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

Federal RegisterApr 6, 2006

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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

49 CFR Parts 523, 533 and 537

[Docket No. NHTSA 2006-24306]

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:

Final rule.

SUMMARY:

This final rule reforms the structure of the corporate average fuel economy (CAFE) program for light trucks and establishes higher CAFE standards for model year (MY) 2008-2011 light trucks. Reforming the CAFE program will enable it to achieve larger fuel savings, while enhancing safety and preventing adverse economic consequences.

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. A target level of fuel economy is established for each increment in footprint. Smaller footprint light trucks have higher targets and larger ones, lower targets. A particular manufacturer's compliance obligation for a model year will be calculated as the harmonic average of the fuel economy targets for the manufacturer's vehicles, weighted by the distribution of manufacturer's production volumes among the footprint increments. Thus, each manufacturer will be required to comply with a single overall average fuel economy level for each model year of production.

The 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. To aid the transition to Reformed CAFE, the Reformed CAFE standards for those years are 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 is set at the level that maximizes net benefits. Net benefits includes the increase in light truck prices due to technology improvements, the decrease in fuel consumption, and a number of other factors viewed from a societal perspective. All of the standards have been 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, its obligation cannot be calculated with absolute precision until the final production figures for that model year become known. However, a manufacturer can 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 will be able to track all of the key variables in the formula used for calculating its obligation (

e.g.

, distribution of production and the fuel economy of each of its models). This final rule announces estimates of the compliance obligations, by manufacturer, for MYs 2008-2011 under Reformed CAFE, using the fuel economy targets established by NHTSA and the product plans submitted to NHTSA by the manufacturers in response to an August 2005 request for updated product plans.

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 reliance on petroleum imports, energy security, and the effects of energy prices and supply on national economic well-being that led to the enactment of EPCA remain very much alive today. America is still overly dependent on petroleum. Sustained growth in the demand for oil worldwide, coupled with tight crude oil supplies, are the driving forces behind the sharp price increases seen over the past several years and are expected to remain significant factors in the years ahead. 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. In the long run, technological innovation will play an increasingly larger role in reducing our dependence on petroleum.

We recognize that financial difficulties currently exist in the motor vehicle industry and that a substantial number of job reductions have been announced recently by large full-line manufacturers. Accordingly, we have carefully balanced the costs of the rule with the benefits of conservation. Compared to Unreformed CAFE, Reformed CAFE enhances overall fuel savings while providing vehicle manufacturers with the flexibility they need to respond to changing market conditions. Reformed CAFE will 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 will reduce the adverse safety risks generated by the Unreformed CAFE program. The transition from the Unreformed CAFE to the Reformed CAFE system will begin soon, but ample lead time is provided before Reformed CAFE takes full effect in MY 2011.

DATES:

Today's final rule is effective August 4, 2006. Petitions for reconsideration must be received by May 22, 2006.

ADDRESSES:

Petitions for reconsideration must be submitted to: Administrator, National Highway Traffic Safety Administration, 400 Seventh Street, SW., Nassif Building, Washington, DC 20590-001.

FOR FURTHER INFORMATION CONTACT:

For technical issues, call Ken Katz, Lead Engineer, Fuel Economy Division, Office of International Vehicle, Fuel Economy, and Consumer Standards, 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. Events leading to today's final rule

B. Today's final rule

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

G. 2003 comprehensive plans for addressing vehicle rollover and compatibility

H. 2003 ANPRM

1. Need for reform

2. Reform options

I. Recent Developments

1. Factors underscoring need for reform

2. Revised Product Plans

III. Summary of the NPRM

IV. Summary of public comments

V. The Unreformed CAFE standards for MYs 2008-2010

A. Legal authority and requirements under EPCA

B. Establishing Unreformed standards according to EPCA—process for determining maximum feasible levels

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

D. Technologically feasible additions to product plans

E. Improved product plans

F. Economic practicability and other economic issues

1. Costs

2. Benefits

3. Comparison of estimated costs to estimated benefits

4. Uncertainty

G. Unreformed standards for MYs 2008-2010

VI. The Reformed CAFE standards for MYs 2008-2011

A. Overview of Reformed CAFE

B. Authority for Reformed CAFE

C. Legal issues related to Reformed CAFE

1. Maximum feasible

2. Backstop

3. Transition period

D. Structure of Reformed CAFE

1. Footprint based function

2. Continuous function

a. Overview of establishing the continuous function standard

b. Industry-wide considerations in defining the stringency of the standard

c. Improving the light truck fleet

d. Defining the function and the preliminary shape of the curve

e. Final level of the curve (and the targets)

3. Application of the continuous function based standard

4. Why this approach to reform and not another?

a. Continuous function vs. the proposed step-function (categories)

b. Continuous function and targets vs. classes and standards

c. Consideration of additional attributes

d. Backstop and “fuel saving” mechanisms

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 reduce vehicle size and to offer smaller vehicles

ii. Reduces the difference between car and light truck CAFE standards

c. More equitable regulatory framework

d. More responsive to market changes

E. Comparison of estimated costs to estimated benefits

1. Costs

2. Benefits

3. Uncertainty

F. MY 2008-2011 Reformed CAFE standards

VII. Technology issues

A. Reliance on the NAS report

B. Technologies included in the manufacturers' product plans

C. Lead Time

D. Technology effectiveness and practical limitations

E. Technology incompatibility

F. Weight reduction

VIII. Economic assumptions

A. Costs of technology

B. Fuel prices

C. Consumer valuation of fuel economy and payback period

D. Opportunity costs

E. Rebound effect

F. Discount rate

G. Import externalities (monopsony, oil disruption effects, and costs of maintaining U.S. presence and strategic petroleum reserve)

H. Uncertainty analysis

I. The 15 percent gap

J. Pollution and greenhouse gas valuation

K. Increased driving range and vehicle miles traveled

L. Added costs from congestion, crashes, and noise

M. Employment impacts

IX. MY 2008-2010 Transition period

A. Choosing the Reformed or Unreformed CAFE system

B. Application of credits between compliance options

X. 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 (Rear Center Seat Lap/Shoulder Belts)

4. FMVSS 208, Occupant Crash Protection (35 mph Frontal Impact Testing)

5. FMVSS 301, Fuel System Integrity

B. Potential future safety standards and voluntary safety improvements

1. Anti-lock Brakes and Electronic Stability Control (ESC)

2. Roof Crush, FMVSS 216

3. Side Impact and Ejection Mitigation Air Bags (Thorax and Head Air Bags)

4. Offset Frontal Crash Testing

C. Cumulative weight impacts of the safety standards and voluntary improvements

D. Federal Motor Vehicle Emissions Standards

1. Tier 2 requirements

2. Onboard vapor recovery

3. California Air Resources Board—Clean Air Act Section 209 standards

XI. Need of the Nation to Conserve Energy

XII. Comparison of the final and proposed standards

A. Changes in the Volpe model

B. Higher fuel price forecasts

C. Revisions to the Reformed CAFE system

D. Updated product plans

E. Evaluating the adopted Reformed CAFE

XIII. Applicability of the CAFE standards

A. Inclusion of MDPVs in MY 2011

B. “Flat-floor” provision

XIV. Additional issues

A. Limited-line manufacturer standard

B. Credit trading

C. Reporting requirements

D. Preemption

XV. 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. Privacy Act

XVI. Regulatory Text

I. Executive Summary

A. Events Leading to Today's Final Rule

In the notice of proposed rulemaking (NPRM) that the agency published on August 30, 2005, the agency proposed to reform the light truck CAFE program. The Reformed CAFE standard was to be based on a step function.

To aid the transition to the Reformed CAFE system, we proposed to provide manufacturers with two alternative compliance options (Unreformed and Reformed) for manufacturers in MYs 2008-2010. The agency proposed requiring compliance with the Reformed CAFE system, beginning in MY 2011. The agency noted in the NPRM that it was publishing a separate notice inviting the manufacturers to submit more updated product plans and stated that it recognized that the new plans might differ enough from the previously submitted plans to necessitate changes in the shape of the step function as well as in the levels of stringency of the standards.

As proposed, the structure of Reformed CAFE for each model year would have three basic elements—

(1)—six footprint categories of vehicles.

(2)—a target level of average fuel economy for each footprint category, as expressed by a step function (see figure 1 below).

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

In addition, the agency invited public comment on a number of additional changes to the CAFE program. One was whether to base the Reformed CAFE on a continuous function instead of a step function. A second was whether to include large sport utility vehicles (SUVs) in the CAFE standards. A third was whether to revise the “flat floor” criterion for classifying vehicles as light trucks so that minivans and passenger vans would be treated as light trucks.

In response to the NPRM and request for new product plans, the agency

obtained a great deal of new information. Compared to the plans that the manufacturers submitted to the agency in early 2004, the new plans submitted in November 2005 contained a significant increase in the variety and amount of efforts to improve fuel economy. The agency also received critiques of the analyses it performed to determine the fuel economy capabilities of the manufacturers in MYs 2008-2011.

In response to the public comments, the agency revised its analyses and assumptions including those related to the rate at which increased amounts of fuel saving technologies can be added to a manufacturer's fleet. The new assumptions are closer to the assumptions made by the National Academies of Science in a 2002 study of the CAFE program, and provide increased assurance that the standards adopted today will be economically practicable.

NHTSA also made other changes. It decided to base Reformed CAFE on a continuous function instead of a step function in order to reduce the incentive under Reformed CAFE for manufacturers to downsize (thus reducing safety) or upsize (thus reducing fuel economy) vehicles. It also decided to add the larger SUVs and passenger vans to the mandatory Reformed CAFE program in MY 2011 and beyond to increase long-term energy savings.

B. Today's Final Rule

The final rule adopted today reforms 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.

