a. Stringency

This document proposes to set attributebased fuel economy standards for passenger cars and light trucks consistent with the Reformed CAFE approach that NHTSA used in establishing the light truck standards for MY 20082011 light trucks. Separate passenger car standards would be set for MYs 20112015, and light truck standards would be set for MYs 20112015. As noted above, EISA limits the number of model years for which standards may be established in a single rulemaking to five. We are proposing to establish standards for five years to maximize the amount of lead time that we can provide the manufacturers. This is necessary to make it possible to achieve the levels of average fuel economy required by MY 2020.

Each vehicle manufacturer's required level of CAFE would be based on target levels of average fuel economy set for vehicles of different sizes and on the distribution of that manufacturer's vehicles among those sizes. Size would be defined by vehicle footprint. The level of the performance target for each footprint would reflect the technological and economic capabilities of the industry. The target for each footprint would be the same for all manufacturers, regardless of differences in their overall fleet mix. Compliance would be determined by comparing a manufacturer's harmonically averaged fleet fuel economy levels in a model year with a required fuel economy level calculated using the manufacturer's actual production levels and the targets for each footprint of the vehicles that it produces.

The proposed standards were developed using a computer model (known as the ``Volpe Model'') that, for any given model year, applies technologies to a manufacturer's fleet until the manufacturer reaches compliance with the standard under consideration. The standards were tentatively set at levels such that, considering the seven largest manufacturers, the cost of the last technology application equaled the benefits of the improvement in fuel economy resulting from that application. We reviewed these proposed standards to consider the underlying increased use of technologies and the associated impact on the industry. This process recognizes that the relevance of costs in achieving benefits, and uses benefit figures that include the value of reducing the negative externalities (economic and environmental) from producing and consuming fuel. These environmental externalities include, among other things, reducing tailpipe emissions of CO2.\3\ In view of the process used to develop the proposed standards, they are also referred to as ``optimized standards.''
\3\ The externalities included in our analysis do not, however, include those associated with the reduction of the other GHG emitted by automobiles, i.e., methane (CH4), nitrous oxide (N2O), and hydroflurocarbons (HFCs). Actual air conditioner operation is not included in the test procedures used to obtain both (1) emission rates for purposes of determining compliance with EPA criteria pollutant emission standards and (2) fuel economy values for purposes of determining compliance with NHTSA CAFE standards, although air conditioner operation is included in ``supplemental'' federal test procedures used to determine compliance with
corresponding and separate EPA criteria pollutant emission standards.

Compared to the 2006 rulemaking that established the MY 200811 CAFE standards for light trucks, this rulemaking much more fully captures the value of the costs and benefits of setting CAFE standards. This is important because assumptions regarding gasoline price projections, along with assumptions for externalities, are based on changed economic and environmental and energy security conditions and play a big role in the agency's balancing of the statutory considerations in arriving at a determination of maximum feasible. In light of EISA and the need to balance the statutory considerations in a way that reflects the current need of the nation to conserve energy, including the current assessment of the climate change problem, the agency revisited the various assumptions used in the Volpe Model to determine the level of the standards. Specifically, in running the Volpe Model and stopping at a point where marginal costs equaled marginal benefits or where net benefits to society are maximized, the agency used higher gasoline prices and higher estimates for energy security values ($0.29 per gallon instead of $0.09 per gallon). The agency also monetized carbon dioxide (at
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$7.00/ton), which it did not do in the previous rulemaking, and expanded its technology list. In addition, the agency used cost estimates that reflect economies of scale and estimated ``learning'' driven reductions in the cost of technologies as well as quicker penetration rates for advanced technologies. These changes to the inputs to the model had a major impact on increasing the benefits in certain model years by allowing for greater penetration of technologies.

