestic economy that are not reflected in the market price for
crude petroleum, or in the prices paid by consumers of petroleum
products such as gasoline. These costs include (1) Higher prices for
petroleum products resulting from the effect of U.S. petroleum demand
on the world oil price; (2) the risk of disruptions to the U.S. economy
caused by sudden reductions in the supply of imported oil to the U.S.;
and (3) expenses for maintaining a U.S. military presence to secure
imported oil supplies from unstable regions, and for maintaining the
strategic petroleum reserve (SPR) to cushion against resulting price
increases.\670\ Reducing these costs by lowering U.S. petroleum imports
represents another source of benefits from stricter CAFE standards and
the savings in consumption of petroleum-based fuels that would result
from higher fuel economy. Higher U.S. imports of crude oil or refined
petroleum products increase the magnitude of these external economic
costs, thus increasing the true economic cost of supplying
transportation fuels above their market prices. Conversely, lowering
U.S. imports of crude petroleum or refined fuels by reducing domestic
fuel consumption can reduce these external costs, and any reduction in
their total value that results from improved fuel economy represents an
economic benefit of more stringent CAFE standards, in addition to the
value of saving fuel itself.
---------------------------------------------------------------------------

    \670\ See, e.g., Bohi, Douglas R. and W. David Montgomery
(1982). Oil Prices, Energy Security, and Import Policy, Washington,
DC: Resources for the Future, Johns Hopkins University Press; Bohi,
D.R. and M.A. Toman (1993). ``Energy and Security: Externalities and
Policies,'' Energy Policy 21:1093-1109 (Docket NHTSA-2009-0062-24);
and Toman, M.A. (1993). ``The Economics of Energy Security: Theory,
Evidence, Policy,'' in A.V. Kneese and J.L. Sweeney, eds. (1993)
(Docket NHTSA-2009-0062-23). Handbook of Natural Resource and Energy
Economics, Vol. III. Amsterdam: North-Holland, pp. 1167-1218.
---------------------------------------------------------------------------

    The first component of the external costs imposed by U.S. petroleum
consumption and imports (often termed the ``monopsony cost'' of U.S.
oil imports), measures the increase in payments from domestic oil
consumers to foreign oil suppliers beyond the increased purchase price
of petroleum itself that results when increased U.S. import demand
raises the world price of petroleum.\671\ However, this monopsony cost
or premium represents a financial transfer from consumers of petroleum
products to oil producers, and does not entail the consumption of real
economic resources. Thus the decline in its value that occurs when
reduced U.S. demand for petroleum products causes a decline in global
petroleum prices produces no savings in economic resources globally or
domestically, although it does reduce the value of the financial
transfer from U.S. consumers of petroleum products to foreign suppliers
of petroleum. Accordingly, NHTSA's analysis of the benefits from
adopting proposed CAFE standards for MY 2017-2025 cars and light trucks
excludes the reduced value of monopsony payments by U.S. oil consumers
that would result from lower fuel consumption.
---------------------------------------------------------------------------

    \671\ The reduction in payments from U.S. oil purchasers to
domestic petroleum producers is not included as a benefit, since it
represents a transfer that occurs entirely within the U.S. economy.
---------------------------------------------------------------------------

    The second component of external costs imposed by U.S. petroleum
consumption and imports reflects the potential costs to the U.S.
economy from disruptions in the supply of imported petroleum. These
costs arise because interruptions in the supply of petroleum products
reduces U.S. economic output, as well as because firms are unable to
adjust prices, output levels, and their use of energy, labor and other
inputs smoothly and rapidly in response to the sudden changes in prices
for petroleum products that are caused by interruptions in their
supply. Reducing U.S. petroleum consumption and imports lowers these
potential costs, and the amount by which it does so represents an
economic benefit in addition to the savings in fuel costs that result
from higher fuel economy. NHTSA estimates and includes this value in
its analysis of the economic benefits from adopting higher CAFE
standards for MY 2017-2025 cars and light trucks.
    The third component of external costs imposed by U.S. petroleum
consumption and imports includes expenses for maintaining a U.S.
military presence to secure imported oil supplies from unstable
regions, and for maintaining the strategic petroleum reserve (SPR) to
cushion against resulting price increases. NHTSA recognizes that
potential national and energy security risks exist due to the
possibility of tension over oil supplies. Much of the world's oil and
gas supplies are located in countries facing social, economic, and
demographic challenges,

thus making them even more vulnerable to potential local instability.
Because of U.S. dependence on oil, the military could be called on to
protect energy resources through such measures as securing shipping
lanes from foreign oil fields. Thus, to the degree to which the
proposed rules reduce reliance upon imported energy supplies or promote
the development of technologies that can be deployed by either
consumers or the nation's defense forces, the United States could
expect benefits related to national security, reduced energy costs, and
increased energy supply. Although NHTSA recognizes that there clearly
is a benefit to the United States from reducing dependence on foreign
oil, we have been unable to calculate the monetary benefit that the
United States will receive from the improvements in national security
expected to result from this program. We have therefore included only
the macroeconomic disruption portion of the energy security benefits to
estimate the monetary value of the total energy security benefits of
this program. We have calculated energy security in very specific
terms, as the reduction of both financial and strategic risks caused by
potential sudden disruptions in the supply of imported petroleum to the
U.S. Reducing the amount of oil imported reduces those risks, and thus
increases the nation's energy security.
    Similarly, while the costs for building and maintaining the SPR are
more clearly attributable to U.S. petroleum consumption and imports,
these costs have not varied historically in response to changes in U.S.
oil import levels. Thus the agency has not attempted to estimate the
potential reduction in the cost for maintaining the SPR that might
result from lower U.S. petroleum imports, or to include an estimate of
this value among the benefits of reducing petroleum consumption through
higher CAFE standards.
    In analyzing benefits from its recent actions to increase light
truck CAFE standards for model years 2005-07 and 2008-11, NHTSA relied
on a 1997 study by Oak Ridge National Laboratory (ORNL) to estimate the
value of reduced economic externalities from petroleum consumption and
imports.\672\ More recently, ORNL updated its estimates of the value of
these externalities, using the analytic framework developed in its
original 1997 study in conjunction with recent estimates of the
variables and parameters that determine their value.\673\ The updated
ORNL study was subjected to a detailed peer review commissioned by EPA,
and ORNL's estimates of the value of oil import externalities were
subsequently revised to reflect their comments and recommendations of
the peer reviewers.\674\ Finally, at the request of EPA, ORNL has
repeatedly revised its estimates of external costs from U.S. oil
imports to reflect changes in the outlook for world petroleum prices,
as well as continuing changes in the structure and characteristics of
global petroleum supply and demand.
---------------------------------------------------------------------------

    \672\ Leiby, Paul N., Donald W. Jones, T. Randall Curlee, and
Russell Lee, Oil Imports: An Assessment of Benefits and Costs, ORNL-
6851, Oak Ridge National Laboratory, November 1, 1997. Available at
http://www.esd.ornl.gov/eess/energy_analysis/files/ORNL6851.pdf
(last accessed October 11, 2011).
    \673\ Leiby, Paul N., ``Estimating the Energy Security Benefits
of Reduced U.S. Oil Imports,'' Oak Ridge National Laboratory, ORNL/
TM-2007/028, Revised July 23, 2007. Available at http://www.esd.ornl.gov/eess/energy_analysis/files/Leiby2007%20Estimating%20the%20Energy%20Security%20Benefits%20of%20Reduced%20U.S.%20Oil%20Imports%20ornl-tm-2007-028%20rev2007Jul25.pdf
(last accessed October 11, 2011).
    \674\  Peer Review Report Summary: Estimating the Energy
Security Benefits of Reduced U.S. Oil Imports, ICF, Inc., September
2007. Available at Docket No. NHTSA-2009-0059-0160.
---------------------------------------------------------------------------

    As the preceding discussion indicates, NHTSA's analysis of benefits
from adopting higher CAFE standards includes only the reduction in
economic disruption costs that is anticipated to result from reduced
consumption of petroleum-based fuels and the associated decline in U.S.
petroleum imports. ORNL's updated analysis reports that this benefit,
which is in addition to the savings in costs for producing fuel itself,
is most likely to amount to $0.185 per gallon of fuel saved by
requiring MY 2017-25 cars and light trucks to achieve higher fuel
economy. However, considerable uncertainty surrounds this estimate, and
ORNL's updated analysis also indicates that a range of values extending
from a low of $0.091 per gallon to a high of $0.293 per gallon should
be used to reflect this uncertainty.
    We note that the calculation of energy security benefits does not
include energy security costs associated with reliance on foreign
sources of lithium and rare earth metals for HEVs and EVs. The agencies
intend to attempt to quantify this impact for the final rule stage, and
seek public input on information that would enable agencies to develop
this analysis. NHTSA also seeks public input on the projections that
energy security benefits will grow rapidly through 2025.
l. Air Pollutant Emissions
i. Changes in Criteria Air Pollutant Emissions
    Criteria air pollutants include carbon monoxide (CO), hydrocarbon
compounds (usually referred to as ``volatile organic compounds,'' or
VOC), nitrogen oxides (NOX), fine particulate matter
(PM2.5), and sulfur oxides (SOX). These
pollutants are emitted during vehicle storage and use, as well as
throughout the fuel production and distribution system. While
reductions in domestic fuel refining, storage, and distribution that
result from lower fuel consumption will reduce emissions of these
pollutants, additional vehicle use associated with the fuel economy
rebound effect will increase their emissions. The net effect of
stricter CAFE standards on total emissions of each criteria pollutant
depends on the relative magnitude of reductions in its emissions during
fuel refining and distribution, and increases in its emissions
resulting from additional vehicle use. Because the relationship between
emissions in fuel refining and vehicle use is different for each
criteria pollutant, the net effect of fuel savings from the proposed
standards on total emissions of each pollutant is likely to differ.
    With the exception of SO2, NHTSA calculated annual
emissions of each criteria pollutant resulting from vehicle use by
multiplying its estimates of car and light truck use during each year
over their expected lifetimes by per-mile emission rates for each
vehicle class, fuel type, model year, and age. These emission rates
were developed by U.S. EPA using its Motor Vehicle Emission Simulator
(MOVES 2010a).\675\ Emission rates for SO2 were calculated
by NHTSA using average fuel sulfur content estimates supplied by EPA,
together with the assumption that the entire sulfur content of fuel is
emitted in the form of SO2.\676\ Total SO2
emissions under each alternative CAFE standard were calculated by
applying the resulting emission rates directly to estimated annual
gasoline and diesel fuel use by cars and light trucks.
---------------------------------------------------------------------------

