Average Fuel Economy Standards for Light Trucks; Model Years 2008-2011

Federal RegisterAug 30, 2005

Ask Donna

What actually matters in this document.

Text

DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

49 CFR Parts 523, 533 and 537

[Docket No. 2005-22223]

RIN 2127-AJ61

Average Fuel Economy Standards for Light Trucks; Model Years 2008-2011

AGENCY:

National Highway Traffic Safety Administration (NHTSA), Department of Transportation.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This notice proposes to reform the structure of the corporate average fuel economy (CAFE) program for light trucks and proposes to establish higher CAFE standards for model year (MY) 2008-2011 light trucks. Reforming the CAFE program would enable it to achieve larger fuel savings while enhancing safety and preventing adverse economic consequences.

During a transition period of MYs 2008-2010, manufacturers may comply with CAFE standards established under the reformed structure (Reformed CAFE) or with standards established in the traditional way (Unreformed CAFE). This will permit manufacturers to gain experience with the Reformed CAFE standards. In MY 2011, all manufacturers would be required to comply with a Reformed CAFE standard.

The reform is based on vehicle size. Under Reformed CAFE, fuel economy standards are restructured so that they are based on a measure of vehicle size called “footprint,” the product of multiplying a vehicle's wheelbase by its track width. Vehicles would be divided into footprint categories, each representing a different range of footprint. A target level of average fuel economy is proposed for each footprint category, with smaller footprint light trucks expected to achieve more fuel economy and larger ones, less. Each manufacturer would still be required to comply with a single overall average fuel economy level for each model year of production. A particular manufacturer's compliance obligation for a model year is calculated as the harmonic average of the fuel economy targets in each size category, weighted by the distribution of manufacturer's production volumes across the size categories.

The proposed Unreformed CAFE standards are: 22.5 miles per gallon (mpg) for MY 2008, 23.1 mpg for MY 2009, and 23.5 mpg for MY 2010. The Reformed CAFE standards for those model years would be set at levels intended to ensure that the industry-wide costs of the Reformed standards are roughly equivalent to the industry-wide costs of the Unreformed CAFE standards in those model years. For MY 2011, the Reformed CAFE standard would be set at the level that maximizes net benefits, accounting for unquantified benefits and costs. We believe that all of the proposed standards would be set at the maximum feasible level, while accounting for technological feasibility, economic practicability and other relevant factors.

Since a manufacturer's compliance obligation for a model year under Reformed CAFE depends in part on its actual production in that model year, the obligation cannot be calculated with absolute precision until the final production figures for that model year become known. However, a manufacturer could calculate its obligation with a reasonably high degree of accuracy in advance of that model year, based on its product plans for the year. Prior to and during the model year, the manufacturer would be able to track all of the key variables in the formula used for calculating the obligation (

e.g.

, distribution of production among the categories and vehicle fuel economy). This notice publishes estimates of the compliance obligations, by manufacturer, for MYs 2008-2011 under Reformed CAFE, using the fuel economy targets proposed by NHTSA and the product plans submitted to NHTSA by the manufacturers in response to a request for product plans published in December 2003.

This rulemaking is mandated by the Energy Policy and Conservation Act (EPCA), which was enacted in the aftermath of the energy crisis created by the oil embargo of 1973-74. The concerns about energy security and the effects of energy prices and supply on national economic well-being that led to the enactment of EPCA remain alive today. Sustained growth in the demand for oil worldwide, coupled with tight crude oil supplies, is the driving force behind the sharp price increases seen over the past several years. Increasingly, the oil consumed in the U.S. originates in countries with political and economic situations that raise concerns about future oil supply and prices.

We recognize that financial difficulties currently exist in the motor vehicle industry and that a substantial number of job losses have been announced recently at large full-line manufacturers. Accordingly, we have carefully balanced the cost of the rule with the benefits of conservation. We believe that, compared to Unreformed CAFE, Reformed CAFE would enhance overall fuel savings while providing vehicle makers the flexibility they need to respond to changing market conditions. Reformed CAFE would also provide a more equitable regulatory framework by creating a level-playing field for manufacturers, regardless of whether they are full-line or limited-line manufacturers. We are particularly encouraged that Reformed CAFE would reduce the adverse safety risks generated by the Unreformed CAFE program. The transition from the Unreformed to the Reformed system would begin soon, but ample lead time is provided before Reformed CAFE takes full effect in MY 2011.

We recognize also that our proposals were derived from analyses of information from a variety of sources, including the product plans submitted by the manufacturers in early 2004. We fully anticipate that the manufacturers will respond to this proposal by providing revised plans that reflect events since then. We will evaluate the revised plans, the public comments, and other information and analysis in selecting the most appropriate standards for MYs 2008-2011.

DATES:

Comments must be received on or before November 22, 2005. We have provided more than the normal 60-day comment period because of the complexity of this rulemaking. However, because of that complexity, the necessity for ensuring sufficient time for careful analysis of the public comments and other available information, and for meeting the April 1, 2006 statutory deadline for issuing a final rule on the CAFE standard for MY 2008, extensions of the comment due date will not be possible. To ensure the agency's consideration of their comments, the public should submit them to the agency not later than the comment due date.

ADDRESSES:

You may submit comments by any of the following methods:

• Web site:

http://dms.dot.gov.

Follow the instructions for submitting comments on the DOT electronic docket site.

• Fax: 1-202-493-2251.

• Mail: Docket Management Facility; U.S. Department of Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, Washington, DC 20590-001.

• Hand Delivery: Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal Holidays.

• Federal eRulemaking Portal: Go to

http://www.regulations.gov.

Follow the online instructions for submitting comments.

Instructions:

All submissions must include the agency name and docket number or Regulatory Identification Number (RIN) for this rulemaking. For detailed instructions on submitting comments and additional information on the rulemaking process, see the Request for Comments heading of the

Supplementary Information

section of this document. Note that all comments received will be posted without change to

http://dms.dot.gov

, including any personal information provided. Please see the Privacy Act heading under Rulemaking Analyses and Notices.

Docket:

For access to the docket to read background documents or comments received, go to

http://dms.dot.gov

at any time or to Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

FOR FURTHER INFORMATION CONTACT:

For technical issues, call Ken Katz, Lead Engineer, Fuel Economy Division, Office of International Policy, Fuel Economy, and Consumer Programs, at (202) 366-0846, facsimile (202) 493-2290, electronic mail

kkatz@nhtsa.dot.gov.

For legal issues, call Stephen Wood or Christopher Calamita of the Office of the Chief Counsel, at (202) 366-2992, or e-mail them at

swood@nhtsa.dot.gov

ccalamita@nhtsa.dot.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive summary

A. Our proposal

B. Energy demand and supply and the value of conservation

II. Background

A. 1974 DOT/EPA report to Congress on potential for motor vehicle fuel economy improvements

B. Energy Policy and Conservation Act of 1975

C. 1979-2002 light truck standards

D. 2001 National Energy Policy

E. 2002 NAS study of CAFE reform

F. 2002 request for comments on NAS study

G. 2003 final rule establishing MY 2005-2007 light truck standards

H. 2003 comprehensive plans for addressing vehicle rollover and compatibility

I. 2003 ANPRM

1. Need for reform

2. Reform options

J. Recent developments

1. Factors underscoring need for reform

2. Reports updating fuel economy potential

III. The Unreformed CAFE proposal for MYs 2008-2010

A. Baseline for determining manufacturer capabilities in MYs 2008-2010

1. General Motors

2. Ford

3. DaimlerChrysler

4. Other manufacturers

B. Selection of proposed Unreformed CAFE standards—process for determining maximum feasible levels

C. Technologically feasible additions to baseline

D. Economic practicability and other economic issues

1. Costs

2. Benefits

3. Comparison of estimated costs to estimated benefits

4. Uncertainty

IV. The Reformed CAFE proposal for MYs 2008-2011

A. Proposed approach to reform

1. Establishment of footprint categories

2. Targets

a. Overview of target selection process

b. Industry-wide considerations in selecting the targets

c. Relative position of the targets

d. Level of the targets

3. Standards and required CAFE levels for individual manufacturers

4. Why this approach to reform and not another?

a. Step-function vs. continuous function

b. Categories and targets vs. classes and standards

c. Footprint vs. shadow or weight

d. Reformed standard vs. Reformed standard plus backstop

5. Benefits of reform

a. Increased energy savings

b. Reduced incentive to respond to the CAFE program in ways harmful to safety

i. Reduces incentive to offer smaller vehicles and to reduce vehicle size

ii. Effectively reduces the difference between car and light truck CAFE standards

c. More equitable regulatory framework

d. More responsive to market changes

B. Authority for proposed reform

C. Comparison of estimated costs to estimated benefits

1. Costs

2. Benefits

3. Uncertainty

D. Proposed standards

V. Implementation of options

A. Choosing the Reformed or Unreformed CAFE system

B. Application of credits between compliance options

VII. Impact of other Federal Motor Vehicle Standards

A. Federal Motor Vehicle Safety Standards

1. FMVSS 138, tire pressure monitoring system

2. FMVSS 202, head restraints

3. FMVSS 208, occupant crash protection

4. FMVSS 214, side impact protection

5. FMVSS 301, fuel system integrity

6. Cumulative weight impacts of the FMVSSs

B. Federal Motor Vehicle Emissions Standards

1. Tier 2 requirements

2. Onboard vapor recovery

3. California Air Resources Board LEV II

C. Impacts on manufacturers' baselines

VIII. Need for nation to conserve energy

IX. Applicability of the CAFE standards

A. MDPVs

B. “Flat-floor” provision

X. Rulemaking analyses and notices

A. Executive Order 12866 and DOT Regulatory Policies and Procedures

B. National Environmental Policy Act

C. Regulatory Flexibility Act

D. Executive Order 13132 Federalism

E. Executive Order 12988 (Civil Justice Reform)

F. Unfunded Mandates Reform Act

G. Paperwork Reduction Act

H. Regulation Identifier Number (RIN)

I. Executive Order 13045

J. National Technology Transfer and Advancement Act

K. Executive Order 13211

L. Department of Energy review

M. Plain language

N. Privacy Act

XI. Comments

I. Executive Summary

A. Our Proposal

This proposal is part of a continuing effort by the Department of Transportation to reform the structure of the CAFE regulatory program so that it achieves higher fuel savings while enhancing safety and preventing adverse economic consequences. We have previously set forth our concerns about the way in which the current CAFE program operates and sought comment on approaches to reforming the CAFE program. We have also previously increased light truck CAFE standards, from the “frozen” level of 20.7 mpg applicable from MY 1996 through MY 2004, to a level of 22.2 mpg applicable to MY 2007. In adopting those increased standards, we noted that we were limited in our ability to make further increases without reforming the program.

This notice proposes to reform the structure of the CAFE program for light trucks based on vehicle size and proposes to establish higher CAFE standards for MY 2008-2011 light trucks. Reforming the CAFE program would enable it to achieve larger fuel savings while enhancing safety and preventing adverse economic consequences.

During a transition period of MYs 2008-2010, manufacturers may comply with CAFE standards established under the reformed structure (Reformed CAFE) or with standards established in the traditional way (Unreformed CAFE). This will permit manufacturers to gain experience with the Reformed CAFE standards. The Reformed CAFE standards for those model years would

be set at levels intended to ensure that the industry-wide cost of those standards are roughly equivalent to the industry-wide cost of the Unreformed CAFE standards for those model years. The additional leadtime provided by the transition period would aid, for example, those manufacturers that would, for the first time, face a binding CAFE constraint and be required to make fuel economy improvements beyond those that they planned on their own to make.

In MY 2011, all manufacturers would be required to comply with a Reformed CAFE standard. The Reformed CAFE standard for that model year would be set at the level that maximizes net benefits.

The Unreformed standards for MYs 2008-2010 are set with particular regard to the capabilities of and impacts on the “least capable” full line manufacturer (

i.e.

, one that produces a wide variety of types and sizes of vehicles) with a significant share of the market. A single CAFE level, applicable to each manufacturer, is established for each model year.

The Unreformed CAFE standards for MYs 2008-2010 would be:

MY 2008: 22.5 mpg

MY 2009: 23.1 mpg

MY 2010: 23.5 mpg

We estimate that these standards could save 5.4 billion gallons of fuel over the lifetime of the vehicles sold during those model years, compared to the savings that would occur if the standards remained at the MY 2007 level of 22.2 mpg.

The Reformed CAFE approach to establishing light truck CAFE standards has the potential of providing even greater fuel savings. Under Reformed CAFE, each manufacturer's required level of CAFE would be based on target levels of average fuel economy set for vehicles of various size categories. The categories would be defined by vehicle “footprint”—the product of the average track width (the distance between the centerline of the tires on the same axle) and wheelbase (basically, the distance between the centers of the axles). The target values would reflect the technological and economic capabilities of the industry within each of the footprint categories. The target for a given size category would be the same for all manufacturers, regardless of differences in their overall fleet mix. Compliance would be determined by comparing a manufacturer's harmonically averaged fleet fuel economy in a model year with a required fuel economy level calculated using the manufacturer's actual production levels and the category targets.

The range of targets for each model year would be as follows:

MY 2008: From 26.8 mpg for the smallest vehicles to 20.4 mpg for the largest;

MY 2009: From 27.4 mpg for the smallest vehicles to 21.0 mpg for the largest;

MY 2010: From 27.8 mpg for the smallest vehicles to 20.8 mpg for the largest;

MY 2011: From 28.4 mpg for the smallest vehicles to 21.3 mpg for the largest.

The standards based on these targets would save approximately 10.0 billion gallons of fuel over the lifetime of the vehicles sold during those four model years, compared to the savings that would occur if the standards remained at the MY 2007 level of 22.2 mpg. The Reformed standards for MYs 2008-2010 would save 650 million more gallons of fuel than the Unreformed standards for those years. As noted above, the Reformed standard for MY 2011 would be the first Reformed standard set at the level that maximizes net benefits. It would save an additional 4.1 billion gallons of fuel.

If all manufacturers complied with the Reformed CAFE standards, the total costs would be approximately $6.2 billion for MYs 2008-2011, compared to the costs they would incur if the standards remained at the MY 2007 level of 22.2 mpg. The resulting vehicle price increases to buyers of MY 2008 light trucks would be paid back

in additional fuel savings in an average of 37 months and to buyers of MY 2011 light trucks in an average of 47 months, assuming fuel prices ranging from $1.51 to $1.58 per gallon.

We estimate that the total benefits under the Unreformed CAFE standards for MYs 2008-2010 plus the Reformed CAFE standard for MY 2011 would be approximately $7.0 billion, and under the Reformed CAFE standards for MYs 2008-2011 would be approximately $7.5 billion.

The payback period represents the length of time required for a vehicle buyer to recoup the higher cost of purchasing a more fuel-efficient vehicle through savings in fuel use. When a more stringent CAFE standard requires a manufacturer to improve the fuel economy of some of its vehicle models, the manufacturer's added costs for doing so are reflected in higher prices for these models. While buyers of these models pay higher prices to purchase these vehicles, their improved fuel economy lowers their owners' costs for purchasing fuel to operate them. Over time, buyers thus recoup the higher purchase prices they pay for these vehicles in the form of savings in outlays for fuel. The length of time required to repay the higher cost of buying a more fuel-efficient vehicle is referred to as the buyer's “payback period.”