The Reformed CAFE structure established and institutionalized in this document minimizes those limitations by establishing a system based on light truck size, which allows us to establish higher CAFE standards for MY 2008-2011 light trucks and achieve greater fuel savings across the industry. In addition to the improved energy savings, this CAFE program enhances safety by eliminating the previous regulatory incentive to downsize vehicles and by raising the light truck standards so that there is no regulatory incentive from the CAFE program to design small vehicles as light trucks instead of passenger cars. It prevents adverse economic consequences by incorporating greater consideration of economic practicability issues into the projections of the timing and rate at which manufacturers can introduce fuel economy improving technologies into their fleets, and by setting the Reformed CAFE standards, beginning in MY 2011, at the level at which marginal benefits equal marginal costs.

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 are set at levels intended to ensure that the industry-wide costs of those standards are roughly equivalent to the industry-wide costs of the Unreformed CAFE standards for those model years. The additional lead time provided by the transition period will aid, for example, those manufacturers that, for the first time, face a binding CAFE standard (

i.e.

, one set above their planned level of CAFE) and will be required to make fuel economy improvements to achieve compliance. In MY 2011, all manufacturers are required to comply with a Reformed CAFE standard. The Reformed CAFE standard for that model year is set at the level that maximizes net benefits by setting the fuel economy targets at the point at which marginal benefits of the last added increment of fuel savings equal the marginal costs of the added technology that produced those savings.

As in prior CAFE rulemakings establishing Unreformed standards, this final rule sets the Unreformed standards for MYs 2008-2010 with particular regard to the capabilities of and impacts on the “least capable” full line manufacturer (

i.e.

, a full line manufacturer is 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 are:

MY 2008: 22.5 mpg

MY 2009: 23.1 mpg

MY 2010: 23.5 mpg

We estimate that compliance with these standards will save 4.4 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.

Under Reformed CAFE, each manufacturer's required level of CAFE is based on target levels set according to vehicle size. The targets are assigned according to a vehicle's “footprint”—the product of the average track width (the distance between the centerline of the tires) and wheelbase (basically, the distance between the centers of the axles). Each vehicle footprint value is assigned a target specific to that footprint value. This differs from what we proposed. The proposed reform was based on a discontinuous (or “step”) function. The proposal segmented the light truck fleet into six discrete categories based on ranges of footprint and assigned a target fuel economy value for each category. The reform adopted in today's final rule is based on a continuous function. Under it, targets are assigned along the continuum of footprint values in the light truck fleet. Each footprint value has a different target. The target values reflect the technological and economic capabilities of the industry. The target for a given footprint value is the same for all manufacturers, regardless of differences in their overall fleet mixes. Compliance is 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 Reformed CAFE standards adopted today are more stringent than those proposed in the NPRM. Under the Reformed CAFE system in the NPRM, we estimated that the average CAFE level required of light truck manufacturers would be 23.9 mpg. It is important to note that the MY 2011 standard as adopted in this rule applies to a larger population of vehicles than that in the NPRM. Today's final rule includes medium duty passenger vehicles (MDPVs) (

i.e.

, larger passenger vans and SUVs) as part of the MY 2011 regulated fleet. We estimate that the average CAFE level required of manufacturers under this rule in MY 2011 will be 24.0 mpg. Thus, the MY 2011 standard is more stringent than that proposed while regulating more vehicles,

i.e.

, larger vehicles with typically low fuel economy performance.

As stated above, manufacturers provided updated product plans that

reflect changes made to the evaluated light truck fleet used in the NPRM, partly in response to changes in fuel prices. Changing market conditions, a regulatory landscape revised by our proposal, and the more stringent fuel efficiency levels required under Reform CAFE will result in the production of MY 2008-2011 light truck fleets that will consume approximately 11 billion fewer gallons of fuel over their lifetimes than the fleets that were originally planned in 2004.

Apart from the updated product plans, the agency has revised some of the assumptions inputted into the Reformed CAFE analysis. In response to comments and consistent with the findings of the National Academy of Sciences, we revised the phase-in rates to provide for additional lead-time when projecting technology applications. The agency also revised fuel prices and the vehicle miles traveled schedule, which is used to calculate fuel savings, in response to higher fuel price forecasts.

Given the revised product plans, the revisions to the model assumptions, and the more stringent standards adopted in this rule, the Reformed standards will save approximately 7.8 billion additional gallons of fuel over the lifetime of the vehicles sold during those four model years. The Reformed standards for MYs 2008-2010 will save approximately 500 million more gallons of fuel than the Unreformed standards for those model years. As noted above, the Reformed standard for MY 2011 is the first Reformed standard set through a process the explicitly maximizes net benefits. It will save more than 2.8 billion gallons of fuel over the lifetime of vehicle sold in that model year.

In order to provide a comparison of the fuel savings of the final rule versus the proposed rule, we recalculated the fuel savings from the proposed Reformed CAFE standards using the updated product plans and the final rule assumptions. Under this analysis, we calculated that the proposed Reformed standards would save 5.4 billion gallons under these more current assumptions. This compares to the 7.8 billion gallons of fuel saved under the more stringent Reformed CAFE standards adopted today.

If all manufacturers comply with the Reformed CAFE standards, the total costs would be approximately $6.7 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 2.9 years and to buyers of MY 2011 light trucks in an average of 4,4 years, assuming fuel prices ranging from $1.96 to $2.39 per gallon (in 2003 dollars).

We estimate that the total benefits under the Unreformed CAFE standards for MYs 2008-2010 plus the Reformed CAFE standard for MY 2011 are approximately $7.6 billion (2003 dollars, discounted at 7%), and under the Reformed CAFE standards for MYs 2008-2011 are approximately $8.1 billion (2003 dollars, discounted at 7%).

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 for the final rule alternatives (

i.e.

, Unreformed and Reformed CAFE) range from 2.9 to 4.9 years. .

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 2006 (Early Report).

We have determined that the 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 these reforms give the Reformed CAFE approach four basic advantages over the Unreformed CAFE approach.

First, Reformed CAFE increases 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 will be required to use advanced fuel-saving technologies to achieve the requisite fuel economy for 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 offers enhanced safety. Due to the structure of Unreformed CAFE standards, vehicle manufacturers that need to supplement their product plans in order to comply with the standards can increase their likelihood of compliance by pursuing a variety of 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 for passenger cars in the CAFE program. For example, 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 as vehicles become smaller, the applicable fuel economy target becomes more stringent. Moreover, Reformed CAFE lessens the incentive to design smaller vehicles to achieve a “light truck” classification, since many small light trucks are subject to targets that have at least the same degree of stringency as passenger car standards, if not higher stringency.

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 nearly exclusively on the full-line manufacturers. Reformed CAFE spreads the regulatory cost burden for fuel economy more broadly across 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. Instead, it allows the manufacturers to adjust the mix of their product offerings in response to the market place. As a result, 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 reduces the need that the agency might otherwise have 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.

In addition to reforming the structure of the light truck CAFE program, we are also expanding its applicability. Starting in MY 2011, the CAFE program will include MPDVs, light trucks that have a gross vehicle weight rating (GVWR) less than 10,000 lbs., a GVWR greater than 8,500 lbs. or a curb weight greater than 6,000 lbs., and that primarily transport passengers. We estimate this will bring an additional 240,000 vehicles into the CAFE program in that model year.

C. Energy Demand and Supply and the Value of Conservation

As we noted in the notice of proposed rulemaking (NPRM),

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 2030, U.S. demand for petroleum products is expected to increase 33 percent compared to 2004.

World oil demand is expected to increase by nearly 44 percent between 2004 and 2025.

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 36 million barrels per day over current levels. OPEC producers are expected to supply nearly 40 percent of the increased production. By 2025, 60 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.

70 FR 51414, August 30, 2005.

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

Annual Energy Outlook 2006 with projections to 2030 (Early Release),

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

Id.

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. 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.

Today's final rule is one piece of President Bush's strategy to move the nation beyond a petroleum-based economy. Aside from the fuel savings that will be realized by today's final rule, the Administration is focusing research on bio-based transportation fuels, improved batteries for hybrid vehicles, and the on-going hydrogen fuel initiative. The President's Advanced Energy Initiative and today's final rule will build on the progress made by the Administration's 2001 National Energy Policy and the increased CAFE standards for MY 2005-2007 light trucks.

II. Background

In proposing the CAFE standards for MYs 2008-2011, the agency provided a detailed summary of the history of fuel economy standards, and in particular, fuel economy standards for light trucks. Below we have provided a summary of that discussion. For more background on the light truck CAFE program, refer to the NPRM.

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). 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. Included as a possible form for a production-weighted standard was a variable standard based on the costs or potential to improve for each manufacturer (1974 Report, p. 77).

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

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 6,000 pounds GVWR.

In 1978, we extended the CAFE program to include vehicles rated between 6,000 and 8,500 pounds GVWR (March 23, 1978; 43 FR 11995, at 11997). Vehicles rated at between 6,000 and 8,500 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 and after considering the variety of approaches presented in the 1974 Report, Congress made a clear and specific choice about the structure of the average fuel economy standard for passenger cars. Congress established a common statutory CAFE standard applicable to each manufacturer's fleet of passenger automobiles.

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.

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. Manufacturers had the option of complying under the combined fleet standard, or under the separate 2WD and 4WD standards. Although the combined standard reflected the combined capabilities of 2WD and 4WD light trucks, it did not necessarily reflect the combined capabilities of the 2WD and 4WD fleets of an individual manufacturer (e.g., a manufacturer may have found it easier to comply with the combined standard than the 2WD and 4WD standards separately, or vice versa). After MY 1991, NHTSA dropped the optional 2WD and 4WD standards.

As explained in the NPRM, 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 after we 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

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.

On November 15, 1995, the Department of Transportation and Related Agencies Appropriations Act for FY 1996 was enacted, which limited the ability of the agency to establish CAFE standards for light trucks (Section 330, Pub. L. 104-50). 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). The same limitation on the setting of CAFE standards was included in the Appropriations Acts for each of FYs 1997-2001. The agency followed the same process as for MY 1998, established the light truck CAFE standard at 20.7 mpg, for MYs 1999-2002.