The agency cannot set out the exact level of CAFE that each manufacturer will be required to meet for each model year under the proposed passenger car or light truck standards since the levels will depend on information that will not be available until the end of each of the model years, i.e., the final actual production figures for each of those years. The agency can, however, project what the industry wide level of average fuel economy would be for passenger cars and for light trucks if each manufacturer produced its expected mix of automobiles and just met its obligations under the proposed ``optimized'' standards for each model year. Adjacent to each average fuel economy figure is the estimated associated level of tailpipe emissions of CO2 that would be achieved.\4\
\4\ Given the contributions made by CAFE standards to addressing not only energy independence and security, but also to reducing tailpipe emissions of CO2, fleet performance is stated in the above discussion both in terms of fuel economy and the associated reductions in tailpipe emissions of CO2 since the CAFE standard will have the practical effect of limiting those emissions approximately to the indicated levels during the official CAFE test procedures established by EPA. The relationship between fuel consumption and carbon dioxide emissions is discussed ubiquitously, such as at www.fueleconomy.gov, a fuel economyrelated Web site managed by DOE and EPA (see http://www.fueleconomy.gov/feg/contentIncludes/co2_ inc.htm, which provides a rounded value of 20 pounds of CO2 per gallon of gasoline). (Last accessed April 20, 2008.) The CO2 emission rates shown are based on gasoline characteristics. Because diesel fuel contains more carbon (per gallon) than gasoline, the presence of diesel engines in the fleetwhich NHTSA expects to increase in response to the proposed CAFE standardswill cause the actual CO2 emission rate corresponding to any given CAFE level to be slightly higher than shown here. (The agency projects that 4 percent of the MY 2015 passenger car fleet and 10 percent of the MY 2015 light truck fleet will have diesel engines.) Conversely (and hypothetically), applying the same CO2 emission standard to both gasoline and diesel vehicles would discourage manufacturers from improving diesel engines, which show considerable promise as a means to improve fuel economy.

For passenger cars:
MY 2011: 31.2 mpg (285 g/mi of tailpipe emissions of CO2)
MY 2012: 32.8 mpg (271 g/mi of tailpipe emissions of CO2)
MY 2013: 34.0 mpg (261 g/mi of tailpipe emissions of CO2)
MY 2014: 34.8 mpg (255 g/mi of tailpipe emissions of CO2)
MY 2015: 35.7 mpg (249 g/mi of tailpipe emissions of CO2)

For light trucks:
MY 2011: 25.0 mpg (355 g/mi of tailpipe emissions of CO2)
MY 2012: 26.4 mpg (337 g/mi of tailpipe emissions of CO2)
MY 2013: 27.8 mpg (320 g/mi of tailpipe emissions of CO2)
MY 2014: 28.2 mpg (315 g/mi of tailpipe emissions of CO2)

MY 2015: 28.6 mpg (310 g/mi of tailpipe emissions of CO2)

The combined industry wide average fuel economy (in miles per gallon, or mpg) levels (in grams per mile, or g/mi) for both cars and light trucks, if each manufacturer just met its obligations under the proposed ``optimized'' standards for each model year, would be as follows:
MY 2011: 27.8 mpg (2.5 mpg increase above MY 2010; 320 g/mi CO2) MY 2012: 29.2 mpg (1.4 mpg increase above MY 2011; 304 g/mi CO2) MY 2013: 30.5 mpg (1.3 mpg increase above MY 2012; 291 g/mi CO2) MY 2014: 31.0 mpg (0.5 mpg increase above MY 2013; 287 g/mi CO2) MY 2015: 31.6 mpg (0.6 mpg increase above MY 2014; 281 g/mi CO2)

The annual average increase during this five year period is approximately 4.5 percent. Due to the uneven distribution of new model introductions during this period and to the fact that significant technological changes can be most readily made in conjunction with those introductions, the annual percentage increases are greater in the early years in this period.

Given a starting point of 31.8 mpg in MY 2015, the average annual increase for MYs 20162020 would need to be only 2.1 percent in order for the projected combined industry wide average to reach at least 35 mpg by MY 2020, as mandated by EISA.

In addition, per EISA, each manufacturer's domestic passenger fleet is required in each model year to achieve 27.5 mpg or 92 percent of the CAFE of the industry wide combined fleet of domestic and nondomestic passenger cars \5\ for that model year, whichever is higher. This requirement results in the following alternative minimum standard (not attributebased) for domestic passenger cars:
\5\ Those numbers set out several paragraphs above.
MY 2011: 28.7 mpg (310 g/mi of tailpipe emissions of CO2)
MY 2012: 30.2 mpg (294 g/mi of tailpipe emissions of CO2)
MY 2013: 31.3 mpg (284 g/mi of tailpipe emissions of CO2)
MY 2014: 32.0 mpg (278 g/mi of tailpipe emissions of CO2) MY 2015: 32.9 mpg (270 g/mi of tailpipe emissions of CO2)

The agency is also issuing, along with this document, a notice requesting updated product plan information and other data to assist in developing a final rule. We recognize that the manufacturer product plans relied upon in developing this proposalthose plans received in late spring of 2007 in response to an early 2007 request for informationmay already be outdated in some respects. We fully expect that manufacturers have revised those plans to reflect subsequent developments, especially the enactment of EISA.