The length of this payback period depends on the initial increase in a vehicle's purchase price, the improvement in its fuel economy, the number of miles it is driven each year, and the retail price of fuel. We calculated payback periods using the fuel economy improvement and average price increase for each manufacturer's vehicles estimated to result from the proposed standard, the U.S. Energy Information Administration's forecast of future retail gasoline prices, and estimates of the number of miles light trucks are driven each year as they age developed from U.S. Department of Transportation data. Energy Information Administration, Annual Energy Outlook 2005 (AEO 2005), Table 100,

http://www.eia.doe.gov/oiaf/aeo/supplement/index.html

; and U.S. Department of Transportation, 2001 National Household Travel Survey,

http://nhts.ornl.gov/2001/index.shtml.

Under these assumptions, payback periods ranged from as short as 22 months to as long as 48 months, averaging 35 months for the seven largest manufacturers of light trucks.

The fuel prices used to calculate the length of the payback periods are those expected over the life of the MY 2008-2011 light trucks, not the current fuel prices. Those future fuel prices were obtained from the AEO 2005.

We have tentatively determined that the proposed standards under both Unreformed CAFE and Reformed CAFE represent the maximum feasible fuel economy level for each system. In reaching this conclusion, we have balanced the express statutory factors and other relevant considerations, such as safety concerns, effects on employment and the need for flexibility to transition to a Reformed CAFE program that can achieve greater fuel savings in a more economically efficient way.

The Reformed CAFE approach incorporates several important elements of reform suggested by the National Academy of Sciences in its 2002 report (Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards). The agency believes that the Reformed CAFE approach has four basic advantages over the Unreformed CAFE approach.

First, Reformed CAFE will enlarge energy savings. The energy-saving potential of Unreformed CAFE is limited because only a few full-line manufacturers are required to make improvements. In effect, the capabilities of these full-line manufacturers, whose offerings include larger and heavier light trucks, constrain the stringency of the uniform, industry-wide standard. As a result, the Unreformed CAFE standard is generally set below the capabilities of limited-line manufacturers, who sell predominantly lighter and smaller light trucks. Under Reformed CAFE, which accounts for size differences in product mix, virtually all light-truck manufacturers would be required to improve the fuel economy of their vehicles. Thus, Reformed CAFE will continue to require full-line manufacturers to improve the overall fuel economy of their fleets, while also

requiring limited-line manufacturers to enhance the fuel economy of the vehicles they sell.

Second, Reformed CAFE will offer enhanced safety. The vehicle manufacturers constrained by Unreformed CAFE standards are encouraged to pursue the following compliance strategies that entail safety risks: downsizing of vehicles, design of some vehicles to permit classification as “light trucks” for CAFE purposes, and offering smaller and lighter vehicles to offset sales of larger and heavier vehicles. The adverse safety effects of downsizing and downweighting have already been documented in the CAFE program for passenger cars. When a manufacturer designs a vehicle to permit its classification as a light truck, it may increase the vehicle's propensity to roll over.

Reformed CAFE is designed to lessen each of these safety risks. Downsizing of vehicles is discouraged under Reformed CAFE since smaller vehicles are expected to achieve greater fuel economy. Moreover, Reformed CAFE lessens the incentive to design smaller vehicles to achieve a “light truck” classification, since small light trucks would be regulated at roughly the same degree of stringency as passenger cars.

Third, Reformed CAFE provides a more equitable regulatory framework for different vehicle manufacturers. Under Unreformed CAFE, the cost burdens and compliance difficulties have been imposed primarily on the full-line manufacturers who have large sales volumes at the larger and heavier end of the light-truck fleet. Reformed CAFE spreads the regulatory cost burden for fuel economy more broadly across vehicle manufacturers within the industry.

Fourth, Reformed CAFE is more market-oriented because it more fully respects economic conditions and consumer choice. Reformed CAFE does not force vehicle manufacturers to adjust fleet mix toward smaller vehicles unless that is what consumers are demanding. As the industry's sales volume and mix changes in response to economic conditions (

e.g.

, gasoline prices and household income) and consumer preferences (

e.g.

, desire for seating capacity or hauling capability), the level of CAFE required of manufacturers under Reformed CAFE will, at least partially, adjust automatically to these changes. Accordingly, Reformed CAFE may reduce the need for the agency to revisit previously established standards in light of changed market conditions, a difficult process that undermines regulatory certainty for the industry. In the mid-1980's, for example, the agency relaxed several Unreformed CAFE standards because fuel prices fell more than had been expected when those standards were established and, as a result, consumer demand for small vehicles with high fuel economy did not materialize as expected. By moving to a more market-oriented system, the agency may also be able to pursue more multi-year rulemakings that span larger time frames than the agency has attempted in the past.

The agency is also issuing, along with this notice, a notice requesting updated product plan information and other data to assist in developing a final rule. We recognize that the manufacturer product plans relied upon in developing this proposal—those plans received in early 2004 in response to a 2003 request for information—may already be outdated in some respects. We fully expect that manufacturers have revised those plans to reflect subsequent developments.

We solicit comment on all aspects of this proposal. In particular, we solicit comment on (1) whether the proposed levels of maximum feasible CAFE reflect an appropriate balancing of the explicit statutory factors and other relevant factors, (2) whether CAFE reform should be designed based on size categories or as a continuous function, (3) whether the reform should be based on a single size attribute or whether adjustments should also be made for attributes such as towing capability and cargo hauling capability, and (4) whether the three-year transition period is necessary or whether it can be reduced to achieve a more rapid transition to the Reformed CAFE system. Other specific areas where we request comments are identified elsewhere in this preamble and in the Preliminary Regulatory Impact Analysis (PRIA). Based on public comments and other information, including new data and analysis, and updated product plans, the standards adopted in the final rule could well be different.

B. Energy demand and supply and the value of conservation

Many of the concerns about energy security and the effects of energy prices and supply on national economic well-being that led to the enactment of EPCA in 1975 persist today.

The demand for oil is steadily growing in the U.S. and around the world. By 2025, U.S. demand for oil is expected to increase 40 percent and world oil demand is expected to increase by nearly 60 percent. Most of these increases would occur in the transportation sector. To meet this projected increase in world demand, worldwide productive capacity would have to increase by more than 44 million barrels per day over current levels. OPEC producers are expected to supply nearly 60 percent of the increased production. By 2025, nearly 70 percent of the oil consumed in the U.S. would be imported oil. Strong growth in the demand for oil worldwide, coupled with tight crude oil supplies, is the driving force behind the sharp price increases seen over the past four years. Increasingly, the oil consumed in the U.S. originates in countries with political and economic situations that raise concerns about future oil supply and prices.

The sources of the figures in this section can be found below in section VIII, “Need for Nation to conserve energy.”

Energy is an essential input to the U.S. economy and having a strong economy is essential to maintaining and strengthening our national security. Conserving energy, especially reducing the nation's dependence on petroleum, benefits the U.S. in several ways. Reducing total petroleum use decreases our economy's vulnerability to oil price shocks. Reducing dependence on oil imports from regions with uncertain conditions enhances our energy security and can reduce the flow of oil profits to certain states now hostile to the U.S. Reducing the growth rate of oil use will help relieve pressures on already strained domestic refinery capacity, decreasing the likelihood of future product price volatility.

II. Background

A. 1974 DOT/EPA report to Congress on potential for motor vehicle fuel economy improvements

In 1974, the Department of Transportation (DOT) and Environmental Protection Agency (EPA) submitted to Congress a report entitled “Potential for Motor Vehicle Fuel Economy Improvement” (1974 Report).

This report was prepared in compliance with Section 10 of the Energy Supply and Environmental Coordination Act of 1974, Public Law 93-319 (the Act). The Act directed EPA and DOT to report on the practicability of a production-weighted fuel economy improvement standard of 20 percent for new motor vehicles in the 1980 time frame. As required by Section 10 of the Act, the report included an assessment of the technological challenges of meeting any such standard, including lead times involved, the test procedures required to determine compliance, the economic

costs and benefits, the enforcement means, the effect on energy and other resources, and the relationship of safety and emission standards to CAFE.

The 1974 report is available in the docket for this rulemaking.

In the 1974 Report, DOT/EPA said that performance standards regulating fuel economy could take either of two modes: A production-weighted average standard for each manufacturer's entire fleet of vehicles or a fuel economy standard tailored to individual classes of vehicles. They identified three forms that a production-weighted standard could take:

• A common standard (

e.g.

, 16.8 mpg for all manufacturers);

• A standard stated as a uniform per cent improvement (

e.g.

, 20% improvement for each manufacturer); or

• A variable standard based on the costs or potential to improve for each manufacturer.

(1974 Report, p. 77)

As to standards for individual classes, they identified two different forms:

• A standard stated as uniform quantity of improvement (

e.g.

, 2.8 mpg for all classes); or

• A variable standard based on the potential to improve each class.

(1974 Report, p. 77-78)

DOT/EPA concluded in the 1974 Report that a production-weighted standard establishing one uniform specific fuel economy average for all manufacturers would, if sufficiently stringent to have the needed effect, impact most heavily on manufacturers who have lower fuel economy, while not requiring manufacturers of current vehicles with better fuel economy to maintain or improve their performance. (1974 Report, p. 12) Production-weighted standards specifically tailored to each manufacturer would eliminate some inequities, but were considered to be difficult to administer fairly. (Ibid.)

B. Energy Policy and Conservation Act of 1975

Congress enacted the Energy Policy and Conservation Act (EPCA Pub. L. 94-163) during the aftermath of the energy crisis created by the oil embargo of 1973-74. The Act established an automobile fuel economy regulatory program by adding Title V, “Improving Automotive Efficiency,” to the Motor Vehicle Information and Cost Savings Act. Title V has been amended from time to time and codified without substantive change as Chapter 329 of title 49, United States Code. Chapter 329 provides for the issuance of average fuel economy standards for passenger automobiles and separate standards for automobiles that are not passenger automobiles (light trucks).

For the purposes of the CAFE statute, “automobiles” include any “4-wheeled vehicle that is propelled by fuel (or by alternative fuel) manufactured primarily for use on public streets, roads, and highways (except a vehicle operated only on a rail line), and rated at not more than 6,000 pounds gross vehicle weight.” They also include any such vehicle rated at between 6,000 and 10,000 pounds gross vehicle weight (GVWR) if the Secretary decides by regulation that an average fuel economy standard for the vehicle is feasible, and that either such a standard will result in significant energy conservation or the vehicle is substantially used for the same purposes as a vehicle rated at not more than 6000 pounds GVWR.

In 1978, NHTSA published a final rule in which we determined that standards for vehicles rated between 6000 and 8500 pounds GVWR are feasible, that such standards will result in significant energy conservation on a per-vehicle basis and that those vehicles are used for substantially the same purposes as vehicles rated at not more than 6000 pounds GVWR (March 23, 1978; 43 FR 11995, at 11997). Vehicles rated at between 6000 and 8500 pounds GVWR first became subject to the CAFE standards in MY 1980.

The CAFE standards set a minimum performance requirement in terms of an average number of miles a vehicle travels per gallon of gasoline or diesel fuel. Individual vehicles and models are not required to meet the mileage standard. Instead, each manufacturer must achieve a harmonically averaged level of fuel economy for all specified vehicles manufactured by a manufacturer in a given MY. The statute distinguishes between “passenger automobiles” and “non-passenger automobiles.” We generally refer to non-passenger automobiles as light trucks.

In enacting EPCA, Congress made a clear and specific choice about the structure of the average fuel economy standard for passenger cars. After considering the variety of approaches presented in the 1974 Report, Congress established a common statutory CAFE standard applicable to each manufacturer's fleet of passenger automobiles. The Secretary of Transportation has the authority to change the standard if it no longer represents the “maximum feasible” standard consistent with the criteria set forth in the statute. Pursuant to that authority, the Secretary amended the passenger car standard with regard to MYs 1986-1989 to address situations in which, despite manufacturers' good faith compliance plans, market conditions rendered the statutory standard impracticable and infeasible. Since 1990, the CAFE standard for passenger automobiles has been 27.5 mpg and compliance is determined in accordance with detailed procedures set forth in Section 32904(a) and (b).

Congress was considerably less decided and prescriptive with respect to what sort of standards and procedures should be established for light trucks. It neither made a clear choice among the approaches (or among the forms of those approaches) identified in the 1974 Report nor precluded the selection of any of those approaches or forms. Further, it did not establish by statute a CAFE standard for light trucks. Instead, Congress provided the Secretary with a choice of establishing a form of a production-weighted average standard for each manufacturer's entire fleet of light trucks, as suggested in the 1974 Report, or a form of production-weighted standards for classes of light trucks. Congress directed the Secretary to establish maximum feasible CAFE standards applicable to each manufacturer's light truck fleet, or alternatively, to classes of light trucks, and to establish them at least 18 months prior to the start of each model year. When determining a “maximum feasible level of fuel economy,” the Secretary is directed to balance factors including the nation's need to conserve energy, technological feasibility, economic practicability and the impact of other motor vehicle standards on fuel economy.

Manufacturers are required to provide a series of fuel economy reports to both the EPA and NHTSA. NHTSA requires manufacturers to provide pre-model year and mid-model year reports. See 49 CFR part 537. The reports to NHTSA must include, in part, vehicle model fuel economy values as calculated under the EPA regulations, projected sales volumes, and actual sales volumes as available. A manufacturer must supply similar information to the EPA at the end of a model year, along with actual production volumes so that its fleet wide average fuel economy can be calculated. The EPA then certifies these reports and submits them to NHTSA so that we may determine a manufacturer's compliance with the CAFE standards.

C. 1979-2002 light truck standards

NHTSA established the first light truck CAFE standards for MY 1979 and applied them to light trucks with a GVWR up to 6,000 pounds (March 14, 1977; 42 FR 13807). Beginning with MY 1980, NHTSA raised this GVWR ceiling to 8,500 pounds. For MYs 1979-1981, the agency established separate standards for two-wheel drive (2WD)

and four-wheel drive (4WD) light trucks without a “combined” standard reflecting the combined capabilities of 2WD and 4WD light trucks. Manufacturers that produced both 2WD vehicles and 4WD vehicles could, however, decide to treat them as a single fleet and comply with the 2WD standard.

Beginning with MY 1982, NHTSA established a combined standard reflecting the combined capabilities of 2WD and 4WD light trucks, plus optional 2WD and 4WD standards. After MY 1991, NHTSA dropped the optional 2WD and 4WD standards. During MYs 1980-1995, NHTSA also separated the “captive imports”

of U.S. light truck manufacturers from their other truck models in determining compliance with CAFE standards.

“Captive import” means, with respect to a light truck, one which is not domestically manufactured but which is imported by a manufacturer whose principal place of business is the United States. 49 CFR 533.4(b)(2).

Since the agency sets standards at the maximum feasible level of average fuel economy, as required by EPCA, and since the agency's determinations about the maximum feasible level of average fuel economy in future model years are highly dependent on projections about the state of technology and market conditions in those years, NHTSA twice found it necessary to reduce a light truck standard when it received new information relating to the agency's past projections. In 1979, the agency reduced the MY 1981 2WD standard after Chrysler demonstrated that there were smaller than expected fuel economy benefits from various technological improvements and larger than expected adverse impacts from other federal vehicle standards and test procedures (December 31 1979; 44 FR 77199).