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 trucks 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. The report noted that the widespread penetration of even existing technologies will probably require 4-8 years. 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, the committee 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 that a system in which fuel economy targets were dependent on vehicle weight, with lower fuel consumption targets set for lighter vehicles and higher targets for heavier vehicles, up to some maximum weight, would create incentives to reduce the variance in vehicle weights between large and small vehicles, thus providing for overall vehicle safety. (NAS, p. 5 (Finding 12)). The report stated that such a system has the potential to increase fuel economy with fewer negative effects on both safety and consumer choice.

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).

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. NAS stated that targets could vary among passenger cars and among trucks, based on some attribute of these vehicles such as weight, size, or load-carrying capacity. The report explained that 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 (NAS, p. 87). 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.

The report illustrated an example of an attribute-based system using a continuous function (NAS, p. 109). Essentially, as illustrated, the continuous function was represented as a line, which graphed “gallons per mile” versus “curb weight.” Under the continuous function example, a vehicle's target fuel economy would be determined by locating the vehicle's curb weight along the line and identifying the corresponding gallons per mile value.

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. 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.

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.

G. 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.

Recognizing the role of CAFE, we stated:

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.

H. 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. That document, while not espousing any particular form of reform, sought specific input 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 manufacturers 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 NPRM explored the various reform options raised in the ANPRM. It is worth noting again several of those options.

Included in the reform discussion 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 potential reform options under which vehicles with a GVWR of up to 10,000 lbs. could be included under the CAFE program. One presented option would be to include vehicles defined by EPA as medium duty passenger vehicles

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.

The EPA's discussion of the MDPV definition is at 65 FR 6698, 6749-50, 6851-6852.

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.

I. Recent developments

1. Factors underscoring need for reform

In the NPRM, we recognized 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.

Two of the larger, 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.

When the NPRM was published the weekly U.S. retail price was $2.55 per gallon.

While the retail price of gasoline has declined since publication of the NPRM it is still $2.34, which is $.75 per gallon higher than when the 2003 final rule was published.

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.

See id.

We noted in the NPRM that 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 36-year period beginning in 2008 and extending to 2034.

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.

The Preliminary Regulatory Impact Analysis (PRIA) for the NPRM was based on projected gasoline prices from the then most 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.

The Final Regulatory Impact Analysis (FRIA) for today's rule is based on the revised forecast EIA published in the AEO2006 (Early outlook) (see FRIA p. XIII-26). The current forecasted price for gasoline ranges from $1.96 to $2.39 per gallon.

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

The EIA gasoline prices are provided in 2003 dollars. In terms of 2006 dollars (based on the 2003 GDP deflator; see,

http://www.gpoaccess.gov/usbudget/fy05/sheets/hist10z1.xls

) the forecasted range of fuel prices would be $2.04 to 2.49.

2. Revised product plans

In response to a request for comment (RFC)

published in conjunction with the NRPM, the agency has received updated product plans from the vehicle manufacturers. While the NPRM was based on product plans received in response to the 2003 ANPRM, the final rule relied on product plans received in response to the August 2005 RFC.

70 FR 51466; August 30, 2005; Docket No. NHTSA-2005-22144-03.

III. Summary of the NPRM

On August 30, 2005, the agency published a notice of proposed rulemaking (NPRM) to establish CAFE standards for model years (MYs) 2008 through 2011, and more importantly to reform the CAFE program (70 FR 51414). The NPRM was one piece of the Department of Transportation's continuing effort to achieve higher fuel savings while enhancing safety and preventing adverse economic consequences. We noted that the previous rulemaking efforts increased the 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. However, in order to continue moving forward with improved fuel savings while enhancing safety and preventing adverse economic consequences the agency proposed to reform the light truck CAFE system.

In the NPRM, we proposed fuel economy standards for light trucks in MYs 2008-2010, established under the traditional CAFE system (Unreformed CAFE system). We also proposed standards for MYs 2008-2010 established under a proposed reformed CAFE system (Reformed CAFE). During MYs 2008-2010, manufacturers would have an option of complying with standards established under the Unreformed or the Reformed CAFE system. We proposed that this period would serve as a transition period to provide manufacturers an opportunity to adjust to changes in the CAFE system and to provide this agency and the manufacturers' opportunity to gain experience with the new system. For MY 2011, we proposed standards established under Reformed CAFE only.

The Unreformed standards for MYs 2008-2010 were proposed with particular regard to the capabilities of and impacts on the “least capable” full-line manufacturer (a full-line manufacturer is 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, was proposed each model year as follows:

MY 2008: 22.5 mpg

MY 2009: 23.1 mpg

MY 2010: 23.5 mpg

We estimated that these standards could save 4.4 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 proposed Reformed CAFE system relied on a category and target system in which the light truck fleet was segmented according to size and a manufacturer's required fuel economy level would be based on its actual fleet distribution across the categories as compared to applicable fuel economy targets. As proposed, 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 1 below.).

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

ER06AP06.000

To define the proposed category boundaries (step boundaries), we first plotted the light truck production volumes by footprint. We then sought to designate the category boundaries at points where there was low volume footprint immediately adjacent to and to left of a high volume footprint. Our intent in doing this was to reduce any incentive for manufacturers to increase footprint in order to move a model into a category with a lower fuel economy 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. Each category was then assigned a fuel economy target.

The proposed fuel economy targets were determined by a three-step process. First, the agency applied feasible technology to each of the seven largest light truck manufacturers' fleets

individually until the marginal cost of the added technology equaled the marginal benefit of the additional technology. Next, initial targets were determined by placing all of the improved vehicles into the six categories and calculating a production-weighted fuel economy average within each category. Finally, the initial targets were adjusted by equal increments of fuel savings to a level at which marginal cost equaled marginal benefit for industry as a whole. This final level provided the targets as proposed, which would be used to determine a manufacturer's required fuel economy level.

The seven largest light truck manufacturers are General Motors, Ford, DaimlerChrysler, Toyota, Honda, Hyundai, and Nissan.

Under the proposed reform, 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 claculation 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.

As proposed, a manufacturer's required fuel economy was represented as the following formula:

ER06ap06.001

During the MY 2008-2010 transition period, we proposed that manufacturers may comply with CAFE standards established under Reformed CAFE or with standards established under Unreformed CAFE. To further ease the transition, and to ensure that the Reformed standards were economically practical, the proposed Reformed CAFE standards were set at levels at which the industry-wide cost of those standards were roughly equivalent to the industry-wide cost of the Unreformed CAFE standards for those model years.

As proposed, all manufacturers would be required to comply with a Reformed CAFE standard in MY 2011. The proposed Reformed CAFE standard for that model year was set at the level that maximized net benefits.

Under the NPRM, the range of targets for each model year was 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

We estimated that 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 were estimated to save 525 million more gallons of fuel than the Unreformed standards for those years. We estimated the proposed MY 2011 standard to save an additional 2.8 billion gallons of fuel.

We 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 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 proposed Reformed CAFE approach incorporated 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; NAS report). The agency outlined four basic advantages that the proposed Reformed CAFE approach has over the Unreformed CAFE approach: enlarged energy savings, enhanced safety, a more equitable regulatory framework for different vehicle manufacturers, and a more market oriented approach that more fully respects economic conditions and consumer choice. Reformed CAFE forces vehicle manufacturers to ensure that they are incorporating available technologies to enhance fuel efficiency in all the vehicles they produce.

In addition to the proposed step function approach, the agency also discussed a continuous function approach. We explained that under a continuous function approach there would be no categories, but instead each footprint value would be assigned a fuel economy target. We provided an example of a continuous function standard and requested comment on such an approach.

Aside from proposing structural changes to the CAFE program, the agency also discussed the potential of expanding the applicability of the program to include heavier and heavier rated light trucks in MY 2011. The agency requested comment on the inclusion of vehicles classified by the Environmental Protection Agency (EPA) as medium duty passenger vehicles (MDPVs)

in the light truck CAFE program.

In 40 CFR 86-1803-01, EPA defines “MPDV” as a light truck rated at more than 8,500 lbs GVWR, or that has a vehicle curb weight of more than 6,000 pounds, or that has a basic vehicle frontal area in excess of 45 square feet. “MDPV” does not include a vehicle that:

Is an “incomplete truck” as defined in this subpart; or

Has a seating capacity of more than 12 persons; or

Is designed for more than 9 persons in seating rearward of the driver's seat; or

Is equipped with an open cargo area (for example, a pick-up truck box or bed) of 72.0 inches in interior length or more. A covered box not readily accessible from the passenger compartment will be considered an open cargo area for purposes of this definition.

Along with soliciting comment on the CAFE proposal, the agency also requested updated product plan information and other data to assist in developing a final rule. We noted that based on public comments and other information, new data and analysis, and updated product plans, the standards adopted in the final rule could well be different then those proposed.

IV. Summary of Public Comments

NHTSA received over 45,000 individual submissions to the rulemaking docket prior to the close of the comment period, including ones from vehicle manufacturers and associations, environmental and consumer advocacy groups, members of Congress, and private individuals. The vast majority of the submissions were letters or e-mails prepared by various organizations and submitted by private individuals to the docket.

Light truck manufacturers and their trade associations that commented on the proposal included General Motors Corporation (Docket No. 2005-22223-1493), Ford Motor Company (Docket No. NHTSA-2005-22223-1570), DaimlerChrysler (Docket No. 20005-22223-1573), Toyota (Docket No. NHTSA-2005-22223-1724), Honda (Docket No. NHTSA-2005-22223-1649), Nissan (Docket No. NHTSA-2005-22223-2058), Mitsubishi Motor Company (Docket No. NHTSA-2005-22223-1819), Hyundai (Docket No. NHTSA-2005-22223-2035), Porsche (Docket No. NHTSA-2005-22223-1688), BMW of North America (Docket No. NHTSA-2005-22223-1616), Volkswagen of North America (Docket No. NHTSA-2005-22223-1674), the Alliance of Automobile Manufacturers (Alliance; Docket No. NHTSA-2005-22223-1642), and the Association of International Automobile Manufacturers (Docket No. NHTSA-2005-22223-1645).