We solicit comment on all aspects of this proposal, including the methodology, economic assumptions, analysis and tentative conclusions. In particular, we solicit comment on whether the proposed levels of CAFE satisfy EPCA, e.g., reflect an appropriate balancing of the explicit statutory factors and other relevant factors. Other specific areas where we request comments are identified elsewhere in this preamble and in the Preliminary Regulatory Impact Analysis (PRIA). Based on public comments and other information, including new data and analysis, and updated product plans,\6\ the standards adopted in the final rule could well be different from those proposed in this document.
\6\ The proposed standards are, in the first instance, based on the confidential product plans submitted by the manufacturers in the spring of 2006. The final rule will be based on the confidential plans submitted in the next several months. The agency anticipates that those new plans, which presumably will reflect in some measure the enactment of EISA and the issuance of this proposal, will project higher levels of average fuel economy than the 2006 product plans.

b. Benefits

We estimate that the proposed standards for passenger cars would save approximately 18.7 billion gallons of fuel and avoid tailpipe CO2 emissions by 178 billion metric tons over the lifetime of the passenger cars sold during those model years, compared to the fuel savings and emissions reductions that would occur if the standards remained at the adjusted baseline (i.e., the higher of manufacturer's plans and the manufacturer's required level of average fuel economy for MY 2010).

We estimate that the value of the total benefits of the proposed passenger car standards would be approximately $31 billion \7\ over the lifetime of the 5 model
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years combined. This estimate of societal benefits includes direct impacts from lower fuel consumption as well as externalities and also reflects offsetting societal costs resulting from the rebound effect. \7\ The $22 billion estimate is based on a 7% discount rate for valuing future impacts. NHTSA estimated benefits using both 7% and 3% discount rates. Under a 3% rate, net consumer benefits for passenger car CAFE improvements total $28 million.

We estimate that the proposed standards for light trucks would save approximately 36 billion gallons of fuel and prevent the tailpipe emission of 343 million metric tons of CO2 over the lifetime of the light trucks sold during those model years, compared to the fuel savings and emissions reductions that would occur if the standards remained at the adjusted baseline. We estimate that the value of the total benefits of the proposed light truck standards would be approximately $57 billion \8\ over the lifetime of the 5 model years of light trucks combined. This estimate of societal benefits includes direct impacts from lower fuel consumption as well as externalities and also reflects offsetting societal costs resulting from the rebound effect.
\8\ The $56 billion estimate is based on a 7% discount rate for valuing future impacts. NHTSA estimated benefits using both 7% and 3% discount rates. Under a 3% rate, net consumer benefits for light truck CAFE improvements total $70 million.

c. Costs

The total costs for manufacturers just complying with the standards for MY 20112015 passenger cars would be approximately $16 billion, compared to the costs they would incur if the standards remained at the adjusted baseline. The resulting vehicle price increases to buyers of MY 2015 passenger cars would be recovered or paid back \9\ in additional fuel savings in an average of 56 months, assuming fuel prices ranging from $2.26 per gallon in 2016 to $2.51 per gallon in 2030.\10\
\9\ See Section V.A.7 below for discussion of payback period. \10\ The fuel prices (shown here in 2006 dollars) used to calculate the length of the payback period are those projected (Annual Energy Outlook 2008, revised early release) by the Energy Information Administration over the life of the MY 20112015 light trucks, not current fuel prices.

The total costs for manufacturers just complying with the standards for MY 20112015 light trucks would be approximately $31 billion, compared to the costs they would incur if the standards remained at the adjusted baseline. The resulting vehicle price increases to buyers of MY 2015 light trucks would be paid back in additional fuel savings in an average of 50 months, assuming fuel prices ranging from $2.26 to $2.51 per gallon.

d. Flexibilities

The agency's benefit and cost estimates do not reflect the availability and use of flexibility mechanisms, such as compliance credits and credit trading because EPCA prohibits NHTSA from considering the effects of those mechanisms in setting CAFE standards. EPCA has precluded consideration of the FFV adjustments ever since it was amended to provide for those adjustments. The prohibition against considering compliance credits was added by EISA.

The benefit and compliance cost estimates used by the agency in determining the maximum feasible level of the CAFE standards assume that manufacturers will rely solely on the installation of fuel economy technology to achieve compliance with the proposed standards. In reality, however, manufacturers are likely to rely to some extent on flexibility mechanisms provided by EPCA (as described in Section VI) and will thereby reduce the cost of complying with the proposed standards to a meaningful extent.