    \675\ The MOVES model assumes that the per-mile rates at which
these pollutants are emitted are determined by EPA regulations and
the effectiveness of catalytic after-treatment of engine exhaust
emissions, and are thus unaffected by changes in car and light truck
fuel economy.
    \676\ These are 30 and 15 parts per million (ppm, measured on a
mass basis) for gasoline and diesel respectively, which produces
emission rates of 0.17 grams of SO2 per gallon of
gasoline and 0.10 grams per gallon of diesel.
---------------------------------------------------------------------------

    Changes in emissions of criteria air pollutants resulting from
alternative increases in CAFE standards for MY

2017-2025 cars and light trucks are calculated from the differences
between emissions under each alternative increase in CAFE standards,
and emissions under the baseline alternative.
    Emissions of criteria air pollutants also occur during each phase
of fuel production and distribution, including crude oil extraction and
transportation, fuel refining, and fuel storage and transportation.
NHTSA estimates the reductions in criteria pollutant emissions from
producing and distributing fuel that would occur under alternative CAFE
standards using emission rates obtained by EPA from Argonne National
Laboratories' Greenhouse Gases and Regulated Emissions in
Transportation (GREET) model, which provides estimates of air pollutant
emissions that occur in different phases of fuel production and
distribution.677 678 EPA modified the GREET model to change
certain assumptions about emissions during crude petroleum extraction
and transportation, as well as to update its emission rates to reflect
adopted and pending EPA emission standards.
---------------------------------------------------------------------------

    \677\ Argonne National Laboratories, The Greenhouse Gas and
Regulated Emissions in Transportation (GREET) Model, Version 1.8,
June 2007, available at http://www.transportation.anl.gov/modeling_simulation/GREET/index.html (last accessed October 11, 2011).
    \678\ Emissions that occur during vehicle refueling at retail
gasoline stations (primarily evaporative emissions of volatile
organic compounds, or VOCs) are already accounted for in the
``tailpipe'' emission factors used to estimate the emissions
generated by increased light truck use. GREET estimates emissions in
each phase of gasoline production and distribution in mass per unit
of gasoline energy content; these factors are then converted to mass
per gallon of gasoline using the average energy content of gasoline.
---------------------------------------------------------------------------

    The resulting emission rates were applied to the agency's estimates
of fuel consumption under alternative CAFE standards to develop
estimates of total emissions of each criteria pollutant during fuel
production and distribution. The agency then employed the estimates of
the effects of changes in fuel consumption on domestic and imported
sources of fuel supply discussed previously to calculate the effects of
reductions in fuel use on changes in imports of refined fuel and
domestic refining. NHTSA's analysis assumes that reductions in imports
of refined fuel would reduce criteria pollutant emissions during fuel
storage and distribution only. Reductions in domestic fuel refining
using imported crude oil as a feedstock are assumed to reduce emissions
during fuel refining, storage, and distribution. Finally, reduced
domestic fuel refining using domestically produced crude oil is assumed
to reduce emissions during all four phases of fuel production and
distribution.\679\
---------------------------------------------------------------------------

    \679\ In effect, this assumes that the distances crude oil
travels to U.S. refineries are approximately the same regardless of
whether it travels from domestic oilfields or import terminals, and
that the distances that gasoline travels from refineries to retail
stations are approximately the same as those from import terminals
to gasoline stations. We note that while assuming that all changes
in upstream emissions result from a decrease in petroleum production
and transport, our analysis of downstream criteria pollutant impacts
assumes no change in the composition of the gasoline fuel supply.
---------------------------------------------------------------------------

    Finally, NHTSA calculated the net changes in domestic emissions of
each criteria pollutant by summing the increases in emissions projected
to result from increased vehicle use, and the reductions anticipated to
result from lower domestic fuel refining and distribution.\680\ As
indicated previously, the effect of adopting higher CAFE standards on
total emissions of each criteria pollutant depends on the relative
magnitude of the resulting reduction in emissions from fuel refining
and distribution, and the increase in emissions from additional vehicle
use. Although these net changes vary significantly among individual
criteria pollutants, the agency projects that on balance, adopting
higher CAFE standards for MY 2017-25 cars and light trucks would reduce
emissions of all criteria air pollutants except carbon monoxide (CO).
---------------------------------------------------------------------------

    \680\ All emissions from increased vehicle use are assumed to
occur within the U.S., since CAFE standards would apply only to
vehicles produced for sale in the U.S.
---------------------------------------------------------------------------

    The net changes in direct emissions of fine particulates
(PM2.5) and other criteria pollutants that contribute to the
formation of ``secondary'' fine particulates in the atmosphere (such as
NOX, SOX, and VOCs) are converted to economic
values using estimates of the reductions in health damage costs per ton
of emissions of each pollutant that is avoided, which were developed by
EPA. These savings represent the estimated reductions in the value of
damages to human health resulting from lower atmospheric concentrations
and population exposure to air pollution that occur when emissions of
each pollutant that contributes to atmospheric PM2.5
concentrations are reduced. The value of reductions in the risk of
premature death due to exposure to fine particulate pollution
(PM2.5) accounts for a majority of EPA's estimated values of
reducing criteria pollutant emissions, although the value of avoiding
other health impacts is also included in these estimates.
    These values do not include a number of unquantified benefits, such
as reduction in the welfare and environmental impacts of
PM2.5 pollution, or reductions in health and welfare impacts
related to other criteria air pollutants (ozone, NO2, and
SO2) and air toxics. EPA estimates different per-ton values
for reducing emissions of PM and other criteria pollutants from vehicle
use than for reductions in emissions of those same pollutants during
fuel production and distribution.\681\ NHTSA applies these separate
values to its estimates of changes in emissions from vehicle use and
from fuel production and distribution to determine the net change in
total economic damages from emissions of these pollutants.
---------------------------------------------------------------------------

    \681\ These reflect differences in the typical geographic
distributions of emissions of each pollutant, their contributions to
ambient PM2.5 concentrations, pollution levels
(predominantly those of PM2.5), and resulting changes in
population exposure.
---------------------------------------------------------------------------

    EPA projects that the per-ton values for reducing emissions of
criteria pollutants from both mobile sources (including motor vehicles)
and stationary sources such as fuel refineries and storage facilities
will increase over time. These projected increases reflect rising
income levels, which are assumed to increase affected individuals'
willingness to pay for reduced exposure to health threats from air
pollution, as well as future population growth, which increases
population exposure to future levels of air pollution.
ii. Reductions in CO2 Emissions
    Emissions of carbon dioxide and other greenhouse gases (GHGs) occur
throughout the process of producing and distributing transportation
fuels, as well as from fuel combustion itself. Emissions of GHGs also
occur in generating electricity, which NHTSA's analysis anticipates
will account for an increasing share of energy consumption by cars and
light trucks produced in the model years that would be subject to their
proposed rules. By reducing the volume of fuel consumed by passenger
cars and light trucks, higher CAFE standards will reduce GHG emissions
generated by fuel use, as well as throughout the fuel supply system.
Lowering these emissions is likely to slow the projected pace and
reduce the ultimate extent of future changes in the global climate,
thus reducing future economic damages that changes in the global
climate are expected to cause. By reducing the probability that climate
changes with potentially catastrophic economic or environmental impacts
will occur, lowering GHG emissions may also result in economic benefits
that exceed the resulting reduction in the expected future economic
costs caused