Manufacturers generally agreed that distinguishing vehicles within the light truck fleet according to a size metric, i.e., footprint, adequately recognized differences in manufacturers' compliance efforts due to differences in fleet mix. They stated that step-function standard based on footprint would provide manufacturers greater flexibility in complying with the CAFE requirements while at the same time, address safety concerns associated with the program. Contrary to their general support for the proposed step function standard, manufacturers expressed reservations with a continuous function standard as discussed in the NPRM. Manufacturers stated that a continuous function standard would be overly complex to administer and with which to comply.

While manufacturers expressed general support for the structure of the proposed Reformed CAFE, manufacturers generally expressed concern with the process, as well as the assumptions relied upon in that process, used to define the Reformed CAFE standards. Manufacturers argued that the agency's reliance on a cost-benefit analysis to determine the stringency of the light truck CAFE standards did not adequately account for the capabilities of the industry, and in some instances would not satisfy the “economic practicability” consideration required under EPCA. Additionally, manufacturers took issue with the economic and technological assumptions employed in the Reformed CAFE analysis, as well as in the Unreformed CAFE analysis. Manufacturers asserted that the agency did not properly account for technological and market risks that have the potential to render the standards infeasible.

With regard to the applicability of the light truck CAFE program, the vehicle

manufacturers generally opposed including vehicles with a GVWR greater than 8,500 lbs in the light truck program. Manufacturers asserted that standards were not practical for these vehicles; these vehicles are used in a substantially different manner than lighter vehicles, making the CAFE standards inappropriate; and that regulation of these vehicles would not result in significant fuel savings.

Environmental, consumer and safety advocacy groups commenting on the proposal included Environmental Defense (Docket No. NHTSA-2005-22223-1491, 1698-1703, 1805), Natural Resource Defense Council (NRDC; Docket No. NHTSA-2005-22223-1705 through 1710), the Union of Concerned Scientists (Docket No. NHTSA-2005-22223-1977, 1978), the Insurance Institute for Highway Safety (IIHS; Docket No. NHTSA-2005-22223-2082), Center for Biological Diversity (Docket No. NHTSA-2005-22223-1638 through 1641), National Environmental Trust (Docket No. NHTSA-2005-22223-1483, 1484), Sierra Club (Docket No. NHTSA-2005-22223-1623), U.S. PIRG (Docket No. NHTSA-2005-22223-1623), Alliance to Save Energy—American Council for an Energy-Efficient Economy (ACEEE; (Docket No. NHTSA-2005-22223-1711), the American Jewish Committee (Docket No. NHTSA-2005-22223-1420), Alliance for Affordable Energy

et al.

(Docket No. NHTSA-2005-22223-1726),

AAA (Docket No. NHTSA-2005-22223-1804), and Public Citizen (Docket No. NHTSA-2005-22223-2188, 2189).

Signatories to the Alliance for Affordable Energy

et al.

, included representatives from Environmental and Energy Study Group, Environmental Energy Solutions, Global Possibilities, Institute for Environmental Research Education, Mainstay Energy, National Environmental Trust, North Carolina Solar Center, Oregon Environmental Council, Redwood Alliance, The Stella Group, Ltd., SUN DAY Campaign, SustainableBusiness.com, Triangle Clean Cities Coalition, and Vermont Energy Investment Corp.

In general, the environmental and consumer groups stated that the increased fuel prices, the need of the nation to conserve energy and the availability of “effective technologies” necessitate more stringent standards. Several of these commenters stated that the light truck standard should approach that for passenger cars or higher. These groups generally asserted that any reform proposal must include a mechanism to guarantee the fuel savings projected by the agency under the new standards. Many of these groups expressed concern that the proposed structure and reliance on vehicle footprint in the Reformed CAFE system would permit manufacturers to “upsize” their fleets, which would result in reduced fuel savings. Several commenters stated that the statutory requirement to set “maximum feasible” standards makes it impermissible for the agency to limit the level of the new standards based on the concepts of “optimal economic efficiency” or “least capable manufacturer.” They argued that setting the Reformed CAFE standards during the transition period at levels that impose the same costs as the Unreformed standards was inconsistent with the “maximum feasible” requirement. Additionally, some of these groups disagreed with the agency's statement regarding the preemption of State regulation of greenhouse gas emissions from motor vehicles. The Center for Biological Diversity asserted that the accompanying draft Environmental Assessment was inadequate.

IIHS expressed concern that the category system as proposed would provide an incentive for unsafe compliance strategies. IIHS stated that the category system still provided an incentive to downsize a vehicle within a category in order to improve its fuel economy. IIHS stated that downsizing, particularly among the smaller vehicles, can have a negative impact on safety. To address this issue, IIHS recommended that the agency adopt a continuous function approach as discussed in the NPRM.

A number of comments representing the interests of States were received. These comments generally voiced opposition to various parts of the NPRM. The New York State Department of Environmental Conservation (NY DEC; Docket No. NHTSA-22223-1646), the State of New Jersey Department of Environmental Protection (Docket No. NHTSA-22223-1651), NESCAUM

(Docket No. NHTSA-22223-1625), the Pennsylvania Department of Environmental Protection (PA DEP; Docket No. NHTSA-22223-1807), the California Air Resources Board (Docket No. NHTSA-22144-31), STAPPA/ALAPCO

(Docket No. NHTSA-22223-1494), and the Connecticut Department of Environmental Protection (Docket No. NHTSA-22223-1624) disagreed with the statement in the NPRM preamble about preemption of State greenhouse gas regulations for motor vehicles and requested that not include any such statement in the final rule. These commenters generally also requested that the agency increase the stringency of the final fuel economy requirements as well as regulate the fuel economy of light trucks with a GVWR up to 10,000 lbs. The Attorneys General for California, Massachusetts, New York, Connecticut, New Jersey, Maine, Oregon, Vermont, and the New York City Corporation Counsel (Attorneys General; Docket No. NHTSA-22223-2223) also objected to the preemption language, and further stated that the agency is obligated to perform an environmental impact statement under the National Environmental Policy Act. The California Energy Commission expressed support for the Reformed CAFE structure, but stated that, because of uncertainty in the economic assumptions relied upon by the agency, standards should be established at this time for model year 2008 only (Docket No. NHTSA-22144-19).

NESCAUM (Northeast States for Coordinated Air Use Management) is an interstate association of air quality control divisions representing the six New England States, as well as New York and New Jersey.

State and Territorial Air Pollution Program Administrators and the Association of Local Air Pollution Control Officials.

Members of Congress also submitted comment, expressing concern over the proposal. A letter signed by Representatives Tammy Baldwin, Jim McDermott, Susan Davis, Raul Grijalva, Barbara Lee, Michael Michaud, Ed Case, Robert Wexler, Pete Stark, Dennis Cardoza, Allyson Y. Schwartz, and Jim Moran stated that the proposal contains a number of positive aspects, particularly the use of footprint instead of weight as the basis for Reformed CAFE (Docket No. NHTSA-22223-1334). However, Representative Baldwin et. al asked that the agency establish more stringent standards and establish standards for vehicles with a GVWR between 8,500 and 10,000 lbs, stating that such revisions are necessary to reduce the nation's demand for foreign oil and to lower gasoline costs for consumers.

Comments were also received from a variety of additional organizations and interests. The Competitive Enterprise Institute (Docket No. NHTSA-22223-1682) commented that the proposal would provide more flexibility to manufacturers and be more accommodating to consumer preference, but argued that increased CAFE standards have the potential to affect motor vehicle safety adversely. The Mercatus Center (Docket No. NHTSA-22223-1632) and Criterion Economics (Docket No. NHTSA-22223-1976) raised concerns relating to many of the analytic assumptions used in the preliminary regulatory impact analysis. The Sport Utility Vehicle Owners of America (Docket No. NHTSA-22223-1599) and Marine Retailers Association of America (Docket No. NHTSA-22223-84) argued that there was a need to

consider the utility of light trucks, particularly towing capacity.

As stated above, the vast majority of comments received were submitted by individual citizens. Private individuals expressed concern that the proposed standards would not be sufficient to meet the nation's need to conserve energy, would not protect the nation from future spikes in fuel prices, would negatively impact the environment, and would encourage manufacturers to build larger vehicles with lower fuel economy.

NRDC provided citizens with a letter requesting that the agency increase the light truck standard by 1 mpg a year over five years. These letters raised concern that the fuel economy standards as proposed would not adequately address the nation's need to conserve fuel.

The Union of Concerned Scientists also provided citizens with form letters that requested the agency to regulate vehicles with a GVWR greater than 8,500 lbs, to consider “cost-efficient technologies” for “mid-size SUVs,” and to provide a mechanism to ensure that manufacturers do not “up-size” vehicles. Other similar documents were also submitted to the docket.

Some expressed belief that sufficient technology is available that would enable the manufacturers to exceed the proposed CAFE standards.

While the above discussion very briefly describes the comments submitted by the various interested parties, more detailed discussions of the comments and the agency's responses are embedded in the analysis and discussion which follow.

V. The Unreformed CAFE Standards for MYs 2008-2010

The agency is establishing Unreformed CAFE standards of 22.5 miles per gallon (mpg) for model year (MY) 2008, 23.1 mpg for MY 2009, and 23.5 mpg for MY 2010. We estimate that these standards will save 4.4 billion gallons of fuel over the lifetime of 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. We have determined that these requirements represent the maximum feasible fuel economy levels achievable by industry in those model years.

