Greenhouse Gas & Fuel Efficiency for Medium/Heavy Duty Vehicles

Cost savings due to reduced fuel consumption and shorter refueling times, environmental benefits due to reduction of greenhouse gas and other pollutant emissions, improvements in health due to reduced pollution, and improved energy security. "Energy security" is somewhat vague, but the chapter calculating its components clarifies what it means and why it matters to citizens.

Most of the major benefits are quantified and monetized. One exception: only the effects of carbon emissions, not all greenhouse gases, are monetized. The NPRM says estimates of the health effects will be supplied in the final RIA. The RIA explicitly omits "monopsony" effect on oil prices because this is just a transfer.

The proposed rule has taken into consideration how to measure the fuel standards of new vehicles and differing vehicle classes. The regulation will give the desired outcomes based on the EPA models and simulations. The theory is testable and coherent—by changing the vehicles, fuel economy will increase and CO2 and other greenhouse gases will diminish. The RIA incorporates rebound effect.

Much of the support comes from calculations by EPA and DOT. If the projections turn out to be true, the proposed rule will improve fuel efficiency and reduce emissions; however, there needs to be more evidence from past experience. It seems odd that the RIA did not consider the actual results of prior CAFE standards to demonstrate that this regulation is likely to have the predicted effects. Calculations of benefits include assumed rebound effects, which appear to be the most likely values that can be discerned from a small amount of literature and NHTSA's own analysis.

A range of values for the social cost of carbon are used. Peer review led to a range of estimates for energy security premium. The RIA acknowledges uncertainty about the size of the rebound effect but uses point values anyway. Value of fuel savings is assumed to be pretty certain, despite the likelihood of fluctuating fuel prices.

NPRM characterizes greenhouse gas emissions and energy security effects as classic externalities. It also discusses the "energy paradox" that truck owners seem unwilling to make investments in fuel efficiency that pay for themselves. The RIA acknowledges that cost-minimizing businesses should be expected to adopt technologies whose fuel savings outweigh the cost. It suggests very briefly that this does not occur because of poor information (despite the SmartWay program), lack of trust in fuel efficiency information in the resale market, uncertainty about future fuel prices, and "incomplete coordination" (people who buy trucks are not the same as the people who operate them). So there are certainly some claims of systemic problems here.

Environmental externality issues are explained succinctly. Five explanations offered for the “energy paradox:” inadequate/unverified information in a form relevant to individual companies, inadequate information in the resale market, "split incentives" (different people make decisions about equipment and fuel purchases), uncertainty about future savings, and adjustment/transactions costs. But then NPRM also says the latter two explanations may not involve market failure, and forcing purchasers to buy fuel-efficient trucks might make them worse off. So, the theories explaining why profit-maximizing businesses fail to minimize costs are a bit muddled.

The NPRM cites anecdotal evidence supporting the "energy paradox" in regard to truck owners, but says there is no published empirical evidence or data. The NPRM notes that for some discount rates and social costs of carbon, the size of the externality exceeds the increase in costs—so the regulation may do more good than harm even if the externality is the only problem. Heavy-duty vehicles account for 12 percent of U.S. oil use, suggesting this slice of the market is significant.

Environmental and energy security problems are assumed to exist with certainty. There is some relevant discussion about the size of the problem indirectly through the RIA and proposed rule. But the agencies never directly address the size of the problem. Ranges of estimates suggest uncertainty about the size. Discussion of energy paradox acknowledges substantial uncertainty but merely requests comments.

The RIA lists eight alternatives including no action.

Seven of the alternatives involve setting standards for engines, for different classes of tractors or trucks, and in some cases for trailers. An additional pair of alternatives involve setting the standard 20 percent more stringent or 20 percent less stringent than the preferred alternative. So, the alternatives are different along several dimensions, though all are variants of standards.

Carbon savings, fuel savings, and total value of benefits are calculated for each alternative in 2030 and 2050, but not for lifetime of model years 2014-18 or for a stream of years.

The baseline is clear and adjusts for fuel price changes but does not project how fuel efficiency will evolve in the absence of a new regulation. The baseline is model year 2010 fuel economy. Price projections from EIA's Annual Energy Outlook 2010 are used, and fuel supply assumptions altered to reflect the Renewable Fuels Standard. The NPRM acknowledges that some improvements in fuel economy may occur in the absence of the regulations and requests comment on how to estimate these to obtain a more accurate baseline.

There are a multitude of costs associated with the alternatives considered, and overall the analysis does a good job of monetizing the expenses. However, the DOT and EPA could have done a better job analyzing the full array of alternatives and some of the small costs. Analysis considers direct cost of each technology plus multipliers to account for effects on (firms') indirect costs. Costs are calculated for alternatives only for 2030 and 2050.

Costs include R&D, certification/compliance, cost of including the technology, and indirect costs. Fuel savings are counted as a negative cost rather than a benefit, so the total cost figure is negative.

The DOT and EPA do not fully consider market forces that will change due to the proposed rule. Little direct consideration of how costs would be passed through or deadweight loss from price increases. Since the analysis generated large fuel cost savings, it would suggest price decreases that could be passed through. The RIA uses a computable general equilibrium model to assess economy-wide effects, but all of the results are listed as blanks in tables.

Rebound effect included. Costs of noise, accidents, and congestion from rebound effect are included as "negative benefits." Considers effects of vehicle mass reduction on safety; concludes these would be minimal.

Costs are definitely uncertain, and the RIA acknowledges there may be a range of estimates. There is some econometric data given regarding costs, but the analysis never fully addresses the range of possible costs. Notes that indirect cost allocation involves uncertainty, so it calculated costs using "indirect cost multipliers" ($7.7 billion total) and "retail price equivalents" ($9.3 billion total). But costs are generally presented as point estimates rather than ranges.

Net benefits are calculated for each alternative in 2030 and 2050. The alternative that maximizes net benefits is clear. Net benefits are positive under any scenario, since costs are always negative due to fuel savings. A separate table shows the fuel savings as a benefit rather than a negative cost.

A table shows cost per ton of reduced CO2 emissions for the chosen alternative. No similar calculations for the other alternatives, but this could have been done using the information in the RIA.

The agencies certify that the proposed regulation would not have a substantial impact on small entities because they plan to defer the standards for small businesses. A few statements acknowledge possible cost passthroughs, but there is no significant analysis.

The analysis does not identify all parties who would receive benefits in much detail. Calculates value of fuel savings both pre- and post-tax. Pre-tax shows value of fuel savings to society; post-tax shows value to truck owners. Notes that owners who drive more miles will receive greater savings, but does not offer any calculations. Benefits are presented annually and also over the lifetime of model year 2014-18 trucks. Benefits of fuel savings accrue to truckers; benefits of carbon reductions are global. No other discussion of benefit incidence.