by more gradual changes in the earth's climatic systems.
    Quantifying and monetizing benefits from reducing GHG emissions is
thus an important step in estimating the total economic benefits likely
to result from establishing higher CAFE standards. Because carbon
dioxide emissions account for nearly 95 percent of total GHG emissions
that result from fuel combustion during vehicle use, NHTSA's analysis
of the effect of higher CAFE standards on GHG emissions focuses mainly
on estimating changes in emissions of CO2. The agency
estimates emissions of CO2 from passenger car and light
truck use by multiplying the number of gallons of each type of fuel
(gasoline and diesel) they are projected to consume under alternative
CAFE standards by the quantity or mass of CO2 emissions
released per gallon of fuel consumed. This calculation assumes that the
entire carbon content of each fuel is converted to CO2
emissions during the combustion process.
    NHTSA estimates emissions of CO2 that occur during fuel
production and distribution using emission rates for each stage of this
process (feedstock production and transportation, fuel refining and
fuel storage and distribution) derived from Argonne National
Laboratories' Greenhouse Gases and Regulated Emissions in
Transportation (GREET) model. For liquid fuels, NHTSA converts these
rates to a per-gallon basis using the energy content of each fuel, and
multiplies them by the number of gallons of each type of fuel produced
and consumed under alternative standards to estimate total
CO2 emissions from fuel production and distribution. GREET
supplies emission rates for electricity generation that are expressed
as grams of CO2 per unit of energy, so these rates are
simply multiplied by the estimates of electrical energy used to charge
the on-board storage batteries of plug-in hybrid and battery electric
vehicles. As with all other effects of alternative CAFE standards, the
reduction in CO2 emissions resulting from each alternative
increase in standards is measured by the difference in total emissions
from producing and consuming fuel energy used by MY 2017-25 cars and
light trucks with those higher CAFE standards in effect, and total
CO2 emissions from supplying and using fuel energy consumed
under the baseline alternative. Unlike criteria pollutants, the
agency's estimates of CO2 emissions include those occurring
in domestic fuel production and consumption, as well as in overseas
production of petroleum and refined fuel for export to the U.S.
Overseas emissions are included because GHG emissions throughout the
world contribute equally to the potential for changes in the global
climate.
iii. Economic Value of Reductions in CO2 Emissions
    NHTSA takes the economic benefits from reducing CO2
emissions into account in developing and analyzing the alternative CAFE
standards it has considered for MY 2017-25. Because research on the
impacts of climate change does not produce direct estimates of the
economic benefits from reducing CO2 or other GHG emissions,
these benefits are assumed to be the ``mirror image'' of the estimated
incremental costs resulting from increases in emissions. Thus the
benefits from reducing CO2 emissions are usually measured by
the savings in estimated economic damages that an equivalent increase
in emissions would otherwise have caused. The agency does not include
estimates of the economic benefits from reducing GHGs other than
CO2 in its analysis of alternative CAFE standards.
    NHTSA estimates the value of the reductions in emissions of
CO2 resulting from adopting alternative CAFE standards using
a measure referred to as the ``social cost of carbon,'' abbreviated
SCC. The SCC is intended to provide a monetary measure of the
additional economic impacts likely to result from changes in the global
climate that would result from an incremental increase in
CO2 emissions. These potential effects include changes in
agricultural productivity, the economic damages caused by adverse
effects on human health, property losses and damages resulting from
rising sea levels, and the value of ecosystem services. The SCC is
expressed in constant dollars per additional metric ton of
CO2 emissions occurring during a specific year, and is
higher for more distant future years because the damages caused by an
additional ton of emissions increase with larger concentrations of
CO2 in the earth's atmosphere.
    Reductions in CO2 emissions that are projected to result
from lower fuel production and consumption during each year over the
lifetimes of MY 2017-25 cars and light trucks are multiplied by the
estimated SCC appropriate for that year to determine the economic
benefit from reducing emissions during that year. The net present value
of these annual benefits is calculated using a discount rate that is
consistent with that used to develop the estimate of each SCC estimate.
This calculation is repeated for the reductions in CO2
emissions projected to result from each alternative increase in CAFE
standards.
    NHTSA evaluates the economic benefits from reducing CO2
emissions using estimates of the SCC developed by an interagency
working group convened for the specific purpose of developing new
estimates for use by U.S. Federal agencies in regulatory evaluations.
The group's purpose in developing new estimates of the SCC was to allow
Federal agencies to incorporate the social benefits of reducing
CO2 emissions into cost-benefit analyses of regulatory
actions that have relatively modest impacts on cumulative global
emissions, as most Federal regulatory actions can be expected to have.
NHTSA previously relied on the SCC estimates developed by this
interagency group to analyze the alternative CAFE standards it
considered for MY 2012-16 cars and light trucks, as well as the fuel
efficiency standards it adopted for MY 014-18 heavy-duty vehicles.
    The interagency group convened on a regular basis over the period
from June 2009 through February 2010, to explore technical literature
in relevant fields and develop key inputs and assumptions necessary to
generate estimates of the SCC. Agencies participating in the
interagency process included the Environmental Protection Agency and
the Departments of Agriculture, Commerce, Energy, Transportation, and
Treasury. This process was convened by the Council of Economic Advisers
and the Office of Management and Budget, with active participation and
regular input from the Council on Environmental Quality, National
Economic Council, Office of Energy and Climate Change, and Office of
Science and Technology Policy.
    The interagency group's main objective was to develop a range of
SCC values using clearly articulated input assumptions grounded in the
existing scientific and economic literatures, in conjunction with a
range of models that employ different representations of climate change
and its economic impacts. The group clearly acknowledged the many
uncertainties that its process identified, and recommended that its
estimates of the SCC should be updated periodically to incorporate
developing knowledge of the science and economics of climate impacts.
Specifically, it set a preliminary goal to revisit the SCC values
within two years, or as substantial improvements in understanding of
the science and economics of climate impacts and updated models for
estimating and

valuing these impacts become available. The group ultimately selected
four SCC values for use in federal regulatory analyses. Three values
were based on the average of SCC estimates developed using three
different climate economic models (referred to as integrated assessment
models), using discount rates of 2.5, 3, and 5 percent. The fourth
value, which represents the 95th percentile SCC estimate from the
combined distribution of values generated by the three models at a 3
percent discount rate, represents the possibility of possibility of
higher-than-expected impacts from the accumulation of GHGs in the
earth's atmosphere, and the consequently larger economic damages.
    Table IV-10 summarizes the interagency group's estimates of the SCC
during various future years, which the agency has updated to 2009
dollars to correspond to the other values it uses to estimate economic
benefits from the alternative CAFE standards considered in this
NPRM.\682\
---------------------------------------------------------------------------

    \682\ The SCC estimates reported in the table assume that the
damages resulting from increased emissions are constant for small
departures from the baseline emissions forecast incorporated in each
estimate, an approximation that is reasonable for policies with
projected effects on CO2 emissions that are small
relative to cumulative global emissions.
[GRAPHIC] [TIFF OMITTED] TP01DE11.178

[GRAPHIC] [TIFF OMITTED] TP01DE11.179

    As Table IV-10 shows, the four SCC estimates selected by the
interagency group for use in regulatory analyses are $5, $23, $38, and
$70 per metric ton (in 2009 dollars) for emissions occurring in the
year 2012. The value that the interagency group centered its attention
on is the average SCC estimate developed using different models and a 3
percent discount rate, or $23 per metric ton in 2012. To capture the
uncertainties involved in regulatory impact analysis, however, the
group emphasized the importance of considering the full range of
estimated SCC values. As the table also shows, the SCC estimates also
rise over time; for example, the average SCC at the 3 percent discount
rate increases to $27 per metric ton of CO2 by 2020 and
reaches $46 per metric ton of CO2 in 2050.
    Details of the process used by the interagency group to develop its
SCC estimates, complete results including year-by-year estimates of
each of the four values, and a thorough discussion of their intended
use and limitations is provided in the document Social Cost of Carbon
for Regulatory Impact Analysis Under Executive Order 12866, Interagency
Working Group on Social Cost of Carbon, United States Government,
February 2010.\683\
---------------------------------------------------------------------------

    \683\ This document is available in the docket for the 2012-2016
rulemaking (NHTSA-2009-0059).
---------------------------------------------------------------------------

m. Discounting Future Benefits and Costs
    Discounting future fuel savings and other benefits accounts for the
reduction in their value when they are deferred until some future date,
rather than received immediately. The value of benefits that are not
expected to occur until the future is lower partly because people value
current consumption more highly than equivalent consumption at some
future date--stated simply, they are impatient--and partly because they
expect their living standards to be higher in the future, so additional
consumption will improve their well-being by more today than it will in
the future. The discount rate expresses the percent decline in the
value of these benefits--as viewed from today's perspective--for each
year they are deferred into the future. In evaluating the benefits from
alternative increases in CAFE standards for MY 2017-2025 passenger cars
and light trucks, NHTSA primarily employs a discount rate of 3 percent
per year, but in accordance with OMB guidance, also presents these
benefit and cost estimates using a 7 percent discount rate.
    While it presents results that reflect both discount rates, NHTSA
believes that the 3 percent rate is more appropriate for discounting
future benefits from increased CAFE standards, because the agency
expects that most or all of vehicle manufacturers' costs for complying
with higher CAFE standards will ultimately be reflected in higher
selling prices for their new vehicle models. By increasing sales prices
for new cars and light trucks, CAFE regulations will thus primarily
affect vehicle purchases and other private consumption decisions. Both
economic theory and OMB guidance on discounting indicate that the
future benefits and costs of regulations that mainly affect private
consumption

should be discounted at consumers' rate of time preference.\684\
---------------------------------------------------------------------------

    \684\ Id.
---------------------------------------------------------------------------

    Current OMB guidance also indicates that savers appear to discount
future consumption at an average real (that is, adjusted to remove the
effect of inflation) rate of about 3 percent when they face little risk
about the future. Since the real interest rate that savers require to
persuade them to defer consumption into the future represents a
reasonable estimate of consumers' rate of time preference, NHTSA
believes that the 3 percent rate is appropriate for discounting
projected future benefits and costs resulting from higher CAFE
standards.
    Because there is some uncertainty about whether vehicle
manufacturers will completely recover their costs for complying with
higher CAFE standards by increasing vehicle sales prices, however,
NHTSA also presents benefit and cost estimates discounted using a
higher rate. To the extent that manufacturers are unable to recover
their costs for meeting higher CAFE standards by increasing new vehicle
prices, these costs are likely to displace other investment
opportunities available to them. OMB guidance indicates that the real
economy-wide opportunity cost of capital is the appropriate discount
rate to apply to future benefits and costs when the primary effect of a
regulation is ``* * * to displace or alter the use of capital in the
private sector,'' and OMB estimates that this rate currently averages
about 7 percent.\685\ Thus the agency's analysis of alternative
increases in CAFE standards for MY 2017-25 cars and light trucks also
reports benefits and costs discounted at a 7 percent rate.
---------------------------------------------------------------------------

    \685\ Office of Management and Budget, Circular A-4,
``Regulatory Analysis,'' September 17, 2003, 33. Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf (last accessed Sept.
26, 2011).
---------------------------------------------------------------------------