Consistent with the NPRM, the Unreformed CAFE standards in MYs 2008-2010 are one option for compliance during a transition period in which manufacturers may comply with either the Reformed or Unreformed CAFE systems. During the transition period, the requirements under the Reformed CAFE systems are linked to those of the Unreformed system, in the sense that the Reformed CAFE standards for MYs 2008-2010 are 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.

As stated in the NPRM, this transition approach has several important advantages. We have determined the Unreformed standards to be economically practicable. The Reformed standards spread the cost burden across the industry to a greater extent. As such, equalizing the cost between the Unreformed and the Reformed CAFE systems ensures that the costs associated with the transition period do not result in economically severe compliance requirements. 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 arriving at the Unreformed CAFE standards, we used the same type of analyses as in the NPRM and as we employed in establishing light truck CAFE standards for MYs 2005-2007. First, we analyzed the confidential product planning data submitted by the manufacturers to ascertain the “baseline” capabilities and fuel economy of each manufacturer that has a significant share of the light truck market. Second, we conducted a three-stage 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. In order to perform the two analyses, the agency relied on the National Academy of Sciences (NAS) report entitled, “Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,” which contains costs and effectiveness estimates for various technologies that could be used to enhance vehicle fuel economy.

As explained in the August 2005 NPRM,

the Stage Analysis involves application of the agency's engineering expertise and judgment about possible adjustments to the detailed product plans submitted by individual manufacturers. More specifically, Stage I analysis involves the application of technologies which are deemed to be available for use by MY 2008 and which would not require significant changes to the vehicle's driveline components (

i.e.

, the engine and transmission). Stage II analysis involves the application of more advanced transmission upgrades and engine improvements that are readily available in the marketplace. Stage III analysis involves the application of diesel and hybrid powertrains to select products.

70 FR 51414 (August 30, 2005).

The Volpe Analysis was described in detail in the NPRM and Final Rule establishing light truck CAFE standards for MYs 2005-2007.

The Volpe analysis uses a technology application algorithm to systematically apply consistent cost and performance assumptions to the entire industry, as well as consistent assumptions regarding economic decision-making by manufacturers. The resultant computer model (the CAFE Compliance and Effects Model), developed by technical staff of the DOT Volpe National Transportation Systems Center in consultation with NHTSA staff, is used to help estimate the overall economic impact of the Unreformed CAFE standards. The Volpe analysis shows the economic impact of the standards in terms of increases in new vehicle prices on a manufacturer-wide, industry-wide, and average per-vehicle basis. Based on these estimates and corresponding estimates of net economic and other benefits, the agency is able to set the standards that are economically practicable and technologically feasible. The Stage Analysis and the Volpe Analysis rely on the same product plan information from manufacturers, consider many of the same technologies (the Stage Analysis considers some manufacturer-specific technologies not represented in the Volpe Analysis), and apply similar conditions regarding the applicability of those technologies.

See 67 FR 77015 (December 16, 2002) and 68 FR 16868 at 16871 (April 7, 2003). Docket Nos. NHTSA-2002-11419-55 and NHTSA-2002-11419-18361.

We note that the Volpe model has been updated and refined with respect to its representation of some fuel-saving technologies, but remains fundamentally the same. The updated model has also been peer reviewed.

The model documentation, including a description of the input assumptions and process, as well as peer review reports and the agency's response to reviewers, were made available in the rulemaking docket for the August 2005 NPRM.

The agency's response to the peer review is provided in the docket at NHTSA-2005-22223-52.

See Docket Nos. NHTSA-20005-22223-3, 4, 5.

We received a significant number of comments in response to the proposed

Unreformed CAFE standards, expressing a wide range of views. While some of those commenting argued that technology is available to set the standards higher, others argued that insufficient lead time, as well as technological and monetary constraints, make it unlikely that the proposed standards would be attainable. We have reviewed these comments and adjusted many aspects of the analyses used to determine the Unreformed CAFE standards in order to account for issues brought to our attention. Responses to comments that raised specific technology and economic assumptions issues are discussed in detail below in sections VIII. Technology issues, and IX.

Economic Assumptions

In the balance of this section, we describe in further detail how we developed the Unreformed CAFE standards. After considering the foregoing and taking into consideration the statutory criteria specified in 49 U.S.C. 32092(f)

, we are adopting the Unreformed CAFE standards specified above, having concluded that they constitute the maximum feasible standards for MYs 2008-2010.

The statutory criteria, which are addressed elsewhere in this document, are: (1) The nation's need to conserve energy; (2) technological feasibility; (3) economic practicability (including employment consequences); and the impact of other regulations on fuel economy.

A. Legal Authority and Requirements Under EPCA

As previously stated, EPCA requires that the CAFE standards set a minimum performance standard at a level determined by the Secretary of Transportation to be the “maximum feasible” average fuel economy achievable by manufacturers in a given model year (49 U.S.C. 32902). To guide determinations of the maximum feasible fuel economy level, Congress specified four statutory criteria that must be considered: technological feasibility, economic practicability, the effect of other Federal motor vehicle standards on fuel economy, and the need of the United States to conserve energy. The agency is permitted to consider additional societal considerations and historically has considered 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 significant adverse 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).

We have set the Unreformed standards with particular regard to the “least capable manufacturer with a significant share of the market,” 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.

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

“Least capable manufacturer” is something of a misnomer as a major manufacturer could install substantial amounts of fuel saving technologies and still be the major manufacturer with lowest projected CAFE due to its mix of vehicles.

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 must consider the industry's ability to improve fuel economy, but with appropriate consideration given to the difficulties of individual manufacturers.

In response to this congressional direction, we have traditionally given particular regard to the “least capable manufacturer with a substantial share of the market.” The agency 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.

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 significant 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 set at levels solely on a cost-benefit basis. 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 1338-39. 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 minimis, 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.

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 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.”

B. Establishing Unreformed Standards According to EPCA—Process for Determining Maximum Feasible Levels

In establishing the Unreformed standards for MYs 2008-2010, the agency relied upon its historical standard setting process, which includes consideration of the “least capable manufacturer with a significant share of the market.”

NRDC, Environmental Defense and the Union of Concerned Scientists stated that the “least capable manufacturer” approach applied by the agency in setting standards under the Unreformed CAFE standards violates EPCA and Congress' expressed intent. NRDC argued that “while the agency is permitted to consider the single, least capable manufacturer in assessing economic practicability, it simply may not allow that manufacturer's capabilities to drive the standard setting process,” and referred to

CAS.

CAS

, the petitioners alleged that the agency had given “impermissible weight to shifts in consumer demand toward larger, less fuel-efficient trucks”

in reducing the MY 1985 standard for light trucks and in establishing the MY 1986 standard for light trucks. In reducing the MY 1985 standard as well as in establishing the MY 1986 one, NHTSA considered the impacts of different levels of standards on the least capable manufacturer. The Court noted the conference report for EPCA “states that the fuel economy standards delegated to NHTSA are to be the product of balancing the benefits of higher fuel economy levels against the difficulties individual manufacturers would face in achieving those levels,”

Then it quoted language to that effect from the conference report. In the end, the Court upheld the standards established through consideration of the least capable manufacturer with a significant share of the market, stating that “a standard with harsh economic consequences for the auto[mobile] industry * * * would represent an unreasonable balancing of EPCA's policies.”

Id. at 1323-4.

Id. at 1338.

Id. at 1340.

As a first step toward ensuring that the CAFE levels selected as the maximum feasible levels under Unreformed CAFE will not lead to significant 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 all other manufacturers that submitted confidential product plan data and assessed their technological capabilities to go beyond those plans. By doing so, we are able to determine the extent to which each can enhance their fuel economy performance using technology.

C. Baseline for Determining Manufacturer Capabilities in MYs 2008-2010

In order to determine the maximum feasible fuel economy levels for MYs 2008-2010 under the Unreformed CAFE system, we first determined each manufacturer's fuel economy baselines for MYs 2008-2010. That is, we determined the fuel economy levels that manufacturers were planning to achieve in those years.

The manufacturer baselines relied upon for the proposed Unreformed CAFE standards were based upon information submitted by manufacturers in response to the December 29, 2003 request for product plans

, and any additional manufacturer updates. In conjunction with the August 2005 NPRM, we issued a RFC seeking updated product plans to enable NHTSA to use the most accurate and up-to-date product plan information in establishing the Reformed and Unreformed CAFE standards.

See

68 FR 74931; see also Docket No. NHTSA-2003-16709-1.

See

Docket No. NHTSA-2005-22144.

In response to the RFC, we received product plans from DaimlerChrysler, Ford, General Motors, Honda, Hyundai, Mitsubishi, Nissan, Subaru and Toyota. To supplement the data provided in response to the RFC, we also relied on product data available from public sources. Taken together, it was this updated information that the agency used in development of the standards for today's final rule.

We note that 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 Porsche and Volkswagen will continue to pay fines instead of bringing their fleets into compliance. For purpose of the NPRM, we also assumed that BMW would continue to pay fines. However, BMW has indicated that it does not intend to pay fines in the model years subject to this rulemaking. We have adjusted our analysis accordingly.

Finally, in response to a comment from DaimlerChrysler, we removed Mitsubishi's information from DaimlerChrysler's product plans due to DaimlerChrysler's recent sale of its entire share of Mitsubishi stock and adjusted DaimlerChrysler's baseline capabilities accordingly.

Based on the updated manufacturer's responses and the available public data, we determined the baseline capabilities as follows:

Table 1.—Estimated Market Shares and Planned CAFE Levels (Without Credits)

Manufacturer

Market share

MY 2008 (mpg)

MY 2009 (mpg)

MY 2010 (mpg)

General Motors

25.8

21.36

21.43

21.59

Ford

19.4

21.53

21.79

22.65

DaimlerChrysler

23.0

21.96

22.01

22.42

Toyota

11.6

22.51

22.44

22.65

Honda

6.5

24.56

Nissan

5.7

21.01

20.70

21.13

Hyundai

3.6

23.22

23.49

23.36

Subaru

1.1

25.87

27.15

27.05

BMW

0.8

21.29

Porsche

0.2

16.80

Isuzu

0.4

20.38

20.24

20.14

Suzuki

0.3

21.93

Volkswagen

0.3

18.78

Mitsubishi

1.3

24.33

24.41

24.70

*Based on 2005 production data.