In 1984, the agency reduced the MY 1985 light truck standards to the following levels: Combined standard-19.5 mpg, 2WD standard-19.7 mpg and 4WD standard-18.9 mpg (October 22, 1984; 49 FR 41250). The agency concluded that market demand for light truck performance, as reflected in engine mix and axle ratio usage, had not materialized as anticipated when the agency initially established the MY 1985 standards. The agency said that this resulted from lower than anticipated fuel prices. The agency concluded that the only actions then available to manufacturers to improve their fuel economy levels for MY 1986 would have involved product restrictions likely resulting in significant adverse economic impacts. The reduction of the MY 1985 standard was upheld by the U.S. Circuit Court of Appeals for the District of Columbia.

Center for Auto Safety

NHTSA

, 793 F.2d 1322 (D.C. Cir. 1986) (rejecting the contention that the agency gave impermissible weight to the effects of shifts in consumer demand toward larger, less fuel-efficient trucks on the fuel economy levels manufacturers could achieve).

NHTSA similarly found it necessary on occasion to reduce the passenger car CAFE standards in response to new information. The agency reduced the MY 1986 passenger car standard because a continuing decline in gasoline prices prevented a projected shift in consumer demand toward smaller cars and smaller engines and because the only actions available to manufacturers to improve their fuel economy levels for MY 1986 would have involved product restrictions likely resulting in significant adverse economic impacts. (October 4, 1985; 40 FR 40528) This action was upheld in

Public Citizen

vs.

NHTSA

, 848 F.2d 256 (D.C. Cir. 1988). NHTSA also reduced the MY 1987-88 passenger car standards (October 6, 1986; 51 FR 35594) and MY 1989 passenger car standard (October 6, 1988; 53 FR 39275) for similar reasons.

In 1994, the agency departed from its usual past practice of considering light truck standards for one or two model years at a time and published an Advance Notice of Proposed Rulemaking (ANPRM) in the

Federal Register

outlining NHTSA's intention to set standards for some, or all, of MYs 1998-2006 (59 FR 16324; April 6, 1994).

On November 15, 1995, the Department of Transportation and Related Agencies Appropriations Act for FY 1996 was enacted. Pub. L. 104-50. Section 330 of that Act provided:

None of the funds in this Act shall be available to prepare, propose, or promulgate any regulations * * * prescribing corporate average fuel economy standards for automobiles * * * in any model year that differs from standards promulgated for such automobiles prior to enactment of this section.

Pursuant to that Act, we then issued a final rule limited to MY 1998, setting the light truck CAFE standard for that year at 20.7 mpg, the same level as the standard we had set for MY 1997 (61 FR 14680; April 3, 1996).

On September 30, 1996, the Department of Transportation and Related Agencies Appropriations Act for FY 1997 was enacted (Pub. L. 104-205). Section 323 of that Act included the same limitation on appropriations regarding the CAFE standards contained in Section 330 of the FY 1996 Appropriations Act. The agency followed the same process as the prior year and established a MY 1999 light truck CAFE standard of 20.7 mpg, the same level as the standard that had been set for MYs 1997 and 1998. Because the same limitation on the setting of CAFE standards was included in the Appropriations Acts for each of FYs 1998-2001, the agency followed that same procedure during those fiscal years.

While the Department of Transportation and Related Agencies Appropriations Act for FY 2001 (Pub. L. 106-346) contained a restriction on CAFE rulemaking identical to that contained in prior appropriation acts, the conference committee report for that Act directed NHTSA to fund a study by the NAS to evaluate the effectiveness and impacts of CAFE standards (H. Rep. No. 106-940, at p. 117-118).

In a letter dated July 10, 2001, following the release of the President's National Energy Policy, Secretary of Transportation Mineta asked the House and Senate Appropriations Committees to lift the restriction on the agency spending funds for the purposes of improving CAFE standards. The Department of Transportation and Related Agencies Appropriations Act for FY 2002 (Pub. L. 107-87), which was enacted on December 18, 2001, did not contain a provision restricting the Secretary's authority to prescribe fuel economy standards.

D. 2001 National Energy Policy

The National Energy Policy,

released in May 2001, stated that “(a) fundamental imbalance between supply and demand defines our nation's energy crisis” and that “(t)his imbalance, if allowed to continue, will inevitably undermine our economy, our standard of living, and our national security.” The National Energy Policy was designed to promote dependable, affordable and environmentally sound energy for the future. The Policy envisions a comprehensive long-term strategy that uses leading edge technology to produce an integrated energy, environmental and economic policy. It set forth five specific national goals: “modernize conservation, modernize our energy infrastructure, increase energy supplies, accelerate the protection and improvement of the environment, and increase our nation's energy security.”

http://www.whitehouse.gov/energy/National-Energy-Policy.pdf

The National Energy Policy included recommendations regarding the path that the Administration's energy policy should take and included specific recommendations regarding vehicle fuel economy and CAFE. It recommended that the President direct the Secretary of Transportation to—

—Review and provide recommendations on establishing CAFE standards with due consideration of the National Academy of Sciences study released (in prepublication

form) in July 2001. Responsibly crafted CAFE standards should increase efficiency without negatively impacting the U.S. automotive industry. The determination of future fuel economy standards must therefore be addressed analytically and based on sound science.

—Consider passenger safety, economic concerns, and disparate impact on the U.S. versus foreign fleet of automobiles.

—Look at other market-based approaches to increasing the national average fuel economy of new motor vehicles.

E. 2002 NAS Study of CAFE Reform

In response to direction from Congress, NAS published a lengthy report in 2002 entitled “Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards.”

The NAS submitted its preliminary report to the Department of Transportation in July 2001 and released its final report in January 2002.

The report concludes that the CAFE program has clearly contributed to increased fuel economy and that it was appropriate to consider further increases in CAFE standards. (NAS, p. 3 (Finding 1)) It cited not only the value of fuel savings, but also adverse consequences (

i.e.

, externalities) associated with high levels of petroleum importation and use that are not reflected in the price of petroleum (

e.g.

, the adverse impact on energy security). The report further concluded that technologies exist that could significantly reduce fuel consumption by passenger cars and light truck fuels within 15 years, while maintaining vehicle size, weight, utility and performance. (NAS, p. 3 (Finding 5)) Light duty trucks were said to offer the greatest potential for reducing fuel consumption. (NAS, p. 4 (Finding 5)) The report also noted that vehicle development cycles—as well as future economic, regulatory, safety and consumer preferences—would influence the extent to which these technologies could lead to increased fuel economy in the U.S. market. To assess the economic trade-offs associated with the introduction of existing and emerging technologies to improve fuel economy, the NAS conducted what it called a “cost-efficient analysis”—“that is, the committee [that authored the report] identified packages of existing and emerging technologies that could be introduced over the next 10 to 15 years that would improve fuel economy up to the point where further increases in fuel economy would not be reimbursed by fuel savings.” (NAS, p. 4 (Finding 6))

Recognizing the many trade-offs that must be considered in setting fuel economy standards, the report took no position on what CAFE standards would be appropriate for future years. It noted, “(s)election of fuel economy targets will require uncertain and difficult trade-offs among environmental benefits, vehicle safety, cost, oil import dependence, and consumer preferences.”

The report found that, to minimize financial impacts on manufacturers, and on their suppliers, employees, and consumers, sufficient lead-time (consistent with normal product life cycles) should be given when considering increases in CAFE standards. The report stated that there are advanced technologies that could be employed, without negatively affecting the automobile industry, if sufficient lead-time were provided to the manufacturers.

The report expressed concerns about increasing the standards under the CAFE program as currently structured. While raising CAFE standards under the existing structure would reduce fuel consumption, doing so under alternative structures “could accomplish the same end at lower cost, provide more flexibility to manufacturers, or address inequities arising from the present” structure. (NAS, pp. 4-5 (Finding 10))

Further, almost all of the committee that authored the report, including the committee's safety specialists, said, “to the extent that the size and weight of the fleet have been constrained by CAFE requirements * * * those requirements have caused more injuries and fatalities on the road than would otherwise have occurred.” (NAS, p. 29) Specifically, they noted: “the downweighting and downsizing that occurred in the late 1970s and early 1980s, some of which was due to CAFE standards, probably resulted in an additional 1300 to 2600 traffic fatalities in 1993.” (NAS, p. 3 (Finding 2))

The report noted the following about the concept of equity:

Potential Inequities

The issue of equity or inequity is subjective. However, one concept of equity among manufacturers requires equal treatment of equivalent vehicles made by different manufacturers. The current CAFE standards fail this test. If one manufacturer was positioned in the market selling many large passenger cars and thereby was just meeting the CAFE standard, adding a 22-mpg car (below the 27.5-mpg standard) would result in a financial penalty or would require significant improvements in fuel economy for the remainder of the passenger cars. But, if another manufacturer was selling many small cars and was significantly exceeding the CAFE standard, adding a 22-mpg vehicle would have no negative consequences.

(NAS, p. 102).

To address those structural problems, the report suggested various possible reforms.

The report found that the “CAFE program might be improved significantly by converting it to a system in which fuel targets depend on vehicle attributes.” (NAS, p. 5 (Finding 12)) The report noted

In assessing and comparing possible reforms, the report urged consideration of the following factors:

Fuel use responses encouraged by the policy,

Effectiveness in reducing fuel use,

Minimizing costs of fuel use reduction,

Other potential consequences

—Distributional impacts

—Safety

—Consumer satisfaction

—Mobility

—Environment

—Potential inequities, and

Administrative feasibility.

(NAS, p. 94).

One such system would make the fuel economy target dependent on vehicle weight, with lower fuel consumption targets set for lighter vehicles and higher targets for heavier vehicles, up to some maximum weight, above which the target would be weight-independent. Such a system would create incentives to reduce the variance in vehicle weights between large and small vehicles, thus providing for overall vehicle safety. It has the potential to increase fuel economy with fewer negative effects on both safety and consumer choice. Above the maximum weight, vehicles would need additional advanced fuel economy technology to meet the targets. The committee believes that although such a change is promising, it requires more investigation than was possible in this study.

(NAS, p. 5 (Finding 12))

The report noted further that under an attribute-based approach, the required CAFE levels could vary among the manufacturers based on the distribution of their product mix:

Attribute-Based Fuel Economy Targets

The government could change the way that fuel economy targets for individual vehicles are assigned. The current CAFE system sets one target for all passenger cars (27.5 mpg) and one target for all light-duty trucks (20.7 mpg). Each manufacturer must meet a sales-weighted average (more precisely, a harmonic mean * * *) of these targets. However, targets could vary among passenger cars and among trucks, based on some attribute of these vehicles such as weight, size, or load-carrying capacity. In that case a particular manufacturer's average target for passenger cars or for trucks would depend upon the fractions of vehicles it sold with particular levels of these attributes. For example, if weight were the criterion, a manufacturer that sells mostly light vehicles would have to achieve higher average fuel economy than would a manufacturer that sells mostly heavy vehicles.

(NAS, p. 87)

Based on these findings, the report recommended

Consideration should be given to designing and evaluating an approach with fuel economy targets that are dependent on

vehicle attributes, such as vehicle weight, that inherently influence fuel use. Any such system should be designed to have minimal adverse safety consequences.

(NAS, p. 6, (Recommendation 3))

In February 2002, Secretary Mineta asked Congress “to provide the Department of Transportation with the necessary authority to reform the CAFE program, guided by the NAS report's suggestions.”

F. 2002 Request for Comments on NAS Study

On February 7, 2002, we issued a Request for Comments (RFC) (67 FR 5767; Docket No. 2002-11419) seeking data on which we could base an analysis of manufacturer capability for the purpose of determining the appropriate CAFE standards to set for light trucks for upcoming model years, beginning with MY 2005. We also sought comments on possible reforms to the CAFE program, as it applies to both passenger cars and light trucks, to protect passenger safety, advance fuel-efficient technologies, and obtain the benefits of market-based approaches.

While we have considered the comments, the original RFC was quite general and the comments received tended to focus on concerns with the current program or the generic admonishment against CAFE reform—and not on specific potential options. A more detailed summary of comments can be found in the advanced notice of proposed rulemaking (2003 ANPRM) published on December 29, 2003 (68 FR 74908; Docket No. 2003-16128).

G. 2003 Final Rule Establishing MY 2005-2007 Light Truck Standards

On April 7, 2003, the agency published a final rule establishing light truck CAFE standards for MYs 2005-2007: 21.0 mpg for MY 2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007 (68 FR 16868; Docket No. 2002-11419; Notice 3). The agency determined that these levels are the maximum feasible CAFE levels for light trucks for those model years, balancing the express statutory factors and other included or relevant considerations such as the impact of the standard on motor vehicle safety and employment. NHTSA estimated that the fuel economy increases required by the standards for MYs 2005-2007 would generate approximately 3.6 billion gallons of gasoline savings over the 25-year lifetime of the affected vehicles.

In establishing the standards, the agency analyzed cost-effective technological improvements that could be made to the product offerings planned by the manufacturers. The agency's projection of CAFE capability was based on the manufacturers' most recently submitted product plans and technological improvements we determined to be appropriate and feasible within the time frame. In the final rule, we stated that we did not believe the final rule will necessitate, nor did we believe it will result in, any “mix shifting,”

e.g.

, decreasing the production volumes of vehicles that are heavier or larger and thus have relatively low fuel economy and increasing the production volumes of lighter or smaller vehicles, which might result in significant employment and/or average weight reductions were it to occur.

We further expressed our belief that the final rule for MYs 2005-2007 will neither necessitate nor induce manufacturers to make reductions in vehicle weight that will adversely affect the overall safety of people traveling on the roads of America. Indeed, as the NAS report noted, there are many technological means that are available to manufacturers for improving fuel economy and are much more cost-effective than weight reduction through materials substitution. Accordingly, we did not rely on weight reduction.

We recognized in the final rule that the standard established for MY 2007 could be a challenge for General Motors. We recognized further that, between the issuance of the final rule and the last (MY 2007) of the model years for which standards were being established, there was more time than in previous light truck CAFE rulemakings for significant changes to occur in external factors capable of affecting the achievable levels of CAFE. These external factors include fuel prices and the demand for vehicles with advanced fuel saving technologies, such as hybrid electric and advanced diesel vehicles. We said that changes in these factors could lead to higher or lower levels of CAFE, particularly in MY 2007. Recognizing that it may be appropriate to re-examine the MY 2007 standard in light of any significant changes in those factors, the agency reaffirms its plans to monitor the compliance efforts of the manufacturers.

H. 2003 comprehensive plans for addressing vehicle rollover and compatibility

In September 2002, NHTSA completed a thorough examination of the opportunities for significantly improving vehicle and highway safety and announced the establishment of interdisciplinary teams to formulate comprehensive plans for addressing the four most promising problem areas.

Based on the work of the teams, the agency issued detailed reports analyzing each of the problem areas and recommending coordinated strategies that, if implemented effectively, will lead to significant improvements in safety.

A fifth problem area was announced in 2004, improving traffic safety data.

Two of the problems areas are vehicle rollover and vehicle compatibility. The reports on those areas identify a series of vehicle, roadway and behavioral strategies for addressing the problems.

Among the vehicle strategies, both reports identified reform of the CAFE program as one of the steps that needed to be taken to reduce those problems:

See

http://www-nrd.nhtsa.dot.gov/vrtc/ca/capubs/IPTRolloverMitigationReport/; http://www-nrd.nhtsa.dot.gov/departments/nrd-11/aggressivity/IPTVehicleCompatibilityReport/

The current structure of the CAFE system can provide an incentive to manufacturers to downweight vehicles, increase production of vehicle classes that are more susceptible to rollover crashes, and produce a less homogenous fleet mix. As a result, CAFE is critical to the vehicle compatibility and rollover problems.