    One important exception to the agency's use of 3 percent and 7
percent discount rates is arises in discounting benefits from reducing
CO2 emissions over the lifetimes of MY 2017-2025 cars and
light trucks to their present values. In order to ensure consistency in
the derivation and use of the interagency group's estimates of the unit
values of reducing CO2 emissions (or SCC), the benefits from
reducing CO2 emissions during each future year are
discounted using the same ``intergenerational'' discount rates that
were used to derive each of the alternative values. As indicated in
Table IV-10 above, these rates are 2.5 percent, 3 percent, and 5
percent depending on which estimate of the SCC is being employed.\686\
---------------------------------------------------------------------------

    \686\ The fact that the 3 percent discount rate used by the
interagency group to derive its central estimate of the SCC is
identical to the 3 percent short-term or ``intra-generational''
discount rate used by NHTSA to discount future benefits other than
reductions in CO2 emissions is coincidental, and should
not be interpreted as a required condition that must be satisfied in
future rulemakings.
---------------------------------------------------------------------------

n. Accounting for Uncertainty in Benefits and Costs
    In analyzing the uncertainty surrounding its estimates of benefits
and costs from alternative CAFE standards, NHTSA considers alternative
estimates of those assumptions and parameters likely to have the
largest effect. These include the projected costs of fuel economy-
improving technologies and their anticipated effectiveness in reducing
fuel consumption, forecasts of future fuel prices, the magnitude of the
rebound effect, the reduction in external economic costs resulting from
lower U.S. oil imports, and the discount rate applied to future
benefits and costs. The range for each of these variables employed in
the uncertainty analysis was previously identified in the sections of
this notice discussing each variable.
    The uncertainty analysis was conducted by assuming either
independent normal or beta probability distributions for each of these
variables, using the low and high estimates for each variable as the
values between which 90 percent of observed values are expected to
fall. Each trial of the uncertainty analysis employed a set of values
randomly drawn from these probability distributions, under the
assumption that the value of each variable is independent from those of
the others. In cases where the data on the possible distribution of
parameters was relatively sparse, making a choice of distributions
difficult, a beta distribution is commonly employed to give more weight
to both tails than would be the case had a normal distribution been
employed. Benefits and costs of each alternative standard were
estimated using each combination of variables, and a total of nearly
40,000 trials were used to estimate the likely range of estimated
benefits and costs for each alternative standard.
o. Where can readers find more information about the economic
assumptions?
    Much more detailed information is provided in Chapter VIII of the
PRIA, and a discussion of how NHTSA and EPA jointly reviewed and
updated economic assumptions for purposes of this proposal is available
in Chapter 4 of the draft Joint TSD. In addition, all of NHTSA's model
input and output files are now public and available for the reader's
review and consideration. The economic input files can be found in the
docket for this proposed rule, NHTSA-2010-0131, and on NHTSA's Web
site.\687\
---------------------------------------------------------------------------

    \687\ See http://www.nhtsa.gov/fuel-economy.
---------------------------------------------------------------------------

    Finally, because much of NHTSA's economic analysis for purposes of
this proposal builds on the work that was done for the final rule
establishing CAFE standards for MYs 2012-16, we refer readers to that
document as well. It contains valuable background information
concerning how NHTSA's assumptions regarding economic inputs for CAFE
analysis have evolved over the past several rulemakings, both in
response to comments and as a result of the agency's growing experience
with this type of analysis.\688\
---------------------------------------------------------------------------

    \688\ 74 FR 14308-14358 (Mar. 30, 2009).
---------------------------------------------------------------------------

4. How does NHTSA use the assumptions in its modeling analysis?
    In developing today's proposed CAFE standards, NHTSA has made
significant use of results produced by the CAFE Compliance and Effects
Model (commonly referred to as ``the CAFE Model'' or ``the Volpe
model''), which DOT's Volpe National Transportation Systems Center
developed specifically to support NHTSA's CAFE rulemakings. The model,
which has been constructed specifically for the purpose of analyzing
potential CAFE standards, integrates the following core capabilities:
    (1) Estimating how manufacturers could apply technologies in
response to new fuel economy standards,
    (2) Estimating the costs that would be incurred in applying these
technologies,
    (3) Estimating the physical effects resulting from the application
of these technologies, such as changes in travel demand, fuel
consumption, and emissions of carbon dioxide and criteria pollutants,
and
    (4) Estimating the monetized societal benefits of these physical
effects.
    An overview of the model follows below. Separate model
documentation provides a detailed explanation of the functions the
model performs, the calculations it performs in doing so, and how to
install the model, construct inputs to the model, and interpret the
model's outputs. Documentation of the model, along with model
installation files, source code, and sample inputs are available at
NHTSA's Web site. The model documentation is also available in the
docket for today's proposed rule, as are inputs for and outputs from

analysis of today's proposed CAFE standards.
a. How does the model operate?
    As discussed above, the agency uses the CAFE model to estimate how
manufacturers could attempt to comply with a given CAFE standard by
adding technology to fleets that the agency anticipates they will
produce in future model years. This exercise constitutes a simulation
of manufacturers' decisions regarding compliance with CAFE standards.
    This compliance simulation begins with the following inputs: (a)
The baseline and reference market forecast discussed above in Section
IV.C.1 and Chapter 1 of the TSD, (b) technology-related estimates
discussed above in Section IV.C.2 and Chapter 3 of the TSD, (c)
economic inputs discussed above in Section IV.C.3 and Chapter 4 of the
TSD, and (d) inputs defining baseline and potential new CAFE standards.
For each manufacturer, the model applies technologies in a sequence
that follows a defined engineering logic (``decision trees'' discussed
in the MY 2011 final rule and in the model documentation) and a cost-
minimizing strategy in order to identify a set of technologies the
manufacturer could apply in response to new CAFE standards.\689\ The
model applies technologies to each of the projected individual vehicles
in a manufacturer's fleet, considering the combined effect of
regulatory and market incentives. Depending on how the model is
exercised, it will apply technology until one of the following occurs:
---------------------------------------------------------------------------

    \689\ NHTSA does its best to remain scrupulously neutral in the
application of technologies through the modeling analysis, to avoid
picking technology ``winners.'' The technology application
methodology has been reviewed by the agency over the course of
several rulemakings, and commenters have been generally supportive
of the agency's approach. See, e.g., 74 FR 14238-14246 (Mar. 30,
2009).
---------------------------------------------------------------------------

    (1) The manufacturer's fleet achieves compliance \690\ with the
applicable standard, and continuing to add technology in the current
model year would be attractive neither in terms of stand-alone (i.e.,
absent regulatory need) cost effectiveness nor in terms of facilitating
compliance in future model years; \691\
---------------------------------------------------------------------------

    \690\ The model has been modified to provide the ability--as an
option--to account for credit mechanisms (i.e., carry-forward,
carry-back, transfers, and trades) when determining whether
compliance has been achieved. For purposes of determining maximum
feasible CAFE standards, NHTSA cannot consider these mechanisms, and
exercises the CAFE model without enabling these options.
    \691\ In preparation for the MY 2012-2016 rulemaking, the model
was modified in order to apply additional technology in early model
years if doing so will facilitate compliance in later model years.
This is designed to simulate a manufacturer's decision to plan for
CAFE obligations several years in advance, which NHTSA believes
better replicates manufacturers' actual behavior as compared to the
year-by-year evaluation which EPCA would otherwise require.
---------------------------------------------------------------------------

    (2) The manufacturer ``exhausts'' \692\ available technologies; or
---------------------------------------------------------------------------

    \692\ In a given model year, the model makes additional
technologies available to each vehicle model within several
constraints, including (a) Whether or not the technology is
applicable to the vehicle model's technology class, (b) whether the
vehicle is undergoing a redesign or freshening in the given model
year, (c) whether engineering aspects of the vehicle make the
technology unavailable (e.g., secondary axle disconnect cannot be
applied to two-wheel drive vehicles), and (d) whether technology
application remains within ``phase in caps'' constraining the
overall share of a manufacturer's fleet to which the technology can
be added in a given model year. Once enough technology is added to a
given manufacturer's fleet in a given model year that these
constraints make further technology application unavailable,
technologies are ``exhausted'' for that manufacturer in that model
year.
---------------------------------------------------------------------------

    (3) For manufacturers estimated to be willing to pay civil
penalties, the manufacturer reaches the point at which doing so would
be more cost-effective (from the manufacturer's perspective) than
adding further technology.\693\
---------------------------------------------------------------------------

    \693\ This possibility was added to the model to account for the
fact that under EPCA/EISA, manufacturers must pay fines if they do
not achieve compliance with applicable CAFE standards. 49 U.S.C.
32912(b). NHTSA recognizes that some manufacturers will find it more
cost-effective to pay fines than to achieve compliance, and believes
that to assume these manufacturers would exhaust available
technologies before paying fines would cause unrealistically high
estimates of market penetration of expensive technologies such as
diesel engines and strong hybrid electric vehicles, as well as
correspondingly inflated estimates of both the costs and benefits of
any potential CAFE standards. NHTSA thus includes the possibility of
manufacturers choosing to pay fines in its modeling analysis in
order to achieve what the agency believes is a more realistic
simulation of manufacturer decision-making. Unlike flex-fuel and
other credits, NHTSA is not barred by statute from considering fine-
payment in determining maximum feasible standards under EPCA/EISA.
49 U.S.C. 32902(h).
---------------------------------------------------------------------------