After ascertaining the baseline capabilities of individual manufacturers, the agency applied the Stage analysis to analyze the potential technological improvements to the product offerings for each manufacturer with a substantial share of the light truck market, as well as for the remaining light truck manufacturers.

A more detailed discussion of these issues is contained in the Chapter VI of the FRIA, which has been placed in the docket for this notice. Some of the information included in the FRIA, 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 FRIA omits the confidential information. The FRIA also discusses in detail the fuel-economy-enhancing technologies expected to be available during the MY 2008-2011 time period.

The Alliance and Ford argued that in establishing manufacturer baselines for our analysis, the agency erroneously assumed that each manufacturer's fleet average would be at 22.2 mpg for Model Year 2007. These commenters stated that this assumption is incorrect, because some manufacturers did not submit product plan information to support this assumption and other manufacturers achieve compliance with the CAFE requirements through the use of credits and payment of fines. The Alliance and Ford also stated that some manufacturers (in anticipation of future CAFE increases) might have taken steps in support of higher fleet averages and might have already incorporated fuel saving technologies.

In response, we note that the agency did not assume that each manufacturer's fleet average would be 22.2 mpg for MY 2007. We used the manufacturer's plans to determine the fleet average. When a manufacturer's plans were below 22.2 mpg, we estimated the technologies and costs necessary to bring their fleet average up to a 22.2 mpg baseline. These costs were assigned to the MY 2007 standards, and such costs were not included in the costs for MY 2008.

With respect to alternative fuel vehicles, we note that manufacturers may improve their calculated fuel economy performance by placing these vehicles into the market through MY 2012.

However, 49 U.S.C. 32902(h) prohibits us from taking such benefits into consideration in determining the maximum feasible fuel economy standard. Accordingly, the baseline projections cannot reflect those credits.

The applicability of the alternative fuel provision in § 32905 was extended in the Energy Policy Act of 2005 (Pub. L. 109-58).

Sec. 32902(h) states that when establishing fuel economy standards, the agency:

(1) May not consider the fuel economy of dedicated automobiles; and

(2) Shall consider dual fueled automobiles to be operated only on gasoline or diesel fuel.

D. Technologically Feasible Additions to Product Plans

As explained in the August 2005 NPRM, we performed a Stage analysis to determine what fuel-saving technologies could be applied to a manufacturer's baseline. At each of the three stages, we add technologies based on our engineering judgment and expertise about possible adjustments to the detailed product plans submitted by the manufacturers. Our decision on whether and when to add a technology reflects our consideration of the practicability of applying a specific technology and the necessity for sufficient lead-time in its application. In addition to considering lead time and practicability, the agency adds technologies in a cost-minimizing fashion. That is, we add technologies in order of lower to higher costs as explained in the FRIA (see FRIA p. VI-13).

While technologies are applied in order of “effective cost,” the level of technology added to a manufacturer's fleet is based on the agency's engineering expertise. Technologies are not added until net benefits are maximized as under the Reformed CAFE system. Instead, the agency uses engineering expertise to apply technology. We impose phase-in caps for applications of technology over time and do not make significant changes until a vehicle is refreshed or redesigned to account for product cycles. As such, the price of fuel does not directly factor into the application of technology under the Unreformed CAFE system to the degree that it does under the Reformed CAFE system.

New product plan data in response to the NPRM indicated that manufacturers had shifted the fleet mix and improved the fuel economy of some vehicles. These changes reduced the amount of technology available to be applied. For this reason, more costly technologies (diesel and hybrids) were projected onto the fleet. The agency feels justified in doing so because higher gasoline prices will increase the demand for these types of technologies.

In evaluating which technologies to apply, and the sequence in which to apply them, we follow 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.

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 Report at p. 40. See also Docket No. 2005-22223-10, “Fuel Economy Potential of 2010 Light Duty Trucks.” This document was prepared under the auspices of the U.S. Department of Energy for NHTSA, in order to update the estimates provided by the 2001 NAS Report.

See NAS Report at p. 64.

The Stage I analysis includes technologies that are available for use by MY 2008, but that some manufacturers are not currently choosing to use in their product plans or are using in a limited manner. However, many of these technologies are currently being used in today's light truck fleet. They 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 manufacturers' fleets. The first category is transmission improvements, which includes the introduction and expanded use of 5-speed and 6-speed transmissions and continuously variable transmissions (CVTs). The second category is engine improvements, which includes gradually upgrading light truck engines to include multi-valve overhead camshafts; introducing engines with more than 2 valves per cylinder; applying variable valve timing or 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 includes projections of the potential CAFE increase that could result from the application of diesel engines and hybrid powertrains to select 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.

The Stage analysis also includes the possibility that manufacturers could utilize some vehicle weight reduction as a fuel economy improvement technology on light trucks with curb weights over 5,000 pounds.

However, the weight reduction was only applied in conjunction with a planned vehicle redesign, and sometimes in concert with a reduction in aerodynamic drag.

Based on the results of Dr. Kahane's revised weight and safety analysis, the net weight-safety effect of removing 100 lbs. from a light truck—if footprint is held constant—is zero for all light trucks with curb weights above 3,900 lbs. However, the Stage analysis only considered weight reduction for vehicles with a curb weight in excess of 5,000 lbs. given the statistical uncertainty with the 3,900 lbs. figure. Further discussion of the application of weight reduction is provided below.

The agency again relied on the NAS report, which contains costs and effectiveness estimates for various technologies that could be used to enhance a vehicle's fuel economy. In most instances, NHTSA used the NAS report's mid-range estimate of the potential fuel economy benefits of specific technologies. However, if NHTSA projected the use of a technology specific to a manufacturer, NHTSA relied on effectiveness estimates provided by that manufacturer when applying that technology to that manufacturer and if appropriate, to other manufacturers.

In arriving at the Unreformed CAFE standard, the agency took into account the concerns raised by the manufacturers in response to the August 2005 NPRM. Specifically, the agency is aware that vehicle manufacturers require sufficient lead time to incorporate changes and new features into their vehicles. The agency is also aware that the vehicle manufacturers are unable to deploy new technologies throughout their entire light truck fleet in one model year. Similarly, NHTSA also recognizes that vehicle manufacturers follow design cycles when introducing or significantly modifying a product. In revising and applying the Stage Analysis, NHTSA took these concerns into consideration.

For each of the largest manufacturers that provided product plans with baselines below our proposed levels for at least one model year, the agency projected the use of several Stage I technologies, beginning with MY 2008, and several more technologies, beginning with MY 2009. We note that in performing the Stage Analysis, the agency relied on product plans submitted by the manufacturers as well as comments received in response to the August 2005 NPRM. The agency removed incompatible technologies and technologies already incorporated into manufacturers' product plans from the Stage Analysis. More importantly, the agency delayed and “staggered” applications of technologies such that they are not implemented across the entire fleet in one model year. Most new technologies were added in conjunction with model changes or vehicle introductions. That is, instead of adding technologies to existing vehicles in the middle of their product cycle, we added technologies to vehicles at the time the vehicles were undergoing major engineering changes or when they were introduced.

Aside from reliance on the NAS report, we also relied to a limited extent on technologies present in the manufacturers' confidential product plans. If a technology was present in a manufacturer's product plans, we evaluated the opportunity for additional application of the technology within that manufacturer's fleet, and if appropriate, other manufacturers' fleets. The following are examples of non-confidential technologies used in the Stage Analysis.

Stage 1

Electrical power steering—We first applied this technology to lighter vehicles that do not require a conversion to a 42-volt electrical system. The agency avoided using this technology for heavier vehicles in the near term. The power demands for lighter vehicles do not require a 42-volt system for operation of electric power steering. However, for larger vehicles it appears that a 42-volt system is required to accommodate electric power steering, and adding a 42-volt system was deemed a technology that can be only introduced in conjunction with model changes or product introductions.

In all cases, electric power steering was added to the Stage Analysis to coincide with model changes. By MY 2008, electrical power steering was included on some of the lighter vehicles undergoing model changes. By MYs 2009 and 2010, this technology was gradually added to heavier vehicles at the beginning of their respective product cycles. That way, installation of electrical power steering can coincide with the necessary conversion of these heavier vehicles to a 42-volt electrical system.

Low-friction lubricants—This technology does not require engineering changes to vehicle engines. Therefore, it was implemented in MYs 2008 and 2009 on a large percentage of the eligible fleet without “staggering” the implementation. That is, the agency believes that this technology can be implemented within a relatively short lead time. The agency did not apply low-friction lubricants to vehicles with engines that require higher-friction lubricants.

Aerodynamic drag reduction—This technology was applied to certain vehicles to coincide with a major vehicle redesign or a vehicle introduction. Because aerodynamic drag reduction typically involves actual vehicle body changes, we were especially careful not to attribute any aerodynamic drag reduction, except at the beginning of a new product cycle.

Low-rolling-resistance tires—This technology was added to lighter, passenger-car-based (unibody construction) light trucks that were deemed compatible with passenger-car-like tires. Due to compatibility concerns expressed by several manufacturers, these tires were not applied to light trucks intended for significant off-road duty or pickup trucks with substantial cargo carrying capabilities. Because this technology does not require vehicle engineering resources, we implemented this technology such that it does not necessarily coincide with a planned vehicle introduction or redesign. We believe that in this case, the lead time is sufficient for the manufacturers to make arrangements to purchase sufficient quantities.