(a) Highlights of Current Program

In its final rule setting new CAFE standards for MY 2005-2007 light trucks, NHTSA stated that it intends to examine possible reforms to the CAFE system, including those recommended in the National Academy of Sciences' CAFE report.

(b) Proposed Initiatives

Consistent with its statutory authority, the agency plans to address issues relating to the structure, operation and effects of potential changes to the CAFE system and CAFE standards. In taking this broad view, the agency recognizes that the regulation of the (sic) fuel economy can have substantial effects on vehicle safety, the composition of the light vehicle fleet, the economic well-being of the automobile industry and, of course, our nation's energy security.

It is NHTSA's goal to identify and implement reforms to the CAFE system that will facilitate improvements in fuel economy without compromising motor vehicle safety or American jobs. * * *

* * * NHTSA intends to examine the safety impacts, both positive and negative, that may result from any modifications to CAFE as it now exists. Regardless of the root causes, it is clear that the downsizing of vehicles that occurred during the first decade of the CAFE program had serious safety consequences. Changes to the existing system are likely to have equally significant impacts. NHTSA is determined to ensure that these impacts are positive.

I. 2003 ANPRM

On December 29, 2003, the agency published an ANPRM seeking comment on various issues relating to reforming the CAFE program (68 FR 74908; Docket

No. 2003-16128).

The agency sought comment on possible enhancements to the program that would assist in further fuel conservation, while protecting motor vehicle safety and the economic vitality of the automobile industry. The agency indicated that it was particularly interested in structural reform. This document, while not espousing any particular form of reform, sought more specific input than the 2002 RFC on various options aimed at adapting the CAFE program to today's vehicle fleet and needs.

On the same date, we also published a request for comments seeking manufacturer product plan information for MYs 2008-2012 to assist the agency in analyzing possible reforms to the CAFE program which are discussed in a companion notice published today. (68 FR 74931) The agency sought information that would help it assess the effect of these possible reforms on fuel economy, manufacturers, consumers, the economy, motor vehicle safety and American jobs.

1. Need for reform

The 2003 ANPRM discussed the principal criticisms of the current CAFE program that led the agency to explore light truck CAFE reform (68 FR 74908, at 74910-13. First, the energy-saving potential of the CAFE program is hampered by the current regulatory structure. The Unreformed approach to CAFE does not distinguish between the various market segments of light trucks, and therefore does not recognize that some vehicles designed for classification purposes as light trucks may achieve fuel economy similar to that of passenger cars. The Unreformed CAFE approach instead applies a single standard to the light truck fleet as a whole, encouraging manufacturers to offer small light trucks that will offset the larger vehicles that get lower fuel economy. A CAFE system that more closely links fuel economy standards to the various market segments reduces the incentive to design vehicles that are functionally similar to passenger cars but classified as light trucks.

Second, because weight strongly affects fuel economy, the current light truck CAFE program encourages vehicle manufacturers to reduce weight in their light truck offerings to achieve greater fuel economy.

As the NAS report and a more recent NHTSA study have found, downweighting of the light truck fleet, especially those trucks in the low and medium weight ranges, creates more safety risk for occupants of light trucks and all motorists combined.

Manufacturers can reduce weight without changing the fundamental structure of the vehicle by using lighter materials or eliminating available equipment or options. In contrast, reducing vehicle size, and particularly footprint, generally entails an alteration of the basic architecture of the vehicle.

However, both studies also suggest that if downweighting is concentrated on the heaviest light trucks in the fleet there would be no net safety impact, and there might even be a small fleet-wide safety benefit. There is substantial uncertainty about the curb weight cut-off above which this would occur.

Third, the agency noted the adverse economic impacts that might result from steady future increases in the stringency of CAFE standards under the current regulatory structure. Rapid increases in the light truck CAFE standard could have serious adverse economic consequences. The vulnerability of full-line firms to tighter CAFE standards does not arise primarily from poor fuel economy ratings within weight classes,

i.e.

, from less extensive use of fuel economy improving technologies. As explained in the 2003 ANPRM, their overall CAFE averages are low compared to manufacturers that produce more relatively light vehicles because their sales mixes service a market demand for bigger and heavier vehicles capable of more demanding utilitarian functions. An attribute-based (weight and/or size) system could avoid disparate impacts on full-line manufacturers that could result from a sustained increase in CAFE standards.

2. Reform options

In discussing potential changes, the agency focused primarily on structural improvements to the current CAFE program authorized under the current statutory authority, and secondarily on definitional changes to the current vehicle classification system and whether to include vehicles between 8,500 to 10,000 lbs. GVWR.

The ANRPM discussed two structural reforms. The first reform divided light trucks into two or more classes based on vehicle attributes. The second was an attribute-based “continuous-function” system, such as that discussed in the NAS report. We chose various measures of vehicle weight and/or size to illustrate the possible design of an attribute-based system. However, we also sought comment as to the merits of using other vehicle attributes as the basis of an attribute-based system.

The 2003 ANPRM also presented two potential options under which vehicles with a GVWR of up to 10,000 lbs. could be included under the CAFE program, were the agency to make the requisite determinations to include them. One option would be to include vehicles defined by EPA as medium duty passenger vehicles (65 FR 6698, 6749-50, 6851-6852) for use in the CAFE program. This definition would essentially make SUVs and passenger vans between 8,500 and 10,000 lbs. GVWR subject to CAFE, while continuing to exclude most medium- and heavy-duty pickups and most medium- and heavy-duty cargo vans that are primarily used for agricultural and commercial purposes. A second option would be to make all vehicles between 8,500 and 10,000 lbs GVWR subject to CAFE standards.

Through the 2003 ANPRM, the agency intended to begin a public discussion on potential ways, within current statutory authority, to improve the CAFE program to better achieve our public policy objectives. The agency set forth a number of possible concepts and measures, and invited the public to present additional concepts. The agency expressed interest in any suggestions toward revamping the CAFE program in such a way as to enhance overall fuel economy while protecting occupant safety and the economic vitality of the auto market.

The agency also discussed and sought comment on the classification of vehicles as passenger cars or light trucks. As suggested in numerous of the comments, we are proposing only to clarify the applicability of the flat floor provision to vehicles with folding seats. See section IX.B below. We are not otherwise changing those classification regulations at this time in part because we believe an orderly transition to Reformed CAFE could not be accomplished if we simultaneously change which vehicles are included in the light truck program and because, as applied in MY 2011, Reformed CAFE is likely to reduce the incentive to produce vehicles classified as light trucks instead of as passenger cars. We may revisit the definitional issues as appropriate in the future.

J. Recent developments

1. Factors underscoring need for reform

Since our ANPRM was published in 2003, there have been two important complicating factors that underscore the need for CAFE reform. One factor is the fiscal problems reported by General Motors and Ford, while the other is the recent surge in gasoline prices, a development that may be exacerbating the financial challenges faced by both companies.

The two largest, full-line light-truck manufacturers, General Motors and Ford, have reported serious financial difficulties. The investment community has downgraded the bonds of both companies. Further, both companies have announced significant layoffs and other actions to improve their financial

condition. While these financial problems did not give rise to the Administration's CAFE reform initiative, the financial risks now faced by these companies, including their workers and suppliers, underscore the importance to full-line vehicle manufacturers of establishing an equitable CAFE regulatory framework.

There has also been a sharp and sustained surge in gasoline prices since our last light truck final rule in April 2003 and the December 2003 ANPRM on CAFE reform. According to the Energy Information Administration (EIA), the retail price for gasoline in April 2003 was $1.59 per gallon and in December 2003 was $1.48 per gallon.

The weekly U.S. retail price for the week of August 15, 2005 was $2.55 per gallon.

See

http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html

See

http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html

and

http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp

Although the surge of gasoline prices highlights the need for both more energy supplies and intensified conservation efforts, it is important to recognize that CAFE standards for MYs 2008-2011 should not be based on current gasoline prices. They should be based on our best forecast of what average real gasoline prices will be in the U.S. during the years that these vehicles will be used by consumers: the 26-year period beginning in 2008 and extending almost to 2040.

Since miles of travel tend to be concentrated in the early years of a vehicle's lifetime, the projected gasoline price in the 2008-2020 period is particularly relevant for this rulemaking.

To calculate the fuel savings for the light trucks manufactured in a model year, we consider the savings over a 26-year period. The number of light trucks manufactured during each model year that remains in service during each subsequent calendar year is estimated by applying estimates of the proportion of light trucks surviving to each age up to 26 years (see Table VIII-2 in the PRIA). At the end of 26 years, the proportion of light trucks remaining in service falls below 10 percent.

When we issued the April 2003 final rule for MY 2005-2007 light truck CAFE, we based the final economic assessment of that rule on estimated gasoline prices at the pump that ranged from $1.37 per gallon in 2005 to $1.46 per gallon in 2030 (based on year 2000 prices). Those prices, which are set forth year by year in our April 2003 Final Economic Assessment (Docket No. 11419-18358, page VIII-7), were based on the Energy Information Administration's “Annual Energy Outlook 2003.”

The PRIA for this proposed rule has been based on projected gasoline prices from the more recent Annual Energy Outlook 2005 (AEO2005) (published in 2004 before the recent price rises), which projected gasoline prices ranging from $1.51 to $1.58 per gallon.

These are the most current long-term forecasts for gasoline prices available from EIA at this time. EIA has, however, issued revised short-term forecasts that project gasoline prices remaining above $2 through late 2006, significantly higher than what was projected in AEO2005. Further, we note that in its August “International Energy Outlook 2005,” EIA's reference case for future oil prices “has adopted the Annual Energy Outlook 2005 (AEO2005) October futures case, which has an assumption of higher prices than the AEO2005 reference case and now appears to be a more likely projection for oil prices.” During the rulemaking, we will continue to consult with EIA and other experts on projections of likely gasoline prices over the anticipated lifetime of light trucks sold in MYs 2008-2011, including the development of gasoline price projections for EIA's Annual Energy Outlook 2006 (AEO2006). EIA will be issuing AEO2006, with revised long-term forecasts, in November 2005. We are seeking public comment on the appropriate gasoline price forecast to use in the final rule, including consideration of the AEO2006 forecast.

http://www.eia.doe.gov/oiaf/aeo/index.html

2. Reports updating fuel economy potential

Additionally, the agency has placed in the docket for this notice a 2005 document, prepared under the auspices of the Department of Energy (DOE) for NHTSA, updating the estimates of light-truck fuel economy potential and costs in the 2001 NAS report, “Effectiveness and Import of Corporate Average Fuel Economy (CAFE) Standards. The agency seeks comments on this document. After having this document peer reviewed, the agency will place the peer reviewers' reports in the docket for public comment.

We note that the introduction of the 2005 DOE document states that that document does not address the costs and benefits of hybrid and diesel technology because these matters have been documented in a 2004 Energy and Environmental Analysis, Inc. (EEA) study for the DOE. The title of that study is “Future Potential of Hybrid and Diesel Powertrains in the U.S. Light-Duty Vehicle Market.”

The agency has placed that study in the docket and seeks comments on it as well.

See

http://www-cta.ornl.gov/cta/Publications/pdf/ORNL_TM_2004_181_HybridDiesel.pdf

III. The Unreformed CAFE proposal for MYs 2008-2010

As part of our Reformed CAFE proposal, we have crafted a transition period in which manufacturers have the option of complying with either the Reformed or the Unreformed CAFE systems. During the transition period, the requirements under the Reformed CAFE systems are linked to those of the Unreformed system. The Reformed CAFE standards for MYs 2008-2010 would be set at levels intended to ensure that the industry-wide cost of the Reformed standards are roughly equivalent to the industry-wide cost of the Unreformed CAFE standards in those model years. This approach has several important advantages. If the Unreformed standards are judged to be economically practicable and since the Reformed standards spread the cost burden across the industry to a greater extent, equalizing the costs between the two systems ensures that the Reformed standards will be within the realm of economic practicability. Further, this approach promotes an orderly and effective transition to the Reformed CAFE system since experience will be gained prior to MY 2011. In this section, we describe how we developed the Unreformed CAFE standards.

In developing this proposal for Unreformed CAFE standards, we first analyzed the data submitted by the manufacturers using the same type of analyses we employed in establishing light truck CAFE standards for MYs 2005-2007. We determined which manufacturers have a significant share of the light truck market, analyzed data to determine the CAFE “baseline” for each of those companies, and then conducted a manual engineering analysis (the Stage Analysis)—in conjunction with a computer-based engineering analysis (the Volpe Analysis)—to determine what technologies each company with a significant share of the market could use to enhance its overall fleet fuel economy average.

The “Stage” Analysis primarily involved application of the agency's engineering judgment and expertise about possible adjustments to the detailed product plans submitted by manufacturers. The methodology of the Volpe model was described in detail in the NPRM and Final Rule establishing light truck CAFE standards for MYs 2005-2007. The model has been updated and refined, but remains fundamentally the same. The updated model has been peer reviewed. The model documentation, including a description of the input assumptions and process, as well as peer review reports, will be made available in the rulemaking docket for this

notice. The agency will respond to the reports, and the public comments on those reports, at the time of the final rule.

Giving particular regard to the capabilities of the least capable manufacturer with a significant share of the market, we have tentatively determined the maximum feasible fuel economy levels for MYs 2008-2010. In doing so, we took into account the four statutory factors (the nation's need to conserve energy, technological feasibility, economic practicability (including employment consequences) and the impact of other regulations on fuel economy) as well as other included or relevant considerations such as the need to protect against adverse safety consequences.

As noted above, we have tentatively determined that the following fuel economy standards for MYs 2008-2010 are the maximum feasible levels under the Unreformed approach to light truck CAFE:

MY 2008—22.5 mpg

MY 2009—23.1 mpg

MY 2010—23.5 mpg

A. Baseline for determining manufacturer capabilities in MYs 2008-2010

In evaluating the manufacturers' fuel economy capabilities for MYs 2008-2010, we analyzed manufacturers' projections of their CAFE and their underlying product plans and considered what, if any, additional actions the manufacturers could take to improve their fuel economy. In order to determine the fuel economy capabilities of manufacturers during MYs 2008-2010, we first determined the manufacturers' fuel economy baselines for those years. That is, we determined the fuel economy levels that manufacturers are planning to achieve in those years, given the level of the CAFE standards that they were required to comply with in MY 2007. We relied upon the information submitted by manufacturers in response to the December 29, 2003 request for product plans and any additional manufacturer updates, to determine those plans.

For those manufacturers that did not submit information for those model years, we relied on data from the latest model year for which information from the manufacturers is available. To the extent that additional public information was available regarding the MY 2008-2010 product plans, we incorporated that information into the baselines for those manufacturers.

We note that although manufacturers may receive credit toward their CAFE compliance by placing alternative fuel vehicles into the market through MY 2008, the statute prohibits us from taking such benefits into consideration in determining the maximum feasible fuel economy standard (49 U.S.C. 32902(h)). Accordingly, the baselines and projections do not reflect those credits.