    As discussed below, the model has also been modified in order to--
as an option--apply more technology than may be necessary to achieve
compliance in a given model year, or to facilitate compliance in later
model years. This ability to simulate ``voluntary overcompliance''
reflects the potential that manufacturers will apply some technologies
to some vehicles if doing so would be sufficiently inexpensive compared
to the expected reduction in owners' outlays for fuel.
    The model accounts explicitly for each model year, applying most
technologies when vehicles are scheduled to be redesigned or freshened,
and carrying forward technologies between model years. The CAFE model
accounts explicitly for each model year because EPCA requires that
NHTSA make a year-by-year determination of the appropriate level of
stringency and then set the standard at that level, while ensuring
ratable increases in average fuel economy.\694\ The multiyear planning
capability and (optional) simulation of ``voluntary overcompliance''
and EPCA credit mechanisms increase the model's ability to simulate
manufacturers' real-world behavior, accounting for the fact that
manufacturers will seek out compliance paths for several model years at
a time, while accommodating the year-by-year requirement.
---------------------------------------------------------------------------

    \694\ 49 U.S.C. 32902(a) states that at least 18 months before
the beginning of each model year, the Secretary of Transportation
shall prescribe by regulation average fuel economy standards for
automobiles manufactured by a manufacturer in that model year, and
that each standard shall be the maximum feasible average fuel
economy level that the Secretary decides the manufacturers can
achieve in that year. NHTSA has long interpreted this statutory
language to require year-by-year assessment of manufacturer
capabilities. 49 U.S.C. 32902(b)(2)(C) also requires that standards
increase ratably between MY 2011 and MY 2020.
---------------------------------------------------------------------------

    The model also calculates the costs, effects, and benefits of
technologies that it estimates could be added in response to a given
CAFE standard.\695\ It calculates costs by applying the cost estimation
techniques discussed above in Section IV.C.2, and by accounting for the
number of affected vehicles. It accounts for effects such as changes in
vehicle travel, changes in fuel consumption, and changes in greenhouse
gas and criteria pollutant emissions. It does so by applying the fuel
consumption estimation techniques also discussed in Section IV.C.2, and
the vehicle survival and mileage accumulation forecasts, the rebound
effect estimate and the fuel properties and emission factors discussed
in Section IV.C.3. Considering changes in travel demand and fuel
consumption, the model estimates the monetized value of accompanying
benefits to society, as discussed in Section IV.C.3. The model
calculates both the undiscounted and discounted value of benefits that
accrue over time in the future.
---------------------------------------------------------------------------

    \695\ As for all of its other rulemakings, NHTSA is required by
Executive Order 12866 (as amended by Executive Order 13563) and DOT
regulations to analyze the costs and benefits of CAFE standards.
Executive Order 12866, 58 FR 51735 (Oct. 4, 1993); DOT Order 2100.5,
``Regulatory Policies and Procedures,'' 1979, available at http://regs.dot.gov/rulemakingrequirements.htm (last accessed February 21,
2010).
---------------------------------------------------------------------------

    The CAFE model has other capabilities that facilitate the
development of a CAFE standard. The integration of (a) Compliance
simulation and (b) the calculation of costs, effects,

and benefits facilitates analysis of sensitivity of results to model
inputs. The model can also be used to evaluate many (e.g., 200 per
model year) potential levels of stringency sequentially, and identify
the stringency at which specific criteria are met. For example, it can
identify the stringency at which net benefits to society are maximized,
the stringency at which a specified total cost is reached, or the
stringency at which a given average required fuel economy level is
attained. This allows the agency to compare more easily the impacts in
terms of fuel savings, emissions reductions, and costs and benefits of
achieving different levels of stringency according to different
criteria. The model can also be used to perform uncertainty analysis
(i.e., Monte Carlo simulation), in which input estimates are varied
randomly according to specified probability distributions, such that
the uncertainty of key measures (e.g., fuel consumption, costs,
benefits) can be evaluated.
b. Has NHTSA considered other models?
    As discussed in the most recent CAFE rulemaking, while nothing in
EPCA requires NHTSA to use the CAFE model, and in principle, NHTSA
could perform all of these tasks through other means, the model's
capabilities have greatly increased the agency's ability to rapidly,
systematically, and reproducibly conduct key analyses relevant to the
formulation and evaluation of new CAFE standards.\696\
---------------------------------------------------------------------------

    \696\ 75 FR 25598-25599.
---------------------------------------------------------------------------

    NHTSA notes that the CAFE model not only has been formally peer-
reviewed and tested and reviewed through three rulemakings, but also
has some features especially important for the analysis of CAFE
standards under EPCA/EISA. Among these are the ability to perform year-
by-year analysis, and the ability to account for engineering
differences between specific vehicle models.
    EPCA requires that NHTSA set CAFE standards for each model year at
the level that would be ``maximum feasible'' for that year. Doing so
requires the ability to analyze each model year and, when developing
regulations covering multiple model years, to account for the
interdependency of model years in terms of the appropriate levels of
stringency for each one. Also, as part of the evaluation of the
economic practicability of the standards, as required by EPCA, NHTSA
has traditionally assessed the annual costs and benefits of the
standards. In response to comments regarding an early version of the
CAFE model, DOT modified the CAFE model in order to account for
dependencies between model years and to better represent manufacturers'
planning cycles, in a way that still allowed NHTSA to comply with the
statutory requirement to determine the appropriate level of the
standards for each model year.
    The CAFE model is also able to account for important engineering
differences between specific vehicle models, and to thereby reduce the
risk of applying technologies that may be incompatible with or already
present on a given vehicle model. By combining technologies
incrementally and on a model-by-model basis, the CAFE model is able to
account for important engineering differences between vehicle models
and avoid unlikely technology combinations
    The CAFE model also produces a single vehicle-level output file
that, for each vehicle model, shows which technologies were present at
the outset of modeling, which technologies were superseded by other
technologies, and which technologies were ultimately present at the
conclusion of modeling. For each vehicle, the same file shows resultant
changes in vehicle weight, fuel economy, and cost. This provides for
efficient identification, analysis, and correction of errors, a task
with which the public can now assist the agency, since all inputs and
outputs are public.
    Such considerations, as well as those related to the efficiency
with which the CAFE model is able to analyze attribute-based CAFE
standards and changes in vehicle classification, and to perform higher-
level analysis such as stringency estimation (to meet predetermined
criteria), sensitivity analysis, and uncertainty analysis, lead the
agency to conclude that the model remains the best available to the
agency for the purposes of analyzing potential new CAFE standards.
c. What changes has DOT made to the model?
    Between promulgation of the MY 2012-2016 CAFE standards and today's
proposal regarding MY 2017-2025 standards, the CAFE model has been
revised to make some minor improvements, and to add some significant
new capabilities: (1) Accounting for electricity used to charge
electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs),
(2) accounting for use of ethanol blends in flexible-fuel vehicles
(FFVs), (3) accounting for costs (i.e., ``stranded capital'') related
to early replacement of technologies, (4) accounting for previously-
applied technology when determining the extent to which a manufacturer
could expand use of the technology, (5) applying technology-specific
estimates of changes in consumer value, (6) simulating the extent to
which manufacturers might utilize EPCA's provisions regarding
generation and use of CAFE credits, (7) applying estimates of fuel
economy adjustments (and accompanying costs) reflecting increases in
air conditioner efficiency, (8) reporting privately-valued benefits,
(9) simulating the extent to which manufacturers might voluntarily
apply technology beyond levels needed for compliance with CAFE
standards, and (10) estimating changes in highway fatalities
attributable to any applied reductions in vehicle mass. These
capabilities are described below, and in greater detail in the CAFE
model documentation.\697\
---------------------------------------------------------------------------

    \697\ Model documentation is available on NHTSA's Web site.
---------------------------------------------------------------------------

    To support evaluation of the effects electric vehicles (EVs) and
plug-in hybrid vehicles (PHEVs) could have on energy consumption and
associated costs and environmental effects, DOT has expanded the CAFE
model to estimate the amount of electricity that would be required to
charge these vehicles (accounting for the potential that PHEVs can also
run on gasoline). The model calculates the cost of this electricity, as
well as the accompanying upstream criteria pollutant and greenhouse gas
emissions.
    Similar to this expansion to account for the potential the PHEVs
can be refueled with gasoline or recharged with electricity, DOT has
expanded the CAFE model to account for the potential that other
flexible-fuel vehicles can be operated on multiple fuels. In
particular, the model can account for ethanol FFVs consuming E85 or
gasoline, and to report consumption of both fuels, as well as
corresponding costs and upstream emissions.
    Among the concerns raised in the past regarding how technology
costs are estimated has been one that stranded capital costs be
considered. Capital becomes ``stranded'' when capital equipment is
retired or its use is discontinued before the equipment has been fully
depreciated and the equipment still retains some value or usefulness.
DOT has modified the CAFE model to, if specified for a given
technology, when that technology is replaced by a newly applied
technology, apply a stream of costs representing the stranded capital
cost of the replaced technology. This cost is in addition to the cost
for producing the newly

applied technology in the first year of production.
    As documented in prior CAFE rulemakings, the CAFE model applies
``phase-in caps'' to constrain technology application at the vehicle
manufacturer level. They are intended to reflect a manufacturer's
overall resource capacity available for implementing new technologies
(such as engineering and development personnel and financial
resources), thereby ensuring that resource capacity is accounted for in
the modeling process. This helps to ensure technological feasibility
and economic practicability in determining the stringency of the
standards. When the MY 2012-2016 rulemaking analysis was completed, the
model performed the relevant test by comparing a given phase-in cap to
the amount (i.e., the share of the manufacturer's fleet) to which the
technology had been added by the model. DOT has since modified the CAFE
model to take into account the extent to which a given manufacturer has
already applied the technology (i.e., as reflected in the market
forecast specified as a model inputs), and to apply the relevant test
based on the total application of the technology.
    The CAFE model requires inputs defining the technology-specific
cost and efficacy (i.e., percentage reduction of fuel consumption), and
has, to date, effectively assumed that these input values reflect
application of the technology in a manner that holds vehicle
performance and utility constant. Considering that some technologies
may, nonetheless, offer owners greater or lesser value (beyond that
related to fuel outlays, which the model calculates internally based on
vehicle fuel type and fuel economy), DOT has modified the CAFE model to
accept and apply technology-specific estimates of any value gain
realized or loss incurred by vehicle purchasers.\698\
---------------------------------------------------------------------------