Engine accessory improvement—The agency projected the use of this technology for several manufacturers. This technology category encompasses a variety of engine accessory

improvement technologies that several manufacturers are currently incorporating, such as improved fuel and oil pumps. If a manufacturer provided NHTSA with descriptions for these specific technologies, they were applied to that manufacturer's vehicles where appropriate. If manufacturers provided no information regarding their incorporation of engine accessory improvement technologies, NHTSA applied a potential engine accessory improvement to vehicles that had an engine and engine technologies that would benefit from and be compatible with specific engine accessory improvements. The agency believes that this technology is cost-effective. This technology generally affects the operation of the engine, thus this technology was added in conjunction with a planned introduction of new models.

Stoichiometric Spark Ignition Direct Injection—This technology was added to select vehicles, i.e., those vehicles produced by manufacturers that have product plans which reflect a familiarity with the technology. This technology was applied in conjunction with a planned vehicle redesign. Implementation of this technology was delayed in response to comments and in recognition of cost issues associated with insufficient lead time.

Weight reduction—As explained below, this fuel economy improvement method was used sparingly on vehicles with a curb weights in excess of 5,000 pounds and was applied in conjunction with a planned vehicle redesign.

Stage 2

5-speed and 6-speed automatic transmissions—These technologies were added to some vehicles that, based on the manufacturers' product plans, were projected to continue using 4-speed automatic transmissions. As with Stage I technologies, when a transmission upgrade is used in the Stage Analysis, it is timed to coincide with model changes. Further, we first implemented this technology in vehicles that share major mechanical components with vehicles already equipped with 5- or 6-speed transmissions. For example, we project this technology on certain pickup trucks that share their platforms and engines with multipurpose passenger motor vehicles already equipped with 6-speed transmissions, knowing that these transmissions were readily available to the manufacturer and were compatible with the basic vehicle architecture.

Cylinder deactivation—In response to comments, the agency did not apply this technology to vehicles with incompatible existing engine architecture. The agency applied this technology to select vehicles. In doing so, the agency took into account whether this technology was already available to the manufacturers. In some instances, this technology was already utilized by vehicle manufacturers on some of their light trucks, and the agency believes that adopting this technology to other light trucks would save costs, especially if the technology is implemented at the time of vehicle redesign.

Dual overhead cam (DOHC)—The agency did not use, or delayed the implementation of this technology in vehicles where the comments indicated that the change from single overhead cam (SOHC) would be too complicated and would not produce significant fuel economy improvements because of incompatibility with the existing engine architecture. In other vehicles, implementation of DOHC was timed to coincide with a planned vehicle or engine redesign. In applying this technology, the agency examined the manufacturers' current vehicles. In some instances the manufacturers carry both DOHC engines and SOHC engines of the same displacement and basic architecture. In these instances, the agency projected a gradual switch to only the DOHC engines.

Continuous Variable Transmission (CVT)—CVT technology was relied upon in the analysis for the NPRM. The agency did not apply CVTs in the final rule. The updated product plans reflected that manufacturers had applied CVTs or 6-speeds instead to all of those vehicles to which the agency's analysis applied CVTs in the NPRM.

Front Axle Disconnect—Where this technology was implemented, it was timed to coincide with planned vehicle redesign. In addition, in response to comments regarding the general effectiveness of this technology vis-á-vis its effectiveness in specific vehicle applications, we revised downward the projected fuel economy benefits attributed to this technology.

Variable Valve Lift and Timing—Based on comments, this technology was not used on certain vehicles because the basic engine architecture was incompatible. According to commenters, this technology is incompatible with overhead valve engines. Instead, this technology was applied to certain vehicles already equipped with overhead cam engines featuring variable valve timing.

Stage III

Stage III technologies were not included in the Stage Analysis for all manufacturers because some manufacturers can meet the Unreformed CAFE standards without the need to use any diesel or hybrid technology. For some vehicle manufacturers, we estimated higher sales of light trucks equipped with hybrid engines compared to the manufacturer's product plans. This revised estimate is based on continuing strong demand and increased popularity of hybrid vehicles. For other manufacturers, we projected the use of direct-injection diesel engines in place of large displacement gasoline V8 engines.

E. Improved Product Plans

The agency's revised Stage Analysis produced the following individual projections:

Table 2.—Manufacturers' Fuel Economy Capabilities as Projected Under the Stage Analysis

Manufacturer

Model year 2008

Model year 2009

Model year 2010

DaimlerChrysler

*22.475

23.059

23.599

Ford

22.455

23.060

23.935

General Motors

22.506

23.060

23.450

Nissan

22.452

23.091

23.470

Toyota

22.506

23.054

24.044

*While compliance is calculated with the standard is in tenths of a mile per gallon, our initial analysis projects fuel economy capabilities to thousandths of mpg.

The technologically-feasible fuel economy levels determined under the Stage Analysis provide the basis for the Unreformed CAFE standards. The Volpe model is then used to estimate benefits and costs of these standards. The Volpe model analyzes what technologies can be added to meet the standard determined by the Stage Analysis. More specifically, the Volpe model uses a technology application algorithm developed by Volpe Center staff in consultation with NHTSA 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 are 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.

Although similar, the two analyses do not apply exactly the same technologies. Both are merely technologically feasible ways of achieving the given standard, not predictions of how manufacturers will actually meet it. As discussed below, additional analysis was performed to ensure that the Unreformed CAFE standards are economically practicable for the industry.

We note that the standards adopted today are the same as those proposed in the NPRM, even though the agency performed the Stage analysis on updated product plans as provided by the manufacturers. This result is largely due to the fact that there is a limited pool of technology that can be applied to the manufacturers' fleets in the time period subject to this rulemaking.

The updated product plans reflected that some technologies previously applied by the agency in the Stage analysis were now applied by the manufacturers in their product plans, which meant that these technologies were no longer available for the Stage analysis. Because the pool of feasible technologies that can be applied in the lead time provided is limited, the agency projected fewer additional technologies for the updated product plans beyond the improvements made by the manufacturers.

As a result of having limited technologies and practical constraints on how and when those technologies can be applied, the difference between the NPRM improved fleet and the final rule improved fleet is largely a matter of the level of technology voluntarily added by manufacturers in their revised product plans submitted in response to the NPRM. Consequently, the two improved fleets provide similar fuel economies.

F. Economic Practicability and Other Economic Issues

As explained above, the agency has historically viewed the question of whether a CAFE standard is economically practicable in terms of whether the standard is “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 assesses 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, 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. The baselines provided by Honda and Hyundai for MYs 2008-2010 exceeded the standards in each of those model years. 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 is 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. In applying technologies, the Volpe model is programmed to be as consistent as practical with the technology application method and constraints of 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 and that they will 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.

In estimating the costs and benefits of this rulemaking, the agency employed a variety of cost estimates (

e.g.

, the cost of technology, lead-time) and economic assumptions (

e.g.

, price of fuel, rebound effect). As the cost estimates and economic assumptions apply, in many cases, equally to the Unreformed and Reformed CAFE system analyses, we have addressed these comments below in Section VIII. Technology issues, and Section IX. Economic assumptions. The discussion that follows provides our estimates for the costs and benefits of the Unreformed CAFE standards adopted today.

1. Costs

In terms of vehicle costs for complying with the Unreformed CAFE standards, we estimate the average incremental cost per vehicle to be $64 for MY 2008, $185 for MY 2009, and $195 for MY 2010. The total incremental costs (the cost necessary to bring the corporate average fuel economy for light

trucks from 22.2 mpg (the standard for MY 2007) to the final rule levels are estimated to be $536 million for MY 2008, $1,621 million for MY 2009, and $1,752 million for MY 2010.

Our cost estimates for the Unreformed CAFE system are 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, as estimated by the NAS study, we selected the mid-point for cost 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, we generally observed that present fuel economy performance indicates that some manufacturers will, if their planned fleets remain unchanged, be able to meet the proposed standards without significant expenditures. In contrast, other manufacturers will need to expend significantly more effort than they were planning to meet the final Unreformed CAFE 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 and appropriate 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 Table VI-4 of the FRIA.

2. Benefits

In Chapter VIII of the FRIA, the agency analyzes the economic and environmental benefits of the Unreformed CAFE standards by estimating fuel savings over the lifetime of each model year (approximately 36 years). Benefit estimates include both the benefits to consumers in terms of reduced fuel usage and other savings, such as the reduced externalities generated by the importing, refining, and consuming of petroleum products.

The total benefits of the increases in the levels of the Unreformed CAFE standards are estimated to be $577 million for MY 2008, $1,876 million for MY 2009 and $2,109 million for MY 2010, based on fuel prices ranging from $1.96 to $2.39 in 2003 dollars per gallon and a discount rate of seven percent.

3. Comparison of Estimated Costs to Estimated Benefits

Table 3 compares the incremental costs and benefits for the Unreformed CAFE standards.

Table 3.—Comparison of Incremental Costs and Benefits for the Unreformed CAFE Standards

[In millions]

MY 2008

MY 2009

MY 2010

Total Incremental Costs*

$536

$1,621

$1,752

Total Incremental Benefits*

577

1,876

2,109

* 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.

The discount rate is intended to measure the reduction in the value to society of benefits when they are deferred until some future date rather than received immediately. The benefits are discounted to provide an appropriate comparison of costs to the value of future benefits. 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 AEO 2005.

Based on these forecasts, NHTSA estimated that approximately 8.6 million light trucks affected by this final rule would be sold in MY 2008. For MYs 2009 and 2010, we estimated 8.9 million and 9.0 million light truck sales, respectively.

In the FRIA, we also evaluated the final rule using a 3 percent discount rate for discounting benefits.

The agency relied on AEO 2005 projections for the total sales figures. The manufacturers provided us with projected sales for passenger cars and light trucks. However, taken together, the sales projections provided by the individual companies to NHTSA yielded unrealistically high industry-wide sales volumes. Percentage of total sales per manufacturer was based on past sales data. A complete discussion of light truck sales projections is provided in the FRIA (FRIA p. VIII-8).

