March 7, 2012

2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy

Proposed Rule
Summary

Score: 38 / 60

Additional details
Agency
Environmental Protection Agency
Regulatory Identification Number
2060-AQ54, 2127-AK79
Agency Name
Environmental Protection Agency , Department of Transportation
Rule Publication Date
12/01/2011
Comment Closing Date
01/03/2012
Dollar Year
billions 2009$
Time Horizon (Years)
9

RULE SUMMARY

Proposes standards for greenhouse gas emissions and corporate average fuel economy for light vehicles for 2017-2025; responds to a Presidential memorandum of 2010. EPA and NHTSA, on behalf of the Department of Transportation, are issuing this joint proposal to further reduce greenhouse gas emissions and improve fuel economy for light-duty vehicles. This proposed rulemaking extends the National Program beyond the greenhouse gas and corporate average fuel economy standards set for model years 2012–2016 and is aimed at global climate change and reduction of oil consumption. The rulemaking also considers minor changes in regulations applicable to MY 2012–2016, with respect to air conditioner performance.

COMMENTARY

The requirements relate to technical improvements in vehicle technology that the agencies anticipate inducing via the emissions and fuel-use standards. There is no proper investigation of alternatives to command and control standards, which unfortunately also includes failure to consider the likely development of the industry without further regulation; many of the innovations that are discussed, such as sophisticated gearing and direct-injection engines, are under development as they are of interest to consumers for performance and economy reasons.

MONETIZED COSTS & BENEFITS (AS REPORTED BY AGENCY)

Dollar Year
billions 2009$
 
Time Horizon (Years)
9
 
Discount Rates
3%
7%
Expected Costs (Annualized)    
Expected Benefits (Annualized)    
Expected Costs (Total)
$157
$157
Expected Benefits (Total)
$515
$419
Net Benefits (Annualized)    
Net Benefits (Total)
$358
$262