    \698\ For example, a value gain could be specified for a
technology expected to improve ride quality, and a value loss could
be specified for a technology expected to reduce vehicle range.
---------------------------------------------------------------------------

    For the MY 2012-2016 CAFE rulemaking analysis, DOT modified the
CAFE model to accommodate specification and accounting for credits a
manufacturer is assumed to earn by producing flexible fuel vehicles
(FFVs). Although NHTSA cannot consider such credits when determining
maximum feasible CAFE standards, the agency presented an analysis that
included FFV credits, in order to communicate the extent to which use
of such credits might cause actual costs, effects, and benefits to be
lower than estimated in NHTSA's formal analysis. As DOT explained at
the time, it was unable to account for other EPCA credit mechanisms,
because attempts to do so had been limited by complex interactions
between those mechanisms and the multiyear planning aspects of the CAFE
model. DOT has since modified the CAFE model to provide the ability to
account for any or all of the following flexibilities provided by EPCA:
FFV credits, credit carry-forward and carry-back (between model years),
credit transfers (between passenger car and light truck fleets), and
credit trades (between manufacturers). The model accounts for EPCA-
specified limitations applicable to these flexibilities (e.g., limits
on the amount of credit that can be transferred between passenger car
and light truck fleets). These capabilities in the model provide a
basis for more accurately estimating costs, effects, and benefits that
may actually result from new CAFE standards. Insofar as some
manufacturers actually do earn and use CAFE credits, this provides
NHTSA with the ability to examine outcomes more realistically than EPCA
allows for purposes of setting new CAFE standards.
    NHTSA is today proposing CAFE standards reflecting EPA's proposal
to change fuel economy calculation procedures such that a vehicle's
fuel consumption improvement will be accounted for if the vehicle has
technologies that reduce the amount of energy needed to power the air
conditioner. To facilitate analysis of these standards, DOT has
modified the CAFE model to account for these adjustments, based on
inputs specifying the average amount of improvement anticipated, and
the estimated average cost to apply the underlying technology.
    Considering that past CAFE rulemakings indicate that most of the
benefits of CAFE standards are realized by vehicle owners, DOT has
modified the CAFE model to estimate not just social benefits, but also
private benefits. The model accommodates separate discount rates for
these two valuation methods (e.g., a 3% rate for social benefits with a
7% rate for private benefits). When calculating private benefits, the
model includes changes in outlays for fuel taxes (which, as economic
transfers, are excluded from social benefits) and excludes changes in
economic externalities (e.g., monetized criteria pollutant and
greenhouse gas emissions).
    Since 2003, the CAFE model (and its predecessors) have provided the
ability to estimate the extent to which a manufacturer with a history
of paying civil penalties allowed under EPCA might decide to add some
fuel-saving technology, but not enough to comply with CAFE standards.
In simulating this decision-making, the model considers the cost to add
the technology, the calculated reduction in civil penalties, and the
calculated present value (at the time of vehicle purchase) of the
change in fuel outlays over a specified ``payback period'' (e.g., 5
years). For a manufacturer assumed to be willing to pay civil
penalties, the model stops adding technology once paying fines becomes
more attractive than continuing to add technology, considering these
three factors. As an extension of this simulation approach, DOT has
modified the CAFE model to, if specified, simulate the potential that a
manufacturer would add more technology than required for purposes of
compliance with CAFE standards. When set to operate in this manner, the
model will continue to apply technology to a manufacturer's CAFE-
compliant fleet until applying further technology will incur more in
cost than it will yield in calculated fuel savings over a specified
``payback period'' that is set separately from the payback period
applicable until compliance is achieved. In its analysis supporting MY
2012-2016 standards adopted in 2010, NHTSA estimated the extent to
which reductions in vehicle mass might lead to changes in the number of
highway fatalities occurring over the useful life of the MY 2012-2016
fleet. NHTSA performed these calculations outside the CAFE model (using
vehicle-specific mass reduction calculations from the model), based on
agency analysis of relevant highway safety data. DOT has since modified
the CAFE model to perform these calculations, using an analytical
structure indicated by an update to the underlying safety analysis. The
model also applies an input value indicating the economic value of a
statistical life, and includes resultant benefits (or disbenefits) in
the calculation of total social benefits.
    In comments on recent NHTSA rulemakings, some reviewers have
suggested that the CAFE model should be modified to estimate the extent
to which new CAFE standards would induce changes in the mix of vehicles
in the new vehicle fleet. NHTSA agrees that a ``market shift'' model,
also called a consumer vehicle choice model, could provide useful
information regarding the possible effects of potential new CAFE
standards. NHTSA has contracted with the Brookings Institution (which
has subcontracted with researchers at U.C. Davis, U.C. Irvine) to
develop a vehicle choice model estimated at the vehicle configuration
level that can be

implemented as part of DOT's CAFE model. As discussed further in
Section V of the PRIA, past efforts by DOT staff demonstrated that a
vehicle could be added to the CAFE model, but did not yield credible
coefficients specifying such a model. If a suitable and credibly
calibrated vehicle choice model becomes available in time--whether
through the Brookings-led research or from other sources, DOT may
integrate a vehicle choice model into the CAFE model for the final
rule.
    NHTSA anticipates this integration of a vehicle choice model would
be structurally and operationally similar to the integration we
implemented previously. As under the version applied in support of
today's announcement, the CAFE model would begin with an agency-
estimated market forecast, estimate to what extent manufacturers might
apply additional fuel-saving technology to each vehicle model in
consideration of future fuel prices and baseline or alternative CAFE
standards and fuel prices, and calculate resultant changes in the fuel
economy (and possibly fuel type) and price of individual vehicle
models. With an integrated market share model, the CAFE model would
then estimate how the sales volumes of individual vehicle models would
change in response to changes in fuel economy levels and prices
throughout the light vehicle market, possibly taking into account
interactions with the used vehicle market. Having done so, the model
would replace the sales estimates in the original market forecast with
those reflecting these model-estimated shifts, repeating the entire
modeling cycle until converging on a stable solution.
    Based on past experience, we anticipate that this recursive
simulation will be necessary to ensure consistency between sales
volumes and modeled fuel economy standards, because achieved CAFE
levels depend on sales mix and, under attribute-based CAFE standards,
required CAFE levels also depend on sales mix. NHTSA anticipates,
therefore, that application of a market share model would impact
estimates of all of the following for a given schedule of CAFE
standards: overall market volume, manufacturer market shares and
product mix, required and achieved CAFE levels, technology application
rates and corresponding incurred costs, fuel consumption, greenhouse
gas and criteria pollutant emissions, changes in highway fatalities,
and economic benefits.
    Past testing by DOT/NHTSA staff did not indicate major shifts in
broad measures (e.g., in total costs or total benefits), but that
testing emphasized shorter modeling periods (e.g., 1-5 model years) and
less stringent standards than reflected in today's proposal. Especially
without knowing the characteristics of a future vehicle choice model,
it is difficult to anticipate the potential degree to which its
inclusion would impact analytical outcomes.
    NHTSA invites comment on the above changes to the CAFE model. The
agency's consideration of any alternative approaches will be
facilitated by specific recommendations regarding implementation within
the model's overall structure. NHTSA also invites comment regarding
above-mentioned prospects for inclusion of a vehicle choice model. The
agency's consideration will be facilitated by specific information
demonstrating that inclusion of such a model would lead to more
realistic estimates of costs, effects, and benefits, or that inclusion
of such a model would lead to less realistic estimates.
d. Does the model set the standards?
    Since NHTSA began using the CAFE model in CAFE analysis, some
commenters have interpreted the agency's use of the model as the way by
which the agency chooses the maximum feasible fuel economy standards.
As the agency explained in its most recent CAFE rulemaking, this is
incorrect.\699\ Although NHTSA currently uses the CAFE model as a tool
to inform its consideration of potential CAFE standards, the CAFE model
does not determine the CAFE standards that NHTSA proposes or
promulgates as final regulations. The results it produces are
completely dependent on inputs selected by NHTSA, based on the best
available information and data available in the agency's estimation at
the time standards are set. Ultimately, NHTSA's selection of
appropriate CAFE standards is governed and guided by the statutory
requirements of EPCA, as amended by EISA: NHTSA sets the standard at
the maximum feasible average fuel economy level that it determines is
achievable during a particular model year, considering technological
feasibility, economic practicability, the effect of other standards of
the Government on fuel economy, and the need of the nation to conserve
energy.
---------------------------------------------------------------------------

    \699\ 75 FR 25600.
---------------------------------------------------------------------------

e. How does NHTSA make the model available and transparent?
    Model documentation, which is publicly available in the rulemaking
docket and on NHTSA's Web site, explains how the model is installed,
how the model inputs (all of which are available to the public) \700\
and outputs are structured, and how the model is used. The model can be
used on any Windows-based personal computer with Microsoft Office 2003
or 2007 and the Microsoft .NET framework installed (the latter
available without charge from Microsoft). The executable version of the
model and the underlying source code are also available at NHTSA's Web
site. The input files used to conduct the core analysis documented in
this proposal are available in the public docket. With the model and
these input files, anyone is capable of independently running the model
to repeat, evaluate, and/or modify the agency's analysis.
---------------------------------------------------------------------------