We calculated the reduced fuel consumption of MY 2008-2010 light trucks by comparing their consumption under the final rule for those years to either the manufacturers' plans if they were above 22.2 mpg, or 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 will result from the higher CAFE standard is the difference between each model year's fuel use and the fuel use that would occur under either the manufacturer's plans or if the MY 2007 standard remained in effect. This analysis results in estimated lifetime fuel savings of 555 million, 1,813 million, and 2,023 million gallons for MYs 2008, 2009, and 2010, respectively.

As described in detail in the FRIA, we use a 20 percent rebound effect based on a thorough review of the literature (FRIA p. VIII-45). We are nonetheless aware that there is ongoing research in this area, and will continue to assess this assumption in future rulemakings in light of new evidence.

A more detailed explanation of our analysis is provided in Chapter VIII of the FRIA and the final EA (see EA p. 26).

4. Uncertainty

The agency recognizes that the data and assumptions relied upon in our analysis have inherent limitations that do not permit precise estimates of benefits and costs. NHTSA performed a probabilistic uncertainty analysis to examine the degree of uncertainty in its costs and benefits estimates. 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. As a result of this analysis, the agency thinks it very likely that the benefits of the Unreformed CAFE standards will exceed their costs for all three model years. A detailed discussion of the uncertainty analysis is provided in Chapter X of the FRIA.

G. Unreformed Standards for MYs 2008-2010

We believe the standards established today are challenging enough to encourage the further development and implementation of fuel-efficient technologies and are achievable within the applicable timeframe. Accordingly, we have concluded that the 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), and 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. As noted above, we have concluded that the standards set through this final rule represent the best overall balance of the statutory factors, and in addition, are consistent with the protection of motor vehicle safety and American jobs.

The Unreformed CAFE light truck standards for MYs 2008-2010 are as follows:

MY 2008: 22.5 mpg

MY 2009: 23.1 mpg

MY 2010: 23.5 mpg

VI. The Reformed CAFE Standards for MYs 2008-2011

A. Overview of Reformed CAFE

The structure of Reformed CAFE for each model year, as adopted in today's final rule, has two basic elements—

(1) a function that sets the target fuel economy levels for each value of vehicle footprint;

and

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

(2) a Reformed CAFE standard based on each manufacturer's production-weighted harmonic average of the fuel economy targets for footprint value. Unlike the proposed Reformed CAFE system, which relied on a step function and associated categories, the final Reformed CAFE system relies on a continuous mathematical function relating fuel economy targets to vehicle footprint.

The required level of CAFE for a particular manufacturer for a given model year is calculated using the target-setting function for that model year in conjunction with that manufacturer's actual total production and its production at each footprint value for that model year.

The manufacturer's required CAFE level is calculated by dividing its total production for the model year by the sum of the values obtained by dividing the manufacturer's production of each vehicle model included in its fleet by the fuel economy target for that model.

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.

B. Authority for Reformed CAFE

In the same manner as we explained the step function proposal to be consistent with EPCA,

the continuous function Reformed CAFE standard similarly conforms to the mandate to establish maximum feasible fuel economy standards. The continuous function standard is applicable on a fleet average basis and reflects the agency's balancing of the nation's need to conserve energy, the effect of other standards on fuel economy, technological feasibility, economic practicability and other public policy considerations. Further, like the proposed step function standard, the continuous function achieves the congressional policy objectives embedded in EPCA.

See 70 FR 51415, 51445.

The continuous function standard retains the fleetwide compliance aspect mandated by the CAFE statute. By maintaining reliance on harmonic averaging, the continuous function standard promotes the CAFE statute's overriding goal of conserving energy in a manner that preserves manufacturer flexibility and consumer choice. (H. Rpt. 94-340, p. 87; S. Rpt. 94-179, p. 6.)

The discretion provided to the agency by Congress to determine whether to establish a single fuel economy level applicable to all manufacturers or to set a series of fuel economy levels applicable to individual manufacturers equally supports using a step function or a continuous function to establish fuel economy targets for vehicles of different sizes.

Under either type of function, a manufacturer's required fuel economy level is dependent on the manufacturer's fleet mix. Moreover, just as the category targets described in the NPRM are equally applicable to all manufacturers, the fuel economy targets defined by a continuous function are equally applicable to all manufacturers for a given model year.

A continuous function standard is based on similar technological and economic considerations employed in establishing the proposed step function standard, and which we believe ensure the technological feasibility and economic practicability of the proposed MY 2011 standard. Moreover, a continuous function is defined based on the modeled capabilities of the same percentage of the fleet as in the step function proposal (

i.e.

, 97 percent of the light truck fleet). Reliance on 97 percent of the fleet better reflects industry-wide considerations than the primary focus on the “least capable manufacturer with a substantial share of the market” in the Unreformed CAFE structure.

In the NPRM we recognized the financial challenges facing the motor vehicle industry and that a substantial number of job losses had been announced by large full-line manufacturers. Since publication of the NPRM, two manufacturers of light trucks, each with a significant share of the market, have continued to report financial difficulties. The financial risks faced by these companies, including their workers and suppliers, underscored the importance to full-line vehicle manufacturers of establishing an equitable CAFE regulatory framework. Compared to Unreformed CAFE, the Reformed CAFE will enhance overall fuel savings while providing manufacturers the flexibility they need to respond to changing market conditions. The reforms adopted today will 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.

C. Legal Issues Related to Reformed CAFE

1. Maximum feasible

EPCA requires that the light truck CAFE levels be established at the “maximum feasible average fuel economy level” achievable by the manufacturers in that model year (49 U.S.C. 32902(a)). When deciding on the maximum feasible level, the agency must consider technological feasibility, economic practicability, the effect of other motor vehicle standards of the Federal government on fuel economy, and the need of the nation to conserve energy (49 U.S.C. 32902(f)). The agency must balance these considerations, along with other factors such as safety, when determining the level of CAFE standards.

As indicated above, and described in greater detail below, the Reformed CAFE system uses incremental cost-benefit analysis (as implemented within the Volpe model) to establish standards. The technology cost and benefit assumptions employed by the model are based on those presented in the NAS report. However, consideration is given to manufacturers' critiques of the technology assumptions employed by NAS. The agency also relies on the product plans provided by manufacturers when projecting potential technology applications. The standard arrived at through this process is then evaluated to determine potential sales and employment impacts. As explained in the following discussion, the totality of this analysis results in a standard that is both technologically feasible and economically practicable. As discussed elsewhere in this notice, the standard reflects consideration of the impact of other Federal motor vehicle standards on fuel economy, and as evidenced by our estimates that the resulting standard for MY 2011 will save approximately 2.8 billion gallons of fuel, also addresses the nation's need to conserve energy.

Vehicle manufacturers and the Alliance expressed concern that the agency's new methodology for setting CAFE standards (

i.e.

, using cost-benefit analysis to identify the pattern and stringency of fuel economy targets) risked losing the key economic practicability check that was previously provided by assessing a proposed standard's effect on the least capable manufacturer, an approach that had proven reasonable and workable in many prior CAFE rulemakings. In general, these commenters argued that the agency must continue to consider the “least capable manufacturer” to ensure that standards set under the Reformed CAFE system do not result in adverse economic impacts on any individual manufacturer. General Motors and Ford argued that NHTSA's proposed methodology does not sufficiently consider the capabilities of the “least capable manufacturer,” and thus violates its statutory duty to set standards that are “economically practicable.”

We noted in the NPRM that the term “least capable” manufacturer is something of a misnomer under the Reformed system, since each manufacturer's projected level of CAFE is determined by two factors: (1) The extent to which small or large vehicles predominate in its planned production mix, and (2) the type and amount of fuel-saving technologies 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 their fleet mixes are not identical. Thus, a full-line manufacturer could have a lower overall CAFE than a manufacturer concentrating its production in the smaller footprint range, even though the former manufacturer has applied as much (or more) technology to the models it produces as has the latter manufacturer. The manufacturer concentrating its production in smaller vehicles would have a higher CAFE level due to the higher fuel economies of smaller vehicles. Thus, “large manufacturer with the lowest fuel economy average” might better describe the former than “least capable manufacturer.”

The Reformed CAFE system establishes standards with regard to the capabilities of a wider range of manufacturers than just the “least capable manufacturer.” The fuel economy capabilities of an individual manufacturer are projected based on each of the seven largest manufacturers' specific product plans. Consideration of what specific technologies each manufacturer can apply and at what rate each technology can be applied is also made at the individual manufacturer level. Further, a manufacturer's required fuel economy level reflects that manufacturer's actual fleet mix.

Instead of requiring a uniform level of CAFE—which is inherently more challenging for manufacturers whose fleets have high percentages of larger vehicles to meet than for those whose product lines emphasize smaller models—the Reformed system specifies fuel economy targets that vary according to vehicle footprint; these targets are higher for smaller light trucks and lower for large ones. It uses these targets to determine a required CAFE level for each manufacturer that reflects the size distribution and production volumes of its light truck models. By setting each manufacturer's required fleet-wide CAFE level to reflect its size mix, the Reformed system requires some effort by each manufacturer to improve the fuel efficiency of its individual models, regardless of their size distribution.

As stated above, the Volpe model applies technologies to a manufacturer's fleet until the cost of an additional technology application equals the benefits of the resulting improvement in fuel economy. Because these benefits include the value of reducing economic and environmental externalities from producing fuel, this process results in a “socially optimal” level of fuel economy. Before we arrive at the level of optimal economic efficiency, it is important to understand the assumptions relied on by the model when applying technology.

As with the Stage analysis, the Volpe model's assumptions about technology cost and effectiveness are based on estimates provided in the NAS report, and incorporate information provided by manufacturers. The agency continues to rely on the NAS report to determine technology costs and effectiveness because the estimates developed in the NAS study

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