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
RIA (EPA) can be found with search on footnote references in Fed Register entry—not transparent. Google on RIN brings up immediate links via openregs.com, OMB/RegInfo.gov and other sites; some useful summaries.
3/5
2. How verifiable are the data used in the analysis?
Data are documented and relate to work in longstanding models (e.g., the OMEGA model) or by subcontractors, and use published data such as vehicle sales. Considerable work is required to decipher models and data. Some good practice: placing CSM forecasts in the docket for reference. The joint TSD has detailed schema, e.g., p.2–13.In past CAFE rulemakings, NHTSA used confidential product plans submitted by vehicle manufacturers to develop the reference case fleet. The agencies now have created a new methodology for creating baseline and reference fleets using data, the vast majority of which is publicly available. Both the input and output sheets from their modeling are public so that readers can verify and check NHTSA’s and EPA’s modeling and perform their own analyses with these datasets.
4/5
3. How verifiable are the models and assumptions used in the analysis?
The models are not always transparent, but considerable attention is given to precise formulation of key relationships, and the TSD does give detail.
4/5
4. Was the analysis comprehensible to an informed layperson?
Reasonably so at best. Although the analysis is heavy and detailed reading, the informed layperson would find most of it comprehensible. Writing style often presents information in the form of a question (e.g., How is the baseline chosen?") so as to aid the reader in following the lengthy analysis.
4/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
3/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
Fuel savings and reduced GHG emissions, plus retention of consumer choice over a variety of vehicle size and performance attributes.
4/5
Does the analysis identify how these outcomes are to be measured?
As fuel use, time savings, emissions reductions, health benefits (on mortality, chronic bronchitis, emergency room visits for asthma and work loss), safety and compliance costs.
4/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Not really—more like an assumption that enforcing CAFE standards will induce manufacturers' technical change and cause some consumers to use less fuel, i.e., small fuel-efficient transport will dominate, and will reduce emissions.
3/5
Does the analysis present credible empirical support for the theory?
Statistical extrapolation and simulation modeling. Citation of published work. Extensive engineering analysis is used throughout analysis. But RIA admits the relation between fuel economy (and GHG emissions) and automobile footprint, though directionally clear (i.e., fuel economy tends to decrease and CO2 emissions tend to increase with increasing footprint), is theoretically vague and quantitatively uncertain.
3/5
Does the analysis adequately assess uncertainty about the outcomes?
The agencies recognize that based on economic and consumer demand factors that are external to this rule, the distribution of footprints in the future may be either smaller or larger than what is projected in this rule. However, the agencies assert there will not be significant shifts in this distribution as a direct consequence of this proposed rule. They also acknowledge that benefits from proposed rule are overstated to the extent that market forces improve fuel efficiency in the future but do not attempt to assess this possibility directly. However, they also considered alternative statistical methods (MAD vs. OLS) and considered different time roll-outs of standards in part to deal with uncertainty about outcomes. Uncertain manufacturer baseline noted but ignored.
3/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
2/5
Does the analysis identify a market failure or other systemic problem?
Cites strategic advantages from lowered dependence on oil imports and external costs such as congestion and environmental pollution. The agencies admit that many technologies are readily available that allow savvy consumers to seek vehicles with improved fuel efficiency, but they argue that consumers might be 'myopic' and hence undervalue future fuel savings in their purchasing decisions due to reasons that include: lack of information necessary to estimate value of future fuel savings, uncertainty in future fuel savings when comparing upfront cost to future returns, consumers may value fuel economy less than other vehicle attributes, consumers might be averse to short-term losses associated with higher prices of energy efficient products relative to future fuel savings (aka ‘loss aversion’), and consumers might associate higher fuel economy with inexpensive, less well designed vehicles. The agencies conclude that, if these arguments are valid, there are significant gains to consumers of the government mandating additional fuel economy.
3/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
No coherent theory in a conventional sense; RIA cites desirability of savings of fuel and carbon emissions with a net balance favoring consumers and notes that technical changes are evolving anyway in the marketplace—not clear why the benefits to consumers don't give enough incentives on their own. Analysis draws from literature on why consumers don't demand available technologies that would lower fuel costs thus outlining a consistent theory for consumer myopia. Why car manufacturers cannot profit by educating consumers is not clearly discussed, thus again making their case for government intervention. Analysis also does not clearly present arguments for why private market outcomes are associated with environmental externalities, thus indirectly suggesting that this is an obvious systemic problem that does not require elaboration. They simply state that emissions contribute to greenhouse gases and the threat of climate change.
2/5
Does the analysis present credible empirical support for the theory?
Estimates of elements, such as the rebound effect, are well documented with cross-references; some citations are dated and may even be 1990s revisions of much earlier work. Analysis, however, shows economic and environmental benefits and costs from new regulations rather than developing a theoretical model with hypotheses that are tested by past data that would provide conclusions on what are optimal fuel standards consistent with saving citizens’ fuel costs and lessening GHG. In other words, standards appear without theoretical and empirical modeling of what optimal standards would be.
2/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
There is an odd treatment of uncertainty: e.g., "The agencies considered a wide variety of reasonable statistical methods in order to better understand the range of uncertainty regarding the relationship between fuel consumption, CO2 emission rates, and footprint," but then appear to have chosen methods so as to encourage policy results deemed to be preferable. Probabilistic Uncertainty Analysis also cited. They find that the primary economic benefit resulting from the rule—the value of fuel savings—is extremely sensitive to alternative forecasts of future fuel prices.