    \700\ We note, however, that files from any supplemental
analysis conducted that relied in part on confidential manufacturer
product plans cannot be made public, as prohibited under 49 CFR part
512.
---------------------------------------------------------------------------

    Because the model is available on NHTSA's web site, the agency has
no way of knowing how widely the model has been used. The agency is,
however, aware that the model has been used by other federal agencies,
vehicle manufacturers, private consultants, academic researchers, and
foreign governments. Some of these individuals have found the model
complex and challenging to use. Insofar as the model's sole purpose is
to help DOT staff efficiently analyze potential CAFE standards, DOT has
not expended significant resources trying to make the model as ``user
friendly'' as commercial software intended for wide use. However, DOT
wishes to facilitate informed comment on the proposed standards, and
encourages reviewers to contact the agency promptly if any difficulties
using the model are encountered.
    NHTSA arranged for a formal peer review of an older version of the
model, has responded to reviewers' comments, and has considered and
responded to model-related comments received over the course of four
CAFE rulemakings. In the agency's view, this steady and expanding
outside review over the course of nearly a decade of model development
has helped DOT to significantly strengthen the model's capabilities and
technical quality, and has greatly increased transparency, such that
all model code is publicly available, and all model inputs and outputs
are publicly available in a form that should allow reviewers to
reproduce the agency's analysis. NHTSA is currently preparing
arrangements for a formal peer review of the current CAFE model.
Depending on the schedule for that

review, DOT will consider possible model revisions and, as feasible,
attempt to make any appropriate revisions before performing analysis
supporting final CAFE standards for MY 2017 and beyond.

D. Statutory Requirements

1. EPCA, as Amended by EISA
a. Standard Setting
    EPCA, as amended by EISA, contains a number of provisions regarding
how NHTSA must set CAFE standards. NHTSA must establish separate CAFE
standards for passenger cars and light trucks \701\ for each model
year,\702\ and each standard must be the maximum feasible that NHTSA
believes the manufacturers can achieve in that model year.\703\ When
determining the maximum feasible level achievable by the manufacturers,
EPCA requires that the agency consider the four statutory factors of
technological feasibility, economic practicability, the effect of other
motor vehicle standards of the Government on fuel economy, and the need
of the United States to conserve energy.\704\ In addition, the agency
has the authority to and traditionally does consider other relevant
factors, such as the effect of the CAFE standards on motor vehicle
safety. The ultimate determination of what standards can be considered
maximum feasible involves a weighing and balancing of these factors,
and the balance may shift depending on the information before the
agency about the expected circumstances in the model years covered by
the rulemaking. Always in conducting that balancing, however, the
implication of the ``maximum feasible'' requirement is that it calls
for setting a standard that exceeds what might be the minimum
requirement if the agency determines that the manufacturers can achieve
a higher level, and that the agency's decision support the overarching
purpose of EPCA, energy conservation.\705\
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    \701\ 49 U.S.C. 32902(b)(1).
    \702\ 49 U.S.C. 32902(a).
    \703\ Id.
    \704\ 49 U.S.C. 32902(f).
    \705\ Center for Biological Diversity v. NHTSA, 538 F.3d 1172,
1197 (9th Cir. 2008) (``Whatever method it uses, NHTSA cannot set
fuel economy standards that are contrary to Congress' purpose in
enacting the EPCA--energy conservation.'').
---------------------------------------------------------------------------

    Besides the requirement that standards be maximum feasible for the
fleet in question, EPCA/EISA also contains several other requirements.
The standards must be attribute-based and expressed in the form of a
mathematical function--NHTSA has thus far based standards on vehicle
footprint, and for this rulemaking has expressed them in the form of a
constrained linear function that generally sets higher (more stringent)
mpg targets for smaller-footprint vehicles and lower (less stringent)
mpg targets for larger-footprint vehicles. Second, the standards are
subject to a minimum requirement regarding stringency: they must be set
at levels high enough to ensure that the combined U.S. passenger car
and light truck fleet achieves an average fuel economy level of not
less than 35 mpg not later than MY 2020.\706\ Third, between MY 2011
and MY 2020, the standards must ``increase ratably'' in each model
year.\707\ This requirement does not have a precise mathematical
meaning, particularly because it must be interpreted in conjunction
with the requirement to set the standards for each model year at the
level determined to be the maximum feasible level for that model year.
Generally speaking, the requirement for ratable increases means that
the annual increases should not be disproportionately large or small in
relation to each other. The second and third requirements no longer
apply after MY 2020, at which point standards must simply be maximum
feasible. And fourth, EISA requires NHTSA to issue CAFE standards for
``at least 1, but not more than 5, model years.''\708\ This issue is
discussed in section IV.B above.
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    \706\ 49 U.S.C. 32902(b)(2)(A).
    \707\ 49 U.S.C. 32902(b)(2)(C).
    \708\ 49 U.S.C. 32902(b)(3)(B).
---------------------------------------------------------------------------

    The following sections discuss the statutory factors behind
``maximum feasible'' in more detail.
i. Statutory Factors Considered in Determining the Achievable Level of
Average Fuel Economy
    As none of the four factors is defined in EPCA and each remains
interpreted only to a limited degree by case law, NHTSA has
considerable latitude in interpreting them. NHTSA interprets the four
statutory factors as set forth below.
(1) Technological Feasibility
    ``Technological feasibility'' refers to whether a particular
technology for improving fuel economy is available or can become
available for commercial application in the model year for which a
standard is being established. Thus, the agency is not limited in
determining the level of new standards to technology that is already
being commercially applied at the time of the rulemaking. It can,
instead, set technology-forcing standards, i.e., ones that make it
necessary for manufacturers to engage in research and development in
order to bring a new technology to market. There are certain
technologies that the agency has considered for this rulemaking, for
example, that we know to be in the research phase now but which we are
fairly confident can be commercially applied by the rulemaking
timeframe, and very confident by the end of the rulemaking timeframe.
It is important to remember, however, that while the technological
feasibility factor may encourage the agency to look toward more
technology-forcing standards, and while this could certainly be
appropriate given EPCA's overarching purpose of energy conservation
depending on the rulemaking, that factor must also be balanced with the
other of the four statutory factors. Thus, while ``technological
feasibility'' can drive standards higher by assuming the use of
technologies that are not yet commercial, ``maximum feasible'' is still
also defined in terms of economic practicability, for example, which
might caution the agency against basing standards (even fairly distant
future standards) entirely on such technologies. By setting standards
at levels consistent with an analysis that assumes the use of these
nascent technologies at levels that seem reasonable, the agency
believes a more reasonable balance is ensured. Nevertheless, as the
``maximum feasible'' balancing may vary depending on the circumstances
at hand for the model years in which the standards are set, the extent
to which technological feasibility is simply met or plays a more
dynamic role may also shift.
(2) Economic Practicability
    ``Economic practicability'' refers to whether a standard is one
``within the financial capability of the industry, but not so stringent
as to'' lead to ``adverse economic consequences, such as a significant
loss of jobs or the unreasonable elimination of consumer choice.''
\709\ The agency has explained in the past that this factor can be
especially important during rulemakings in which the automobile
industry is facing significantly adverse economic conditions (with
corresponding risks to jobs). Consumer acceptability is also an element
of economic practicability, one which is particularly difficult to
gauge during times of uncertain fuel prices.\710\