1. General Motors

General Motors' share of the light truck market for MY 2004 was 31.8 percent. In its submission of MY 2008-2010 product plans, General Motors projected that, based on those plans, its light truck fleet would achieve a CAFE level of 21.2 mpg for MY 2008, 21.3 mpg for MY 2009, and 21.3 mpg for MY 2010. Its plans were based on sales of GMC, Chevrolet, Pontiac, Buick, Cadillac, Hummer, SAAB, and Saturn vehicles.

The agency does not consider the overall fleet fuel economy projection for a manufacturer to be entitled to confidential treatment, whether derived from our own analysis or provided by the manufacturer. The agency has consistently published this information in all prior rulemakings establishing CAFE standards. See for example, 68 FR 16868; April 7, 2003, 67 FR 77015; December 16, 2002, 59 FR 16312; April 6, 1994, and 53 FR 11074; April 5, 1988.

2. Ford

Ford Motor Company controlled 25.7 percent of the light truck market in the U.S. in MY 2004. Ford projected that its light truck fleet would achieve a CAFE level of 21.6 mpg for MY 2008, 22.0 mpg for MY 2009 mpg, and 22.3 mpg for MY 2010. Its data were based on sales of Ford branded vehicles, as well as Lincoln, Mercury, Mazda, Land Rover and Volvo branded vehicles.

3. DaimlerChrysler

DaimlerChrysler controlled 19.8 percent of the U.S. light truck market in MY 2004. DaimlerChrysler submitted product plans for MYs 2008-2010, and projected that its light truck fleet would achieve a CAFE level of 21.9 mpg for MY 2008, 22.3 mpg for MY 2009, and 22.3 mpg for MY 2010. Its data were based on sales of Chrysler, Jeep, Dodge, Mercedes, Mitsubishi, Smart

, and Sprinter brand vehicles.

The agency notes that some vehicles and vehicle lines that were included in a manufacturer's product plan ultimately may not be produced. However, the agency relies on the product plans as submitted. Further, if any vehicles are dropped, they are expected to constitute a small percentage of a manufacturer's fleet and have minimal impact on a manufacturer's projected capabilities.

4. Other manufacturers

Of the remaining manufacturers, Nissan and Hyundai (including Kia) provided information regarding sales and fuel economy projections for their vehicles through MY 2010.

The balance of the remaining manufacturers did not provide any MY 2008-2010 information.

For these manufacturers (Toyota, Honda, Subaru, Isuzu, Suzuki, BMW, Porsche, and Volkswagen), we relied on manufacturer information from the latest model year for which it was available, and publicly available information regarding their MY 2008-2010 product plans. Toyota, Honda, and Subaru provided fuel economy projections for MYs 2005-2007. The projected levels of fuel economy provided by Toyota and Honda would comply with the CAFE standard for MY 2007. Accordingly, we used those projected levels for each of MYs 2008-2010. Subaru's submission was supplemented by publicly available information regarding its future vehicle fleet to arrive at its MY 2008-2010 baselines.

In the past, these manufacturers have generally not provided such information since they have either chosen to pay civil penalties instead of complying with the CAFE standards or had fleet fuel economy averages far enough above the standards that it was not necessary for them to make additional improvements in fuel economy.

Isuzu, Suzuki, BMW, Porsche, and Volkswagen did not submit any response. For Isuzu and Suzuki's baselines, we used the latest year for which we had product data (MY 2005) and combined those data with publicly available information regarding Isuzu and Suzuki's future product plans. Further, since all of the light trucks produced by Isuzu and Suzuki are sister vehicles to General Motors vehicles, we were able to determine the technical details for those vehicles. BMW, Porsche, and Volkswagen previously paid fines in lieu of complying with the MY 2002 and 2003 light truck CAFE standards. The agency assumes that because of that past history and their low light truck production volumes, BMW, Porsche, and Volkswagen will continue to pay fines instead of bringing their fleets into compliance. Therefore, we relied on the fuel economy levels from MY 2005 in projecting the baseline for these three manufacturers.

Table 1 provides the baseline values for manufacturers other than General Motors, Ford, and DaimlerChrysler:

Table 1.—Baseline Values for Manufacturers Other Than General Motors, Ford and DaimlerChrysler

[In mpg]

MY 2008

MY 2009

MY 2010

Toyota

22.9

Honda

24.4

Nissan

20.7

20.8

21.2

Hyundai

21.8

23.2

22.8

Subaru

25.7

26.2

BMW

21.3

Porsche

16.8

Isuzu

20.4

20.2

20.1

Suzuki

21.9

Volkswagen

18.8

B. Selection of Proposed Unreformed CAFE Standards—Process for Determining Maximum Feasible Levels

We have tentatively concluded that the proposed standards for the Unreformed CAFE system are technologically feasible and economically practicable for those manufacturers with a substantial share of the light truck market (General Motors, Ford, and DaimlerChrysler), are capable of being met without substantial product restrictions, and will enhance the ability of the nation to conserve fuel and reduce its dependence on foreign oil.

In determining the maximum feasible fuel economy level, we are required to consider the four statutory factors and are permitted to consider additional societal considerations. The agency has historically included the potential for adverse safety consequences when deciding upon a maximum feasible level.

The overarching principle that emerges from the enumerated factors and the court-sanctioned practice of considering safety and links them together is that CAFE standards should be set at a level that will achieve the greatest amount of fuel savings without leading to adverse economic or other societal consequences.

See, e.g.,

Center for Auto Safety

NHTSA (CAS),

793 F. 2d 1322 (D.C. Cir. 1986) (Administrator's consideration of market demand as component of economic practicability found to be reasonable);

Public Citizen

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). As the United States Court of Appeals pointed out in upholding NHTSA's exercise of judgment in setting the 1987-1989 passenger car standards, “NHTSA has always examined the safety consequences of the CAFE standards in its overall consideration of relevant factors since its earliest rulemaking under the CAFE program.”

Competitive Enterprise Institute

NHTSA (CEI I),

901 F.2d 107, 120 at n.11 (D.C. Cir. 1990).

As discussed in many past fuel economy notices, the legislative history of EPCA explicitly states that NHTSA is to take industry-wide considerations into account in determining the maximum feasible CAFE levels, and not necessarily base its determination on any particular company's asserted or projected abilities. This means that CAFE standards will not necessarily be set at the precise level that is associated with the plans of the “least capable manufacturer” with a substantial share of the market or that is projected by the agency for that manufacturer. (For a discussion of the industry-wide considerations and the origins of the “least capable manufacturer” concept, see section IV.A.2.b below.)

It means further that we must take particular care in considering the statutory factors with regard to these manufacturers—weighing their asserted capabilities, product plans and economic conditions against agency projections of their capabilities, the need for the nation to conserve energy and the effect of other regulations (including motor vehicle safety and emissions regulations) and other public policy objectives.

This approach is consistent with the Conference Report on the legislation enacting the CAFE statute:

Such determination [of maximum feasible average fuel economy level] should take industry-wide considerations into account. For example, a determination of maximum feasible average fuel economy should not be keyed to the single manufacturer that might have the most difficulty achieving a given level of average fuel economy. Rather, the Secretary must weigh the benefits to the nation of a higher average fuel economy standard against the difficulties of individual manufacturers. Such difficulties, however, should be given appropriate weight in setting the standard in light of the small number of domestic manufacturers that currently exist and the possible implications for the national economy and for reduced competition association [sic] with a severe strain on any manufacturer.

S. Rep. No. 94-516, 94th Congress, 1st Sess. 154-155 (1975).

The agency has historically assessed whether a potential CAFE standard is economically practicable in terms of whether the standard is one “within the financial capability of the industry, but not so stringent as to threaten substantial economic hardship for the industry.”

See, e.g.,

Public Citizen,

848 F.2d at 264. In essence, in determining the maximum feasible level of CAFE, the agency assesses what is technologically feasible for manufacturers to achieve without leading to adverse economic consequences, such as a significant loss of jobs or the unreasonable elimination of consumer choice.

In adopting this interpretation in the final rule establishing the MY 1981-1984 fuel economy standards for passenger cars (June 30, 1977; 42 FR 33534, at 33536-7), the Department rejected several more restrictive interpretations. One was that the phrase means that the standards are statutorily required to be cost-beneficial. The Department pointed out that Congress had rejected a manufacturer-sponsored amendment to the Act that would have required standards to be set at a level at which benefits were commensurate with costs. It also dismissed the idea that economic practicability should limit standards to free market levels that would be achieved with no regulation.

At the same time, the law does not preclude a CAFE standard that poses considerable challenges to any individual manufacturer. The Conference Report 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.”

CAS,

793 F.2d at 1338-9. 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.” Id. The statute permits the imposition of reasonable, “technology forcing” challenges on any individual manufacturer, but does not contemplate standards that will result in “severe” economic hardship by forcing

reductions in employment affecting the overall motor vehicle industry.

In the past, the agency has set CAFE standards above its estimate of the capabilities of a manufacturer with less than a substantial, but more than a de minimus, share of the market. See, e.g.,

CAS,

793 F.2d at 1326 (noting that the agency set the MY 1982 light truck standard at a level that might be above the capabilities of Chrysler, based on the conclusion that the energy benefits associated with the higher standard would outweigh the harm to Chrysler, and further noting that Chrysler had 10-15 percent market share while Ford had 35 percent market share). On other occasions, the agency reduced an established CAFE standard to address unanticipated market conditions that rendered the standard unreasonable and likely to lead to severe economic consequences. 49 FR 41250, 50 FR 40528, 53 FR 39275; see

Public Citizen,

848 F.2d at 264.

As a first step toward ensuring that the CAFE levels selected as the maximum feasible levels under Unreformed CAFE will not lead to adverse consequences, we reviewed in detail the confidential product plans provided by the manufacturers with a substantial share of the light truck market (General Motors, Ford and DaimlerChrysler) and assessed their technological capabilities to go beyond those plans. By doing so, we are able to determine tentatively the extent to which each can enhance their fuel economy performance using technology.

C. Technologically Feasible Additions to Baseline

The agency has analyzed potential technological improvements to the product offerings for each manufacturer with a substantial share of the light truck market and for the remaining light truck manufacturers.

Under the Unreformed system, we focused on General Motors, Ford, and DaimlerChrysler as the manufacturers with substantial shares of the light truck market. We also conducted analyses of the potential for the other manufacturers to achieve fuel economy levels above their baselines.

A more detailed discussion of these issues is contained in the agency's PRIA, which has been placed in the docket for this notice. Some of the information included in the PRIA, including the details of manufacturers' future product plans, has been determined by the Agency to be confidential business information the release of which could cause competitive harm. The public version of the PRIA omits the confidential information. The PRIA discusses in detail the fuel economy enhancing technologies expected to be available during the MY 2008-2010 time period.

For the purpose of analyzing the potential technological improvements, we applied a three-stage engineering analysis that we relied upon in previous light truck fuel economy rulemakings (Stage Analysis).

At each stage of that analysis, we added technologies based on our engineering judgment and expertise about possible adjustments to the detailed product plans submitted in response to the 2003 request for product plans. Our decision whether and when to add a technology reflected our consideration of the practicability of applying a specific technology and the necessity for lead-time in its application.

The agency recognized that vehicle manufacturers must have sufficient lead time to incorporate changes and new features into their vehicles. Further, in making its lead time determinations, the agency considered the fact that vehicle manufacturers follow design cycles when introducing or significantly modifying a product. In addition to considering lead time, the agency added technologies in a cost-minimizing fashion. That is, it generally first added technologies that were most cost-effective.

In evaluating which technologies to apply, and the sequence in which to apply them, we followed closely the NAS report. The NAS report estimated the incremental benefits and the incremental costs of technologies that may be applicable to actual vehicles of different classes and intended uses (see NAS p. 40).

The NAS report also identified what it called “cost-efficient technology packages,” i.e., combinations of technologies that would result in fuel economy improvements sufficient to cover the purchase price increases that such technologies would require (see NAS p. 64).

Additionally, as noted above, the agency has placed in the docket for this notice a document, prepared under the auspices of the U.S. Department of Energy for NHTSA, that updates the estimates of light-truck fuel economy potential in the 2001 National Academy of Sciences (NAS) report, “Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards.”

The Stage I analysis includes technologies that manufacturers state as being available for use by MY 2008 or earlier, but are choosing not to use them in their product plans. Many of these technologies are currently being used in today's light duty truck fleet. These technologies include non-powertrain applications such as low rolling resistance tires, low friction lubricants, aerodynamic drag reduction, and electric power steering pumps.

The Stage II analysis includes two major categories of technological improvements to the manufacturer's fleets, the timing of which is tied as nearly as possible to planned model change and engine introduction years. The first of these categories is transmission improvements, which consists of the introduction and expanded use of 5-speed and 6-speed transmissions and continuously variable transmissions (CVTs). The application of CVTs was restricted to vehicles that are not designed for rugged off-road applications and/or the need to haul heavy loads, such as smaller unibody SUVs. The second category was engine improvements, and consisted of gradually upgrading all light truck engines to include multi-valve overhead camshafts, introducing engines with more than 2-valves per cylinder, applying variable valve timing/variable valve lift and timing to multi-valve overhead camshaft engines, and applying cylinder deactivation to 6- and 8-cylinder engines.

The Stage III analysis included projections of the potential CAFE increase that could result from the application of diesel engines and hybrid powertrains to some products. Both diesel engines and hybrid powertrains appear in several manufacturers plans within the MY 2008-2010 timeframe, and other manufacturers have publicly indicated that they are looking seriously into both technologies.

Some of the technologies considered under the Stage Analysis have been used in production for over a decade; e.g., engine friction reduction and low friction lubricants. Some have only recently been incorporated in light trucks; e.g., 5-speed and 6-speed automatic transmissions and variable valve timing. Others have been under development for a number of years, but have not yet been produced in significant quantity for an extended period of time (e.g., cylinder deactivation, variable valve lift and timing, CVT, integrated starter generator, and hybrid drive trains).

Our analysis included the possibility of limited vehicle weight reduction for vehicles over 5,000 lbs. curb weight where we determined that weight reduction would not reduce overall safety and would be a cost effective choice.

We determined that reducing the weight of these vehicles would not reduce overall safety. The Kahane study found that the net safety effect of removing 100 pounds from a light truck is zero for light trucks with a curb weight greater than 3,900 lbs.

However, given the significant statistical uncertainty around that figure, we

assumed a confidence bound of approximately 1,000 lbs. and used 5,000 lbs. as the threshold for considering weight reduction.

We used weight reduction primarily in conjunction with a planned vehicle redesign or freshening and sometimes in concert with a reduction in aerodynamic drag.

The amount of projected weight reduction was two percent for light trucks with a curb weight between 5,000 and 6,000 lbs and up to four percent for light trucks with a curb weight over 6,000 lbs.

Kahane, Charles J., PhD, Vehicle Weight, Fatality Risk and Crash Compatibility of Model Year 1991-99 Passenger Cars and Light Trucks, October 2003. DOT HS 809 662. Page 161. Docket No. NHTSA-2003-16318 (

http://www.nhtsa.dot.gov/cars/rules/regrev/evaluate/pdf/809662.pdf

See the discussion of “Effect of Weight and Performance Reductions on Light Truck Fuel Economy” in Chapter V of the PRIA.

Further, our Stage Analysis does not apply technologies where it is not technically sensible to do so. For instance, we estimate that replacing an overhead valve engine with a multi-valve overhead camshaft engine of the same displacement and replacing a 4-speed automatic transmission with a 5- or 6-speed automatic transmission offer about the same potential level of improvement. One of them may be more attractive to a particular manufacturer because of its cost, ease of manufacturing, or the model lines to which it would apply.