2/5
7. How well does the analysis assess the effectiveness of alternative approaches?
3/5
Does the analysis enumerate other alternatives to address the problem?
Not really—the agencies could be focusing on market responses to tax policies and increased fuel scarcity, but do not. Some alternative standards are applied in modeling exercises and there is some recognition that market changes are occurring anyway. Not much exploration of industry change in diesel engines, gearing, direct injection, superchargers, and similar current changes. Analysis enumerates an alternative range in stringency from a set of standards that increase, on average, 2 percent annually to a set of standards that increase, on average, 7 percent annually.
4/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
Narrow since it focuses on simply changing the rate at which set of standards increase and thus is not really an alternative. There is no mention of providing tax credits, raising fuel taxes, or placing higher sales taxes on cars that would encourage consumers and producers to seek and produce more efficient cars that would incentivize the market to develop fuel efficiency changes. Rather, they focus on the command-and-control approach of CAFE that focuses on fleet average standards without specific targets for different vehicles.
1/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Some effort at this in regarding alternative standards; notes consumer response likely when faced with different vehicle footprints, engines, and other attributes.
3/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
Focuses on changes to be expected from CAFE standards; baseline fleet is identified in the analysis for reader to carry out analysis; strictly, this regulatory package continues a history of regulation, not a baseline. EPA and NHTSA estimate the composition of the future vehicle fleet absent proposed standards to conduct comparisons. They developed a comparison fleet in three steps: (1) develop baseline fleet based on model year 2008 data and then (2) project the baseline fleet sales into MYs 2017-2025 (aka reference fleet) the agencies believe would exist in MYs 2017-2025 absent any change due to regulation in 2017-2025; and (3) account for technologies (and corresponding increases in cost and reductions in fuel consumption and CO2 emissions) that could be added to MY 2008-technology vehicles in the future, taking into account previously-promulgated standards, and assuming MY 2016 standards are extended through MY 2025. However, they acknowledge that benefits are overstated to the extent that market forces improve fuel efficiency on their own but don't directly adjust their baseline for this possibility.
2/5
8. How well does the analysis assess costs and benefits?
4/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
Yes, TSD estimates marginal cost effects from alternative technical changes induced by CAFE standards. Incremental costs of achieving standards are estimated for the proposed rule but few alternatives considered.
4/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
Some but not all: good on vehicle costs, some attention to compliance, less good on costs to vehicle owners.
3/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
Price of vehicles, impact on fuel costs are considered. Not clear on filter through from transport to final goods via logistics.
4/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
Some analysis of 'rebound effect' and related behavioral changes. Also increased congestion, crashes, and noise caused by increased vehicle use.
5/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Yes, in the sense of examining several technologies, using the interest rates (7 and 3), directing reader to a Monte Carlo analysis. Excludes uncertainty over baseline evolution of manufacturers' technology.
4/5
Does the analysis identify the alternative that maximizes net benefits?
No, eschews net benefit for cost effectiveness and economic feasibility. But they estimate that fuel savings will far outweigh higher vehicle costs and that the net benefits to society will be in the range of $311 billion (7% discount rate) to $421 billion (3% discount rate) over the lifetimes of those vehicles sold in MYs 2017–2025. Also a payback period analysis is presented.
3/5
Does the analysis identify the cost-effectiveness of each alternative considered?
Cost-effectiveness presented for small range of alternatives chosen.
4/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
Considers the effects on small business, admin/compliance costs, and market responses. Little to no discussion of how changes in fuel costs or vehicle prices might affect parties that provide goods and services related to those products (auto dealers, service stations, insurance companies, etc.).
2/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
Beneficiaries identified include consumers of vehicles and citizen health, but the analysis does not assess incidence on different groups of individuals or locations.
3/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
Unclear, since it appears RIA is used to justify the regulation rather than develop and compare sets of wide alternatives.
3/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
Explains selection of cost effectiveness, rejection of net benefit standard based on EPCA 'discretion'. Also adds in employment effects, which are not necessarily welfare gains. They argued the importance of economic practicality associated with capital availability for future technologies and product demand for vehicles equipped with new technologies as well as other issues associated with consumer interest. Thus they believe economic practicability is an overriding factor that, along with EPCA’s overarching purpose of energy conservation, takes precedence over maximizing net benefits.
4/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
Targets emissions and fuel use by manufacturer fleet, rather than imported fuel-oil targets or GHG targets in the economy. However, it remains problematic to assume that market forces have not contributed to future fuel efficiency as this analysis does.
2/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
Does not directly indicate what data would be used, but analysis does present many projections of emissions and fuel efficiency over time that could be used to assess future performance. Again, it is problematic simply to assume that market forces exert no effects on such projections. Refers to NHTSA Automotive Fuel Economy Reports. Future assessment appears to be focused on whether fleets comply with fuel efficiency requirements without determining any associated gain in environmental quality.
2/5
 
Total 38 / 60