In a rulemaking such as the present one, looking out into the more
distant future, economic practicability is a way to consider the
uncertainty surrounding future market conditions and consumer demand
for fuel economy in addition to other vehicle attributes. In an attempt
to ensure the economic practicability of attribute-based standards,
NHTSA considers a variety of factors, including the annual rate at
which manufacturers can increase the percentage of their fleet that
employ a particular type of fuel-saving technology, the specific fleet
mixes of different manufacturers, and assumptions about the cost of the
standards to consumers and consumers' valuation of fuel economy, among
other things.
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    \709\ 67 FR 77015, 77021 (Dec. 16, 2002).
    \710\ See, e.g., Center for Auto Safety v. NHTSA (CAS), 793 F.2d
1322 (DC Cir. 1986) (Administrator's consideration of market demand
as component of economic practicability found to be reasonable);
Public Citizen v. NHTSA, 848 F.2d 256 (Congress established broad
guidelines in the fuel economy statute; agency's decision to set
lower standard was a reasonable accommodation of conflicting
policies).
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    At the same time, however, the law does not preclude a CAFE
standard that poses considerable challenges to any individual
manufacturer. The Conference Report for EPCA, as enacted in 1975, makes
clear, and the case law affirms, ``(A) determination of maximum
feasible average fuel economy should not be keyed to the single
manufacturer which might have the most difficulty achieving a given
level of average fuel economy.'' \711\ Instead, the agency is compelled
``to weigh the benefits to the nation of a higher fuel economy standard
against the difficulties of individual automobile manufacturers.''
\712\ The law permits CAFE standards exceeding the projected capability
of any particular manufacturer as long as the standard is economically
practicable for the industry as a whole. Thus, while a particular CAFE
standard may pose difficulties for one manufacturer, it may also
present opportunities for another. NHTSA has long held that the CAFE
program is not necessarily intended to maintain the competitive
positioning of each particular company. Rather, it is intended to
enhance the fuel economy of the vehicle fleet on American roads, while
protecting motor vehicle safety and being mindful of the risk to the
overall United States economy.
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    \711\ CEI-I, 793 F.2d 1322, 1352 (DC Cir. 1986).
    \712\ Id.
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    Consequently, ``economic practicability'' must be considered in the
context of the competing concerns associated with different levels of
standards. Prior to the MY 2005-2007 rulemaking, the agency generally
sought to ensure the economic practicability of standards in part by
setting them at or near the capability of the ``least capable
manufacturer'' with a significant share of the market, i.e., typically
the manufacturer whose vehicles are, on average, the heaviest and
largest. In the first several rulemakings establishing attribute-based
standards, the agency applied marginal cost benefit analysis. This
ensured that the agency's application of technologies was limited to
those that would pay for themselves and thus should have significant
appeal to consumers. We note that for this rulemaking, the agency can
and has limited its application of technologies to those that are
projected to be cost-effective within the rulemaking time frame, with
or without the use of such analysis.
    Whether the standards maximize net benefits has thus been a
touchstone in the past for NHTSA's consideration of economic
practicability. Executive Order 12866, as amended by Executive Order
13563, states that agencies should ``select, in choosing among
alternative regulatory approaches, those approaches that maximize net
benefits * * *'' In practice, however, agencies, including NHTSA, must
consider situations in which the modeling of net benefits does not
capture all of the relevant considerations of feasibility. In this
case, the NHTSA balancing of the statutory factors suggests that the
maximum feasible stringency for this rulemaking points to another level
besides the modeled net benefits maximum, and such a situation is well
within the guidance provided by EO's 12866 and 13563.\713\
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    \713\ See 70 FR at 51435 (Aug. 30, 2005); CBD v. NHTSA, 538 F.3d
at 1197 (9th Cir. 2008).
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    The agency's consideration of economic practicability depends on a
number of factors. Expected availability of capital to make investments
in new technologies matters; manufacturers' expected ability to sell
vehicles with new technologies matters; likely consumer choices matter;
and so forth. NHTSA's analysis of the impacts of this rulemaking does
incorporate assumptions to capture aspects of consumer preferences,
vehicle attributes, safety, and other factors relevant to an impact
estimate; however, it is difficult to capture every such constraint.
Therefore, it is well within the agency's discretion to deviate from a
modeled net benefits maximum in the face of evidence of economic
impracticability, and if the agency concludes that the modeled net
benefits maximum would not represent the maximum feasible level for
future CAFE standards. Economic practicability is a complex factor, and
like the other factors must also be considered in the context of the
overall balancing and EPCA's overarching purpose of energy
conservation. Depending on the conditions of the industry and the
assumptions used in the agency's analysis of alternative stringencies,
NHTSA could well find that standards that maximize net benefits, or
that are higher or lower, could be economically practicable, and thus
maximum feasible.
(3) The Effect of Other Motor Vehicle Standards of the Government on
Fuel Economy
    ``The effect of other motor vehicle standards of the Government on
fuel economy,'' involves an analysis of the effects of compliance with
emission, safety, noise, or damageability standards on fuel economy
capability and thus on average fuel economy. In previous CAFE
rulemakings, the agency has said that pursuant to this provision, it
considers the adverse effects of other motor vehicle standards on fuel
economy. It said so because, from the CAFE program's earliest years
\714\ until present, the effects of such compliance on fuel economy
capability over the history of the CAFE program have been negative
ones. In those instances in which the effects are negative, NHTSA has
said that it is called upon to ``mak[e] a straightforward adjustment to
the fuel economy improvement projections to account for the impacts of
other Federal standards, principally those in the areas of emission
control, occupant safety, vehicle damageability, and vehicle noise.
However, only the unavoidable consequences should be accounted for. The
automobile manufacturers must be expected to adopt those feasible
methods of achieving compliance with other Federal standards which
minimize any adverse fuel economy effects of those standards.'' \715\
For example, safety standards that have the effect of increasing
vehicle weight lower vehicle fuel economy capability and thus decrease
the level of average fuel economy that the agency can determine to be
feasible.
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    \714\ 42 FR 63184, 63188 (Dec. 15, 1977). See also 42 FR 33534,
33537 (Jun. 30, 1977).
    \715\ 42 FR 33534, 33537 (Jun. 30, 1977).
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    The ``other motor vehicle standards'' consideration has thus in
practice functioned in a fashion similar to the provision in EPCA, as
originally enacted, for adjusting the statutorily-specified CAFE
standards for MY 1978-1980 passengers cars.\716\ EPCA did not permit
NHTSA to amend those standards based on a finding that the maximum
feasible level of average fuel economy for any of those three years was
greater or less than the standard

specified for that year. Instead, it provided that the agency could
only reduce the standards and only on one basis: if the agency found
that there had been a Federal standards fuel economy reduction, i.e., a
reduction in fuel economy due to changes in the Federal vehicle
standards, e.g., emissions and safety, relative to the year of
enactment, 1975.
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    \716\ That provision was deleted as obsolete when EPCA was
codified in 1994.
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    The ``other motor vehicle standards'' provision is broader than the
Federal standards fuel economy reduction provision. Although the
effects analyzed to date under the ``other motor vehicle standards''
provision have been negative, there could be circumstances in which the
effects are positive. In the event that the agency encountered such
circumstances, it would be required to consider those positive effects.
For example, if changes in vehicle safety technology led to NHTSA's
amending a safety standard in a way that permits manufacturers to
reduce the weight added in complying with that standard, that weight
reduction would increase vehicle fuel economy capability and thus
increase the level of average fuel economy that could be determined to
be feasible.
    In the wake of Massachusetts v. EPA and of EPA's endangerment
finding, granting of a waiver to California for its motor vehicle GHG
standards, and its own establishment of GHG standards, NHTSA is
confronted with the issue of how to treat those standards under EPCA/
EISA, such as in the context of the ``other motor vehicle standards''
provision. To the extent the GHG standards result in increases in fuel
economy, they would do so almost exclusively as a result of inducing
manufacturers to install the same types of technologies used by
manufacturers in complying with the CAFE standards.
    Comment is requested on whether and in what way the effects of the
California and EPA standards should be considered under EPCA/EISA,
e.g., under the ``other motor vehicle standards'' provision, consistent
with NHTSA's independent obligation under EPCA/EISA to issue CAFE
standards. The agency has already considered EPA's proposal and the
harmonization benefits of the National Program in developing its own
proposal.
(4) The Need of the United States To Conserve Energy
    ``The need of the United States to conserve energy'' means ``the
consumer cost, national balance of payments, environmental, and foreign
policy implications of our need for large quantities of petroleum,
especially imported petroleum.'' \717\ Environmental implications
principally include those associated with reductions in emissions of
criteria pollutants and CO2. A prime example of foreign
policy implications are energy independence and energy security
concerns.
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    \717\ 42 FR 63184, 63188 (1977).
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(a) Fuel Prices and the Value of Saving Fuel
    Projected future fuel prices are a critical input into the
preliminary economic analysis of alternative CAFE standards, because
they determine the value of fuel savings both to new vehicle buyers and
to society, which is related to the consumer cost (or rather, benefit)
of our need for large quantities of petroleum. In this rule, NHTSA
relies on fuel price projections from the U.S. Energy Information
Administration's (EIA) most recent Annual Energy Outlook (AEO) for this
analysis. Federal government agencies generally use EIA's projections
in their assessments of future energy-related policies.
(b) Petroleum Consumption and Import Externalities
    U.S. consumption and imports of petroleum products impose costs on
the domestic economy that are not reflected in the market price for
crude petroleum, or in the prices paid by consumers of petroleum
products such as gasoline. These costs include (1) Higher prices for
petroleum products resulting from the effect of U.S. oil import demand
on the world oil price; (2) the risk of disruptions to the U.S. economy
caused by sudden reductions in the supply of imported oil to the U.S.;
and (3) expenses for maintaining a U.S. military presence to secure
imported oil supplies from unstable regions, and for maintaining the
strategic petroleum reserve (SPR) to provide a response option should a
disruption in commercial oil supplies threaten the U.S. economy, to
allow the United States to meet part of its International Energy Agency
obligation to maintain emergency oil stocks, and to provide a national
defense fuel reserve. Higher U.S. imports of crude oil or refined
petroleum products increase the magnitude of these external economic
costs, thus increasing the true economic cost of supplying
transportation fuels above the resource costs of producing them.
Conversely, reducing U.S. imports of crude petroleum or refined fuels
or reducing fuel consumption can reduce these external costs.
(c) Air Pollutant Emissions
    While reductions in domestic fuel refining and distribution that
result from lower fuel consumption will reduce U.S. emissions of
various pollutants, additional vehicle use associated with the rebound
effect \718\ from higher fuel economy will increase emissions of these
pollutants. Thus, the net effect of stricter CAFE standards on
emissions of each pollutant depends on the relative magnitudes of its
reduced emissions in fuel refining and distribution, and increases in
its emissions from vehicle use.\719\ Fuel savings from stricter CAFE
standards also result in lower emissions of CO2, the main
greenhouse gas emitted as a result of refining, distribution, and use
of transportation fuels. Reducing fuel consumption reduces carbon
dioxide emissions directly, because the primary source of
transportation-related CO2 emissions is fuel combustion in
internal combustion engines.
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    \718\ The ``rebound effect'' refers to the tendency of drivers
to drive their vehicles more as the cost of doing so goes down, as
when fuel economy improves.
    \719\ See Section IV.G below for NHTSA's evaluation of this
effect.
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    NHTSA has considered environmental issues, both within the context
of EPCA and the National Environmental Policy Act, in making decisions
about the setting of standards from the earliest days of the CAFE
program. As courts of appeal have noted in three decisions stretching
over the last 20 years,\720\ NHTSA defined the ``need of the Nation to
conserve energy'' in the late 1970s as including ``the consumer cost,
national balance of payments, environmental, and foreign policy
implications of our need for large quantities of petroleum, especially
imported petroleum.'' \721\ In 1988, NHTSA included climate change
concepts in its CAFE notices and prepared its first environmental
assessment addressing that subject.\722\ It cited concerns about
climate change as one of its reasons for limiting the extent of its