The technologically feasible fuel economy levels determined under the Stage Analysis were then input into the Volpe model. The Volpe model uses a technology application algorithm developed by Volpe Center staff to apply technologies to manufacturers' baselines in order to achieve the fuel economy levels produced under the Stage Analysis. This algorithm systematically applies consistent cost and performance assumptions to the entire industry, as well as consistent assumptions regarding economic decision-making by manufacturers. Technologies were selected and applied in order of “effective cost,” (total cost − fine reduction − fuel savings value) / (number of affected vehicles).

This formula is a private cost concept,

i.e.

, it looks at costs to the manufacturer. It is used to predict how a manufacturer would sequence the addition of technologies to meet a given standard.

In the current model year, the system begins by carrying over any technologies applied in the preceding model year, based on commonality of engines and transmissions, as well as any identified predecessor/successor relationships among vehicle models. At each subsequent step toward compliance by a given manufacturer in the current model year, the system considers all engines, transmissions, and vehicles produced by the manufacturer and all technologies that may be applied to those engines, transmissions, and vehicles, where the applicability of technologies is governed by a number of constraints related to engineering and product planning. The system selects the specific application of a technology (

i.e.

, the application of a given technology to a given engine, transmission, vehicle model, or group of vehicle models) that yields the lowest “effective cost”, which the system calculates by taking (1) the cost (retail price equivalent) to apply the technology times the number of affected vehicles, and subtracting (2) the reduction of civil penalties achieved by applying the technology, and subtracting (3) the estimated value to vehicle buyers of the reduction in fuel outlays achieved by applying the technology, and dividing the sum of these components by the number of affected vehicles.

The level of fuel economy improvement resulting from the Stage Analysis provides the basis for the proposed Unreformed CAFE standards. The Volpe model was then used to estimate benefits and costs. The Volpe model is given, as an input, the level of fuel economy improvement and then proceeds to analyze what technologies can be added to meet the standard determined by the Stage Analysis. Although similar, the two analyses do not apply exactly the same technologies. Both are merely ways of achieving the given standard, not predictions of how manufacturers will actually meet it. As explained below in the section on economic practicability and other economic issues, additional analysis was performed to ensure that the proposed Unreformed CAFE standards are economically practicable for the industry.

In its submission, General Motors described a variety of technologies that could be used to improve fuel economy. For each such technology, General Motors included its estimated fuel economy benefit, the basis for that estimate, whether the benefit was direct or interactive, a description of how the technology works and how it increases fuel economy, when the technology would be available for use, its potential applications, where it is currently employed in General Motors' light truck fleets, where the technology could potentially be used, risks in employing the technology, and potential impacts on noise, vibration and harshness (NVH), safety, emissions, cargo and towing capacity.

The agency relied on these descriptions in determining which technologies General Motors could employ in its fleet during MYs 2008-2010.

To assess the fuel economy impacts of these technologies, we used either the NAS report's mid-range numbers

or, when General Motors submitted higher numbers for a particular technology, we used General Motors' numbers.

The determination of technology application that could be employed by a specific manufacturer was based on confidential information provided by each manufacturer. The nature of this confidential information would become apparent from listing the technologies applied by the agency and therefore our discussion in the public document is of a general nature.

The NAS report (p. 42) assessed the fuel consumption impact of technologies applicable to light trucks, including emerging technologies. For most of these technologies, the NAS report presented a range of potential fuel consumption improvement attributable to each technology.

As a result of the Stage Analysis, we have tentatively concluded that, for MYs 2008-2010, General Motors is the least capable of the manufacturers that have a significant share of the light truck market. To ensure that the proposed Unreformed CAFE improvements would not lead to economically severe consequences for the industry, we have given particular regard to General Motors' projected capabilities when balancing the statutory factors to arrive at the proposed standards.

We note that when we established the light truck CAFE standards for MYs 2005-2007, we set the standard for MY 2007 at a level somewhat beyond that we had determined technologically achievable by General Motors, then also the “least capable manufacturer.” We will carefully review the updated product plans that we anticipate General Motors will submit and will review the projections for General Motors' capability when deciding upon final light truck standards for these model years. As directed by law, we will balance all the statutory factors, as well as our concern for motor vehicle safety, before conclusively determining the appropriate level of light truck CAFE standards for MYs 2008-2010.

Ford and DaimlerChrysler each submitted information similar to that provided by General Motors. The agency engaged in the same type of analysis in assessing the potential fuel economy capabilities for those manufacturers. The agency also engaged in the same type of analysis in assessing the potential fuel economy capabilities for Honda, Hyundai, Nissan and Toyota, although the information provided by those companies was less detailed than that of DaimlerChrysler, Ford and General Motors.

Upon reviewing the product plans and making adjustments as described—and balancing the nation's need to conserve energy with what is technologically feasible, economically practicable and unlikely to produce adverse consequences—we have tentatively determined that the following light truck CAFE standards are the maximum feasible fuel economy levels achievable:

MY 2008-22.5.

MY 2009-23.1.

MY 2010-23.5.

D. Economic Practicability and Other Economic Issues

As explained above, the agency has historically reviewed whether a CAFE standard is economically practicable in

terms of whether the standard is one “within the financial capability of the industry, but not so stringent as to threaten substantial economic hardship for the industry.” See,

e.g.

Public Citizen

, 848 F.2d at 264. In the Stage Analysis, technologies are applied to project fuel economy levels that would be technologically feasible for a manufacturer. When considering economic practicability, the agency reviews whether technologically feasible levels may lead to adverse economic consequences, such as a significant loss of sales or the unreasonable elimination of consumer choice. The agency must “weigh the benefits to the nation of a higher fuel economy standard against the difficulties of individual automobile manufacturers.”

CAS

, 793 F.2d at 1332.

The agency has estimated not only the anticipated costs that would be borne by General Motors, Ford, DaimlerChrysler, Honda, Hyundai, Nissan and Toyota to comply with the standards under the Unreformed CAFE system, but also the significance of the societal benefits anticipated to be achieved through fuel savings and other economic benefits from reduced petroleum use. In regard to economic impacts on manufacturers and societal benefits, we have relied on the Volpe model to determine a probable range of costs and benefits.

The Volpe model was used to evaluate the standards initially produced under the Stage Analysis in order to estimate their overall economic impact as measured in terms of increases in new vehicle prices on a manufacturer-wide, industry-wide, and average per-vehicle basis. Like the Stage Analysis, the Volpe model relies on the detailed product plans submitted by manufacturers, as well as available data relating to manufacturers that had not submitted detailed information. The Volpe model is used to trace the incremental steps (and their associated costs) that a manufacturer would take toward achieving the standards initially suggested by the Stage Analysis.

Based on the Stage and Volpe analyses, we have concluded that these standards would not significantly affect employment or competition, and that—while challenging—they are achievable within the framework described above, and that they would benefit society considerably. For this analysis, we have where possible translated the benefits into dollar values and compared those values to our estimated costs for this proposed rule.

1. Costs

In order to comply with the proposed Unreformed CAFE standards, we estimate the average incremental cost per vehicle to be $56 for MY 2008, $130 for MY 2009, and $185 for MY 2010. The total incremental cost (the cost necessary to bring the corporate average fuel economy for light trucks from 22.2 mpg (the standard for MY 2007) to the proposed standards) is estimated to be $528 million for MY 2008, $1,244 million for MY 2009, and $1,798 million for MY 2010.

Our cost estimates for the proposed standards under the Unreformed CAFE system were based on the application of technologies and the resulting costs to individual manufacturers. We assumed that manufacturers would apply technologies on a cost-effectiveness basis (as described above). More specifically, within the range of values anticipated for each technology, we selected the most plausible cost impacts and fuel consumption impacts during the model years under consideration.

Using the estimated costs and fuel savings for the different technologies, the agency then examined the projections provided by different manufacturers for their light truck fleet fuel economy for MYs 2008-2010. Although the details of the projections by individual manufacturers are confidential, present fuel economy performance indicates that some manufacturers would, if their planned fleets remain unchanged, be able to meet the proposed standards without significant expenditures. Other manufacturers would need to expend significantly more effort than that called for in their product plans to meet the proposed standards.

Some manufacturers might achieve more fuel savings than others using similar technologies on a vehicle-by-vehicle basis due to differences in vehicle weight and other technologies present. However, this analysis assumes an equal impact from specific technologies for all manufacturers and vehicles. The technologies were ranked based on the cost per percentage point improvement in fuel consumption and applied where available to each manufacturer's fleet in their order of rank. The complete list of the technologies and the agency's estimates of cost and associated fuel savings can be found in the PRIA.

The level of additional expenditure necessary beyond already planned investment varies for each individual manufacturer. We based expenditures on cost estimates we developed for various technologies that are both available to and technologically feasible for manufacturers within the time frame covered by this NPRM.

Our cost analysis recognizes the importance of the competitive market. We believe that the standards proposed under the Unreformed CAFE system will not limit the availability of vehicles that consumers need and want. We believe that the standards established in this final rule will not result in noticeable changes to power-to-weight ratios, towing capacity or cargo and passenger hauling ability. In short, the standards will not affect the utility of available vehicles and therefore should not conflict with consumer preferences.

2. Benefits

In the PRIA, the agency analyzes the economic and environmental benefits of the proposed Unreformed CAFE standards by estimating fuel savings over the lifetime of each model year (approximately 26 years). Benefit estimates include both the benefits to consumers in terms of reduced fuel use and other savings such as the reduced externalities generated by the importing, refining and consuming of petroleum products.

The benefits of the proposed increases in the Unreformed CAFE standards are estimated to be $64 per vehicle for MY 2008, $142 per vehicle for MY 2009, and $206 per vehicle for MY 2010. The total value of these benefits is estimated to be $605 million for MY 2008, $1,366 million for MY 2009 and $2,007 million for MY 2010, based on fuel prices ranging from $1.51 to $1.58 per gallon. (See the discussion of current fuel prices vs. the fuel prices during the lifetime of the MY 2008-2010 light trucks in section II.J. Recent developments, above.)

3. Comparison of estimated costs to estimated benefits

Table 2 compares the incremental costs and benefits for the Unreformed CAFE standards.

Table 2.—Comparison of Incremental Costs and Benefits for the Proposed Unreformed CAFE Standards

(In millions)

MY 2008

MY 2009

MY 2010

Total incremental costs*

$528

$1,244

$1,798

Total incremental benefits*

$605

$1,366

$2,007

* Relative to the 22.2 mpg standard for MY 2007.

These estimates are provided as present values determined by applying a 7 percent discount rate to the future impacts. In the PRIA, we also use a 3 percent discount rate for discounting benefits and costs, and request comment on what discount rates are appropriate for this rulemaking, including 3, 7, and 10 percent (see Section VIII in the PRIA for a more detailed discussion). To the extent possible, we translated impacts other than direct fuel savings into dollar values and then factored them into our cumulative estimates. We obtained forecasts of light truck sales for future years from AEO2005. Based on these forecasts, NHTSA estimated that approximately 9,480,200 light trucks would be sold in MY 2008. For MYs 2009 and 2010, we estimated 9,613,100 and 9,754,000 light truck sales, respectively.

We calculated the reduced fuel consumption of MY 2008-2010 light trucks by comparing their consumption under the proposed standards for those years to the consumption they would have if the MY 2007 CAFE standard of 22.2 mpg remained in effect during those years. First, the estimated fuel consumption of MY 2008-2010 light trucks was determined by dividing the total number of miles driven during the vehicles' remaining lifetime by the fuel economy level they were projected to achieve under the 22.2 mpg standard.

Then, we assumed that if these same light trucks were produced to comply with higher CAFE standards for those years, their total fuel consumption during each future calendar year would equal the total number of miles driven (including the increased number of miles driven because of the “rebound effect,” the tendency of drivers to respond to increases in fuel economy in the same manner as they respond to decreases in fuel prices,

i.e.

, by driving more),

divided by the higher fuel economy they would achieve as a result of that standard. The fuel savings during each future year that would result from the higher CAFE standard is the difference between each model year's fuel use and the fuel use that would occur if the MY 2007 standard remained in effect. This analysis results in estimated lifetime fuel savings of 0.8 billion, 1.9 billion, and 2.7 billion gallons for MYs 2008, 2009, and 2010, respectively.

As described in detail in the PRIA, we use a 20% rebound effect based on a thorough review of the literature. We are nonetheless aware that there is ongoing research in this area, and will continue to assess this assumption in light of new evidence.

Finally, we assessed the present value of each year's fuel savings by multiplying the total number of gallons saved by the forecast fuel prices for that year and applying a 7 percent discount rate. (As noted above, we also used a 3 percent discount rate in the PRIA.) Fuel price forecasts were obtained from EIA's Annual Energy Outlook 2005 and adjusted to exclude state and local taxes. This analysis resulted in values for estimated lifetime fuel savings of $938 million, $2,114 million, and $3,092 million under the proposed Unreformed CAFE standards for MY 2008, 2009, and 2010, respectively, based on fuel prices ranging from $1.51 to $1.58 per gallon.

In the PRIA, we also analyze other effects of the proposed standards,

e.g.

, the impact on vehicle and refinery emissions, gasoline tanker truck emissions, and the rebound effect. Our analysis indicates that the MY 2008 standard would result in a net reduction of criteria pollutants with a present value of $15.5 million. For MY 2009, this net reduction would have a present value of $34.8 million and for MY 2010 the net reduction of criteria pollutants would have a present value of $52.1 million. We calculate per mile emission rates using EPA's Mobile 6.2 motor vehicle emissions factor model, and monetized changes in total emission levels for criteria pollutants associated with gasoline production, distribution, and combustion.

We also discuss non-monetized effects.

The criteria pollutants used for the agency's analysis are carbon monoxide, volatile organic compounds, nitrogen oxides, fine particulate matter, and sulfur dioxide. Tailpipe emissions from light trucks are predicted to increase under this rulemaking due to the rebound effect, while emissions from refineries and gasoline tanker trucks are predicted to decrease due to a reduction in gasoline consumption.

A more detailed explanation of our analysis is provided in the PRIA and the draft Environmental Assessment.

4. Uncertainty

The agency recognizes that science does not permit precise estimates of benefits and costs. NHTSA performed a probabilistic uncertainty analysis to examine the degree of uncertainty in the costs and benefits. Factors examined included technology costs, technology effectiveness in improving fuel economy, fuel prices, the value of oil import externalities, and the rebound effect. This analysis employed Monte Carlo simulation techniques to examine the range of possible variation in these factors. The analysis indicates that the agency is highly certain that the social benefits of the proposed CAFE levels will exceed their costs for all 3 model years of Unreformed standards included in the proposal.

We solicit comment on whether proposed levels of maximum feasible CAFE reflect an appropriate balancing of the statutory and other relevant factors. Based on those comments and other information, including additional data and analysis, the standards adopted in the final rule could well be different.

IV. The Reformed CAFE Proposal for MYs 2008-2011

We are proposing to establish Reformed standards for MYs 2008-2011. As noted above, manufacturers would have a choice of complying with either Unreformed standards or Reformed standards during the transition period spanning MYs 2008-2010. The transition process should assist the agency in learning about the industry's experiences with Reformed CAFE and determining the best approach in future rulemakings.

A. Proposed Approach to Reform

The structure of Reformed CAFE for each model year would have three basic elements—

(1)—Six footprint

categories of vehicles.

Footprint is an aspect of vehicle size—the product of multiplying a vehicle's wheelbase by its average track width.

(2)—A target level of average fuel economy for each footprint category, as expressed by a step function. (The step or “staircase” nature of the function can be seen in Figure 2 below.)

(3)—a Reformed CAFE standard based on the harmonic production-weighted average of the fuel economy targets for each category.

The required level of CAFE for a particular manufacturer for a model year would be calculated after inserting the following data into the standard for that model year: That manufacturer's actual total production and its production in each footprint category for that model year.

The calculation of the required level would be made by dividing the manufacturer's total production for the model year by the sum of the six fractions (one for each category) obtained by dividing the manufacturer's production in a category by the category's target.

Since the calculation of a manufacturer's required level of average fuel economy for a particular model year would require knowing the final production figures for that model year, the final formal calculation of that level would not occur until after those figures are submitted by the manufacturer to EPA. That submission would not, of course, be made until after the end of that model year.

1. Distribution into footprint categories

Initially, the agency has made a preliminary determination to place light trucks up to 8,500 lbs. GVWR into six categories based on vehicle footprint. As discussed more fully below, the agency chose vehicle footprint as the best potential attribute to use as the basis of a Reformed CAFE program because it is an attribute which would best assure consistency in vehicle design and structure between model years, is consistent with our safety concerns, and may encourage the development and availability of light-weight materials whose use might advance fuel economy and preserve or maybe even enhance safety.

The six categories were defined after placing planned light truck production onto a distribution plot by footprint. We then sought to place the category boundaries generally at points indicating low volume immediately to the left and high volume immediately to the right. Our intent in doing so was to avoid providing an incentive to increase vehicle size in order to move a model into a category with a lower target. We sought to create a reasonable number of categories that would also combine, to the extent practicable, similar vehicle types into the same category structures.

Our effort to do so explains why the boundary between categories 4 and 5 is between integers. The agency chose a non-integer boundary for this boundary because, in doing so, it kept vehicles with the same nameplate and utility within the same grouping.

Our preliminary assessment of the categories is based on the product plan information available to us when devising this proposal. These categories may change based upon our review of updated product plans received in response to this NPRM.

Figure 1 provides the distribution of projected MY 2008-2010 aggregate sales for the industry:

BILLING CODE 4910-59-P

EP30AU05.003

BILLING CODE 4910-59-C

In determining the number and location of categories, the agency used its best judgment applying the considerations set forth above. The agency has made the preliminary determination to establish 6 categories for purposes of this rulemaking, based on vehicle footprint, as shown in Table 2:

Table 2.—Proposed Footprint Categories

Footprint categories

Range of vehicle footprint (sq. ft.)

≤ 43.0

> 43.0-47.0

> 47.0-52.0

> 52.0-56.5

> 56.5-65.0

> 65.0

In future rulemakings, the agency may adjust the footprint categories if necessary to better represent the fleets projected for the model years covered.

2. Targets

For each of MYs 2008-2011, the agency established a target average fuel economy level for each of the six footprint categories. The CAFE standard would be the harmonic production-weighted average of those targets. Thus, the average fuel economy of a manufacturer's vehicles in any particular footprint category need not meet the target for that footprint category. However, to the extent a manufacturer's vehicles fall short of the target in any footprint category, that shortfall would need to be offset by exceeding the target in one or more other footprint categories.

a. Overview of target selection process

We used a three-phase process for determining targets that represent the social optimum for the manufacturers as a group:

In phase one, we applied technologies to the fleet of each of the seven largest manufacturers individually until we reached the point at which the marginal cost of adding technology equaled the marginal benefit of that technology for that manufacturer. We then placed the modified fleets into the categories.

The seven manufacturers are General Motors, Ford, DaimlerChrysler, Toyota, Honda, Hyundai and Nissan. We did not include four additional manufacturers that sell light trucks—Volkswagen, BMW, Porsche and Subaru—because the first three historically have paid civil penalties in lieu of selling a compliant fleet of light trucks and Subaru's market share is considerably smaller than any other company in this market. Together, the seven largest manufacturers account for approximately 95 percent of the market.

Looking at each manufacturer in this group of manufacturers, instead of just the least capable manufacturer as under Unreformed CAFE, provides us with a much fuller, more robust, and representative, understanding and estimate of industry-wide capabilities.

In phase two, for each category, we determined the position of the targets relative to each other and a temporary level of the targets by calculating the average CAFE of those of the seven largest manufacturers that had vehicles in that category.

In phase three, we determined the proposed level of the targets by simultaneously adjusting all of the targets upward or downward by a uniform increment of fuel consumption until we reached the level at which the marginal cost of adding technology to meet that level equaled the marginal benefit of that technology for the seven largest manufacturers, as a group.

This process for determining targets was based on the application of technology under the Volpe model. Unlike the Unreformed CAFE system, the Stage Analysis was not used.

b. Industry-wide considerations in selecting the targets

An Unreformed CAFE standard specifies a “one size fits all” (uniform) level of CAFE that applies to each manufacturer and is set with particular regard to the lowest projected level of CAFE among the manufacturers that have a significant share of the market. The manufacturer with the lowest projected CAFE level has typically been referred to as the “least capable” manufacturer.

As noted above, in selecting the Reformed CAFE targets, we looked at the seven largest manufacturers, instead of focusing primarily on the least capable manufacturer, because under Reformed CAFE, it is unnecessary to set standards with particular regard to the capabilities of a single manufacturer in order to ensure that the standards are technologically feasible and economically practicable for all manufacturers with a significant share of the market. This is true both fleet wide and within any individual category of vehicles.

We note that the term “least capable” manufacturer is something of a misnomer since a manufacturer's projected level of CAFE is determined by two factors: the extent to which small or large vehicles predominate in the manufacturer's planned production mix, and the type and amount of fuel saving technologies that the manufacturer is deemed capable of applying. Two manufacturers may apply the same type and amount of fuel saving technologies to their fleets, yet have differing CAFE levels, if the proportions of small vehicles and large vehicles in each manufacturer's fleet are not identical. Thus, a full line manufacturer may have a lower overall CAFE than a manufacturer concentrating its production in the smaller footprint categories, even though the former manufacturer has applied as much (or more) technology as the latter manufacturer.

We have set the Unreformed standards with particular regard to the “least capable” manufacturer in response to the direction in the conference report on the CAFE statute language to consider industry-wide considerations, but not necessarily base the standards on the manufacturer with the greatest compliance difficulties. By focusing primarily on the least capable manufacturer with a significant share of the market, this approach has ensured that the standards are technologically feasible and economically practicable for all or most of the manufacturers with a significant share of the market. If a standard is technologically feasible and economically practicable for the “least capable” manufacturer, it can be presumed to be so for the “more capable” manufacturers. Together, the manufacturers with a significant share of the market represented a very substantial majority of the light trucks manufactured and thus were deemed to represent “industry-wide considerations.”

However, this approach limits the amount of fuel saving possible under Unreformed CAFE. In the Unreformed system, the agency is constrained by the least capable manufacturer to a much larger degree than in the Reformed system. Since the Unreformed system is a uniform, one-size-fits-all standard, the least capable manufacturer is the one that specializes primarily in larger light trucks. Even though these vehicles may be efficient, they have low fuel economy. The Unreformed standard is set relative to the baseline fuel economy of the least capable manufacturer. This means that other manufacturers making smaller vehicles are not required to make improvements in order to comply because their vehicles get higher fuel economy yet may not be very efficient. The Reformed system takes manufacturer fleet mix into account and requires everyone to improve fuel economy by mandating similar levels of efficiency.

There is only one way under Unreformed CAFE of requiring the “more capable” manufacturers with a significant share of the market,

i.e.

, those with projected levels of CAFE higher than the level projected for the “least capable” manufacturer, to apply more fuel saving technologies than they

were already planning to apply. That way would be for the agency to set a standard above the capabilities of the “least capable” manufacturer.

There is no need under Reformed CAFE to set the standards with particular regard to the capabilities of the “least capable” manufacturer. Indeed, it would often be difficult to identify which manufacturer should be deemed the “least capable” manufacturer under Reformed CAFE. The “least capable” manufacturer approach was simply a way of implementing the guidance in the conference report in the specific context of Unreformed CAFE.

This proposal would change the context. The very structure of Reformed CAFE standards makes it unnecessary to continue to use that particular approach in order to be responsive to guidance in the conference report. Instead of specifying a common level of CAFE, a Reformed CAFE standard specifies a variable level of CAFE that varies based on the production mix of each manufacturer. By basing the level required for an individual manufacturer on that manufacturer's own mix, a Reformed CAFE standard in effect recognizes and accommodates differences in production mix between full- and part-line manufacturers, and between manufacturers that concentrate on small vehicles and those that concentrate on large ones.

There is an additional reason for ceasing to use the “least capable” manufacturer approach. There would be relatively limited added fuel savings under Reformed CAFE if we continued to use the “least capable” manufacturer approach even though there ceased to be a need to use it. (This reasoning is very similar to the reasoning the agency used under Unreformed CAFE when we rejected the suggestion by Mercedes Benz that we should set the standards at the level achievable by very small manufacturers.

In rejecting that suggestion, we cited the language from the conference report about considering industry-wide considerations and not basing the standards on the manufacturer with the greatest difficulties.)

61 FR 145, 154; January 3, 1996.

c. Relative position of the targets

The first phase in determining the footprint category targets was to determine separately for

each

manufacturer the overall level of CAFE that would maximize the net benefits for that manufacturer's vehicles.

In this phase, as noted above, we considered the fleet of each of the seven largest manufacturers without respect to specific footprint category to which each of their vehicles is assigned. To find the socially optimal point for each of these seven manufacturers,

i.e.

, the point at which the incremental or marginal change in costs equals the incremental or marginal change in benefits for that manufacturer, we used the Volpe model to compute the total costs and total benefits of exceeding the baseline

CAFE by progressively larger increments. We began by exceeding the baseline by 0.1 mpg. We then used the model to calculate the total costs and total benefits of exceeding the baseline by 0.2 mpg. The marginal costs and benefits were then computed as the difference between the total costs and total benefits resulting from exceeding the baseline by 0.1 mpg and the total costs and benefits resulting from exceeding the baseline by 0.2 mpg. We then used the Volpe model to calculate the total costs and total benefits of exceeding the baseline by 0.3 mpg and computed the difference between the total costs and benefits between 0.2 mpg and 0.3 mpg to determine the marginal costs and benefits.

An important distinction needs to be made between the baseline and the manufacturer's product plan mpg. As discussed earlier, “baseline” is defined as the fuel economy that would exist absent of the rulemaking,

i.e.

, the model year 2007 standard of 22.2 mpg. The 22.2 mpg baseline differs from the mpg level reported in a manufacturer's product plan. Some manufacturers report fuel economy levels that are below 22.2 mpg. In that case, the cost and benefits of going from the product plan mpg to the baseline (22.2) mpg are not counted as costs and benefits of the rulemaking, as they were already counted in the MY 2005-2007 final rule. Only costs and benefits associated with going from baseline mpg to a higher standard are counted. It is important to note that since technology is applied on a cost effective basis, the most cost effective technologies will be used to get a manufacturer from the product plan mpg to the baseline mpg.

We continued making similar iterations until marginal costs equaled marginal benefits for that manufacturer. Performing this iterative process individually for each manufacturer pushed each of the seven largest manufacturers to a point at which net benefits are maximized for each manufacturer's vehicles.

In the second phase, we took the results of phase one,

i.e.

, each manufacturer's vehicles as modified by the technologies added to them in that phase, and placed the vehicles into the categories based on their footprints. Then, for each category, we determined the average fuel economy of each of the largest seven manufacturers that had vehicles in that footprint category. We then calculated a single harmonic mean for each footprint category based on the average fuel economy of each of the manufacturers selling vehicles in that footprint category.

The level of the single harmonic average or temporary target for each footprint category relative to the levels of the temporary targets for the other footprint categories defines the “shape” of the function on which the standard is based. The shape remains unchanged throughout the equal increment adjustments in phase three below since the absolute differences (on a gallon per mile basis) between the targets are unaffected by those adjustments.

Figure 2 provides an illustrative example. The figure depicts a step or “staircase” function that steps down, left to right, from the highest target (for the footprint category with the vehicles having the smallest footprints,

i.e.

, footprint category 1) to the lowest target (for the footprint category with the vehicles having the largest footprints,

i.e.

, footprint category 6).

For any value of footprint within the range of footprints included in a particular category, the fuel economy target is the same.

Although the height of each step in the hypothetical shown in the figure is identical, it is unlikely that any two steps would be identical in height.

EP30AU05.004

d. Level of the targets

For each model year after the transition period of MYs 2008-2010,

i.e.

, beginning with MY 2011, the third phase involves determining the level of the CAFE targets (and thus the level of the standard) that would require the economically efficient amount of effort by the seven largest manufacturers, as a group, to improve fuel economy. The process for determining the targets that require that amount of overall effort resembles, but is not identical to the process used in phase one for determining the optimum levels of each individual manufacturer.

This third phase of adjustment is necessary because while the economically efficient level of CAFE for each individual manufacturer was determined in phase one, the calculation in phase two of the category averages of those manufacturer-specific levels does not necessarily result in values that correspond to the optimized level of effort for the entire industry, as represented by the seven largest manufacturers, as a group. To ensure that the step function is placed at the level that results in a standard that is optimal for the seven largest manufacturers, as a group, phase three involves the computation of total and marginal costs and benefits across the entire industry (using the combination of the largest seven manufacturers as a proxy for the entire industry), instead of manufacturer by manufacturer.

We begin phase three where we began phase one,

i.e.,

with each manufacturer's baseline CAFE derived, where available, from its product plans. For MY 2011, we used the same baselines as we did for MY 2010, except for manufacturers for which we had MY 2011 product plans from the manufacturer and thus had a MY 2011 baseline. After converting each temporary target (determined in phase two) from miles per gallon to gallons per mile so that we could adjust the footprint category targets by a uniform increment of fuel savings,

we adjusted all six targets by an equal increment and then converted them back to miles per gallon. We adjusted each category target by an equal increment so that the final category target remained relatively close to each manufacturer's individual optimal level in that category (

i.e.,

the manufacturer-specific levels determined in the first phase).

The relationship between miles per gallon and fuel savings is not linear. An increase from 20 mpg to 21 mpg results in a greater fuel savings than an increase from 30 mpg to 31 mpg. Conversely, the relationship between gallons per mile and fuel savings is linear. A change from 0.10 gallons per mile to 0.09 gallons per mile provides the same fuel savings as going from 0.20 gallons per mile to 0.19 gallons per mile.

The direction of these adjustments can be either upward or downward, depending on the marginal costs and benefits. An example of the process of adjusting the targets, while maintaining the shape of the step function, is illustrated in Figure 3:

EP30AU05.005

Using the Volpe model, we applied to each manufacturer's baseline the technologies necessary for that manufacturer to reach the adjusted targets. Based on each manufacturer's baseline, we then calculated total costs and benefits for each manufacturer. Then we added the costs for each of the seven manufacturers together. Likewise, we added the benefits together.

We then adjusted each target a second time by the same increment. Again we added the technologies to the baselines and again calculated the total costs and benefits for the seven manufacturers. Then we compared those totals (for the seven manufacturers) for the second adjusted level to the totals for reaching the first adjusted level, yielding the marginal costs and benefits of the adjustment. After each additional adjustment in the targets, we determined marginal costs and benefits. We stopped adjusting the targets when we reached the point where marginal costs equaled marginal benefits for the industry as a whole. This is the point at which industry-wide net benefits are maximized. The required levels of CAFE that are determined for each manufacturer based on this final adjustment of targets in phase three differ from the levels of CAFE determined for each individual manufacturer in phase one. The difference ranges from 1.2 mpg higher for one manufacturer to 0.8 mpg lower for another manufacturer.

We are proposing this approach because we believe it can achieve the maximum level of technologically feasible and economically practicable fuel savings. We recognize that we are premising our preliminary assessment of economic practicability on finding the level of optimal economic efficiency. We also recognize that the agency in the past has expressed its belief that the statutory consideration of economic practicability differs from, but does not preclude consideration of, cost/benefit analysis. (See,

e.g.

, June 30, 1977; 42 FR 33534, at 33536-7)

We note, however, that the cost/benefit analyses conducted today (especially in light of the more recent addition of an uncertainty analysis required by OMB Circular A-4) are substantially more robust than those conducted in decades past and provide a more substantial basis for consideration of economic practicability. We also believe that the structure of the proposed Reformed CAFE standard, which respects the mix the manufacturer is able to sell, but demands reasonable fuel economy increases for all vehicle sizes, reduces the need to focus on more company-specific and short-term economic considerations because it provides more flexibility for the CAFE program to respond to changing economic and market conditions.

We note further that the regulatory philosophy set forth in Executive Order 12866, “Regulatory Planning and Review,” is that a rulemaking agency should set its regulatory requirements at the level that maximizes net benefits unless its statute prohibits doing so. EPCA neither requires nor prohibits the setting of standards at the level at which net benefits are maximized.

The agency did identify and consider a variety of benefits and costs that could not be monetized. On the benefit side, for example, there is a significant reduction in carbon dioxide emissions. On the cost side, for example, there is a risk of adverse safety impacts from downweighting. Overall, the agency determined that there is no compelling evidence that these unmonetized benefits and costs would, taken together, alter its assessment of the level of the standard for MY 2011 that would maximize net benefits. Thus, the agency determined the stringency of that standard on the basis of monetized net benefits.

EPCA does, however, require that the maximum feasible level be determined after considering economic practicability. Thus, it is possible that, under certain circumstances, NHTSA might be required to set CAFE standards below the level at which net benefits are maximized if considerations of economic practicability make it necessary or prudent to set standards at a lower level. The agency seeks comment on the advisability and potential form of any supplementary methodological approach—beyond economic efficiency—to ensuring that Reformed CAFE standards are set at the level capable of achieving the maximum feasible fuel savings, as determined after consideration of the statutory and other relevant factors.

MYs 2008-2010.

In each of the transition years, we did not adjust the targets to the optimal level. Instead, we adjusted the footprint category targets in equal increments until the total industry costs under the Reformed program approximately equaled the total industry costs under the Unreformed program. Cost equalization has several important advantages. Since the Unreformed standards were judged to be economically practicable and since the

Reformed standards spread the cost burden across the industry to a greater extent, equalizing the costs between the two systems ensures that the Reformed standards are within the realm of economic practicability.

Also, cost equalization promotes an orderly and effective transition to the Reformed system by minimizing the cost differences between the two choices.

We equalized aggregate industry costs between Reformed and Unreformed CAFE. The costs are not borne by manufacturers in the same way and costs for individual manufacturers may differ between the two systems.

3. Standards and required CAFE levels for individual manufacturers

The Reformed CAFE standard is an equation for calculating production-weighted, harmonically-averaged fuel economy in which the footprint category targets are constants, total production and footprint category production are variables, and the required level of CAFE must be solved. The equation is separately solved for each individual manufacturer, using its total production and its production in each footprint category. The solution or answer is the manufacturer's required level of CAFE.

In response to the agency's December 1979 proposal of light truck standards for model years 1983-85, the Regulatory Analysis Review Group (RARG) suggested a similar approach in March 1980: “setting fuel economy targets for different categories of trucks, and using a pre-determined fleet mix for each manufacturer to turn these targets into a composite standard.” See Report of the Regulatory Analysis Review Group, Council on Wage and Price Stability, March 31, 1980, submitted as attachment to letter from R. Robert Russell, Director of the Council, to Joan Claybrook, Administrator, NHTSA (FE-78-01-N01-175). The RARG was established by President Carter to review up to 10 of the most important regulations each year classified as significant under Executive Order 12044. It was chaired by the Council of Economic Advisors (CEA) and was composed of representatives of OMB and the economic and regulatory agencies. It relied on the staff of Council on Wage and Price Stability and the CEA to develop evaluations of agency regulations and the associated economic analyses and to place these analyses in the public record of the agency proposing to issue the regulation.

The required level of CAFE for a manufacturer for a model year would be the production-weighted harmonic average fuel economy of that manufacturer's entire product line for that model year, as determined by inserting the manufacturer's total production and production in each footprint category into the formula. Each manufacturer would be subject to the same fuel economy targets for the same footprint categories and all manufacturers would be required to meet the level of CAFE calculated for it under the same formula. Individual manufacturers would face different required levels of CAFE only to the extent that they produced different mixes of vehicle models. In this respect, the proposal would be no different than if the agency established multiple classes. Under a multiple class system, manufacturers would implicitly have different requirements at the fleet level as a result of differences in their fleet mixes.

The required level would then be compared to the production-weighted harmonic average fuel economy of a manufacturer's entire product line, based on the

actual

fuel economy levels achieved by each model line. If the value based on the actual fuel economy levels were at least equal to the required level of average fuel economy, then a manufacturer would be in compliance. If it were greater than that level, the manufacturer would earn credits usable in any of the three preceding or following model years.

More specifically, the manner in which a manufacturer's required overall CAFE for a model year is computed is similar to the way in which a manufacturer's actual CAFE for a model year is calculated. The required level is computed on the basis of the number of vehicles in each footprint category and the footprint category targets as follows:

EP30AU05.006

This formula can be restated more compactly as follows:

Required CAFE Level =

EP30AU05.007

(Required CAFE level sum formula)

N is the total number (sum) of light trucks produced by a manufacturer,

is the number (sum) of light trucks produced by that manufacturer in the i-th light truck footprint category, and

Target

is fuel economy target of the i-th footprint category.

The required level is then compared to the CAFE that the manufacturer actually achieves in the model year in question:

Actual CAFE =

EP30AU05.008

N is the total number (sum) of light trucks produced by the manufacturer,

is the number (sum) of the j-th model light trucks produced by the manufacturer,

mpg

is the fuel economy of the j-th model light truck, and

m is the total number of light truck models produced.

A manufacturer is in compliance if the actual CAFE meets or exceeds the required CAFE.

The method of assessing compliance under Reformed CAFE can be further explained using an illustrative example of a manufacturer that produces four models in two footprint categories with targets assumed for the purposes of the example shown in Table 3:

Table 3.—Illustrative Example of Method of Assessing Compliance Under a Step Function Approach

Model

Fuel

economy

(mpg)

Production (units)

Footprint (sq. ft.)

Footprint category

Footprint category target (mpg)

100,000

27.3

100,000

27.3

100,000

22.9

100,000

22.9

Under Reformed CAFE, the manufacturer would be required to achieve an average fuel economy level of:

EP30AU05.009

This fuel economy figure would be compared with the manufacturer's actual CAFE for its entire fleet,

i.e.

, the production-weighted harmonic mean fuel economy level for four models in its fleet:

EP30AU05.010

In the illustrative example, the manufacturer's actual CAFE (22.6 mpg) is less than the required level (24.9 mpg), indicating that the manufacturer is not in compliance.

4. Why this approach to reform and not another?

a. Step-function vs. continuous function

While manufacturers generally recognized the potential advantages of an attribute-based system, several commenters (including manufacturers) on the 2003 ANPRM stated that a continuous function based on one or more vehicle attributes would be preferable to a multi-class attribute-based system. Commenters stated that a system based on a continuous function would remove the “edge effects”

associated with a multi-class system, that determination of the maximum feasible standard for a continuous function would prove simpler than determining maximum feasible standards for a series of classes, and that a continuous function could be structured to eliminate concern regarding the agency's authority to permit credit transfer between classes.

In the context of products placed in a multi-category or multi-class system for regulatory purposes, the term “edge effects” refers to the incentive for the manufacturers of those products to modify them, particularly the ones located near the boundary of an adjacent category or class,

i.e.,

an “edge,” so as to move them into a different category or class where they will receive more favorable regulatory treatment.

Under a continuous function based on footprint, any increase (or decrease) in footprint would result in a decrease (or increase) in the fuel economy target. Under a step function based on footprint, the fuel economy target does not change continuously in response to changes in footprint. The target would increase only at discrete points over the range of footprint. Under this proposal, the targets increase only at the boundaries between adjacent footprint categories.

The continuous function approach uses a statistically estimated relationship between vehicle size and fuel economy to determine the overall required level for each manufacturer. Compliance is calculated in virtually the same manner. In the step-function approach, the denominator of the required overall target is the sum of the number of vehicles in each category divided by the required fuel economy of the category. In the continuous function approach, the denominator of the required overall target is the sum of the number of vehicle models divided by the required fuel economy for that model derived from the function.

Figure 4 shows an illustrative example of a continuous function.

EP30AU05.011

The illustrative continuous function shown in Error! Reference source not found.4 is defined by the following mathematical function:

EP30AU05.012

In the illustrative function,

A = 20.0 mpg

B = 12.9 mpg

C = 15.3 square feet

The mechanics of defining the continuous function would be similar to the procedure used to develop the proposed MY2011 standard. The iterative process described above in “phase one” would be used to add fuel saving technologies to the baseline technologies for each manufacturer's vehicles. Data points representing each vehicle's size and fuel economy (as improved through the phase one process) would then be plotted on a graph. Using statistical techniques, a function would then be fitted through the data to obtain the continuous function. The last step would be the same as described above in “phase three” for the step function,

i.e.,

the function would be adjusted (raised or lowered) until industry-wide net benefits are maximized, in the case of MY 2011, or until industry-wide costs are equal to those of the Unreformed standards, in the case of MYs 2008-2010.

Determination of the required level of CAFE (and of compliance with that level) is accomplished under a continuous function system in exactly the same fashion as under the step function system, except that there are vehicle model-specific targets, instead of category targets. For each vehicle model, the function shown above in Figure 4 is used to define a target that depends on footprint. Examples are shown in the last column of Table 4.

Table 4.—Ilustrative Example of Method of Assessing Compliance Under a Continuous Function Approach

Model

Fuel

Economy (mpg)

Production (units)

Footprint (sq. ft.)

Vehicle Model Specific Target (mpg)

100,000

26.8

100,000

27.4

100,000

23.3

100,000

22.8

Under Reformed CAFE using this illustrative continuous function, the manufacturer would be required to achieve a CAFE of:

EP30AU05.013

The manufacturer's required CAFE would be compared with the manufacturer's actual CAFE,

i.e.,

the production-weighted harmonic mean fuel economy level for four models in its fleet:

EP30AU05.014

In the illustrative example in Figure 4, the manufacturer's actual CAFE (22.6 mpg) is less than the required level (24.9 mpg), indicating that the manufacturer is not in compliance.

A continuous function and a step function can have similar properties. As the number of steps in a step function increases, the difference between the step function and a continuous function decreases. If the number of steps becomes large enough, a graph of the step function approaches being a smooth straight or curved line. In other words, the step function approaches being a continuous function as the number of steps becomes large.

If the step function is composed of only a few categories, then the incentive to upsize may be strong because the rewards for doing so will be significant. The present car/light truck system is a good example. This is a system with basically two steps and the burden of regulatory compliance decreases if a vehicle can be designed to be classified as a light truck instead of as a passenger car.

The same is true for mix shifting. When the number of categories is large, the rewards for mix shifting are limited. This is because the difference in fuel economy targets between two adjacent categories is small and would diminish the credit that could be earned and used to subsidize vehicles in other categories. In contrast, in the Unreformed CAFE system with a single step from cars to light trucks, the rewards—in terms of CAFE compliance—for mix shifting may be significant. A small SUV can be used to subsidize a larger vehicle with lower fuel economy. In the Reformed system, the rewards of mix shifting are considerably less.

DaimlerChrysler, Ford, General Motors, Subaru, and Toyota argued that the creation of multiple classes might encourage some manufacturers to increase weight (or size) or to make other product changes not desired by the market solely to optimize compliance with the regulatory structure, resulting in edge effects. Environmental Defense stated that product offerings would concentrate at points that minimize the price of the design constraint imposed by the CAFE regulations. Manufacturers argued that, under a continuous function scheme, any change to the measured attribute would result in a vehicle being subjected to a different standard. They then stated that because each vehicle model would be subjected to a different standard, manufacturers would be limited in their ability to redesign vehicles in order to subject a vehicle to a less stringent standard. Manufacturers further stated that a continuous weight based function would allow a manufacturer to align its products more with the market.

Conversely, manufacturers stated that, as the number of classes increased under a multi-class system, the “edge effects” of the system would be amplified because more light trucks would be adjacent to a boundary between adjacent classes. Manufacturers argued that the likelihood of redesign in order to subject a vehicle to a less stringent standard would increase. Environmental Defense stated that even using a continuous or piecewise linear function would not completely avoid the problem of manufacturers shifting vehicles to a point with a less stringent standard to minimize compliance costs.

We note that most of the comments compared a continuous function to a simple multi-class structure approach, as opposed to the multiple-category approach we are proposing. We believe a step function is easier for the public to understand than a continuous function, and would facilitate product planning. We also believe our proposed approach minimizes the potential disadvantages articulated by the commenters. Specifically, both the number and the location of the boundaries for the footprint categories are designed to minimize any edge effects.

NHTSA remains interested in the concept of a continuous function standard. This concept was explored both by NAS in its study (chapter 5 and attachment 5A) and by NHTSA in its 2003 ANPRM on CAFE reform. Now that the agency has refined its potential approach to reforming light truck CAFE, the agency believes that would be useful to seek more detailed comments and analyses regarding the relative advantages of step function standards and continuous function standards.

b. Categories and targets vs. classes and standards

We considered an approach under which we would establish each footprint category as a separate class with its own standard. Thus, for each model year under reform, there would have been six different standards, depending upon the footprint size of the vehicle. However, there were two primary shortcomings that led us to evaluate other approaches for our Reformed CAFE.

First, transfers of credits earned in a footprint class in a model year to a different footprint class in a different model year would have required a complicated process of adjustments to ensure that fuel savings are maintained.

This is because credits earned under the multiple classes and standards approach would have differing energy value. Credits earned for exceeding the higher fuel economy standard for the smaller footprint vehicles would have less energy value than exceeding the lower fuel economy standard for the larger footprint vehicles by an equal increment. In fact, if credits were generated in a class with relatively high CAFE standards and transferred to another class with relatively low CAFE standards, total fuel use by all vehicles in the two classes might increase. That

result would undermine the entire reform effort by producing lessened energy security.

The 2003 ANPRM on reforming CAFE noted that the agency had previously concluded that the credits earned in one class could not be transferred to another class, but re-examined the legislative history of the CAFE statute and called that interpretation into question.

One can calculate the appropriate adjustments for such a credit transfer system to ensure no loss of fuel savings. This would ensure equivalent energy sav

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.