2. Credits

NHTSA is also proposing a new Part 536 on use of ``credits'' earned for exceeding applicable CAFE standards. Part 536 will implement the provisions in EISA authorizing NHTSA to establish by regulation a credit trading program and directing it to establish by regulation a credit transfer program.\11\ Since its enactment, EPCA has permitted manufacturers to earn credits for exceeding the standards and to apply those credits to compliance obligations in years other than the model year in which it was earned. EISA extended the ``carryforward'' period to five model years, and left the ``carryback'' period at three model years. Under the proposed Part 536, credit holders (including, but not limited to, manufacturers) will have credit accounts with NHTSA, and will be able to hold credits, apply them to compliance with CAFE standards, transfer them to another ``compliance category'' for application to compliance there, or trade them. A credit may also be cancelled before its expiry date, if the credit holder so chooses. Traded credits will be subject to an ``adjustment factor'' to ensure total oil savings are preserved, as required by EISA. EISA also prohibits credits earned before MY 2011 from being transferred, so NHTSA has developed several regulatory restrictions on trading and transferring to facilitate Congress' intent in this regard. Additional information on the proposed Part 536 is available in section IX below. \11\ Congress required that DOT establish a credit
``transferring'' regulation, to allow individual manufacturers to move credits from one of their fleets to another (e.g., using a credit earned for exceeding the light truck standard for compliance in the domestic passenger car standard). Congress allowed DOT to establish a credit ``trading'' regulation, so that credits may be bought and sold between manufacturers and other parties.
II. Background
A. Contribution of Fuel Economy Improvements to Addressing Energy Independence and Security and Climate Change
1. Relationship Between Fuel Economy and CO2 Tailpipe Emissions

Improving fuel economy reduces the amount of tailpipe emissions of CO2. CO2 emissions are directly linked to fuel consumption because CO2 is the ultimate end product of burning gasoline. The more fuel a vehicle burns, the more CO2 it emits. Since the CO2 emissions are essentially constant per gallon of fuel combusted, the amount of fuel consumption per mile is directly related to the amount of CO2 emissions per mile. Thus, requiring improvements in fuel economy indirectly, but necessarily requires reductions in tailpipe emissions of CO2 emissions. This can be seen in the table below. To take the first value of fuel economy from the table below as an example, a standard of 21.0 mpg would indirectly place substantially the same limit on tailpipe CO2 emissions as a tailpipe CO2 emission standard of 423.2 g/mi of CO2, and vice versa.\12\
\12\ To the extent that manufacturers comply with a CAFE standard with diesel automobiles instead of gasoline ones, the level of CO2 tailpipe emissions would be less. As noted above, the agency projects that 4 percent of the MY 2015 passenger car fleet and 10 percent of the MY 2015 light truck fleet will have diesel engines. The CO2 tailpipe emissions of a diesel powered passenger car are 15 percent higher than those of a comparable gasoline power passenger car.
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Table II1.CAFE Standards (mpg) and the Limits They Indirectly Place on Tailpipe Emissions of CO2 (g/mi)* CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 21.0....................................... 444.4 26.0 341.8 31.0 286.7 36.0 246.9 41.0 216.8 46.0 193.2 22.0....................................... 404.0 27.0 329.1 32.0 277.7 37.0 240.2 42.0 211.6 47.0 188.3 23.0....................................... 386.4 28.0 317.4 33.0 269.3 38.0 233.9 43.0 206.7 48.0 189.1 24.0....................................... 370.3 29.0 306.4 34.0 261.4 39.0 227.9 44.0 202.0 49.0 181.4 25.0....................................... 355.5 30.0 296.2 35.0 253.9 40.0 222.2 45.0 197.5 50.0 177.7 This table is based on calculations that use the figure of 8,887 grams of CO2 per gallon of gasoline consumed, based on characteristics of gasoline vehicle certification fuel. To convert a mpg value into CO2 g/mi, divide 8,887 by the mpg value. 2. Fuel Economy Improvements/CO2 Tailpipe Emission Reductions Since 1975

The need to take action to reduce greenhouse gas emissions, e.g., motor vehicle tailpipe emissions of CO2, in order to forestall and even mitigate climate change is well recognized.\13\ Less well recognized are two related facts. First, improving fuel economy is the only method available to motor vehicle manufacturers for making significant reductions in the CO2 tailpipe emissions of motor vehicles and thus must be the core element of any effort to achieve those reductions. Second, the significant improvements in fuel economy since 1975, due to the CAFE standards and in some measure to market conditions as well, have directly caused reductions in the rate of CO2 tailpipe emissions per vehicle.
\13\ IPCC (2007): Climate Change 2007: Mitigation of Climate Change. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz, O. Davidson, P. Bosch, R. Dave, and L. Meyer (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

In 1975, passenger cars manufactured for sale in the U.S. averaged only 15.8 mpg (562.5 grams of CO2 per mile or 562.5 g/mi of CO2). By 2007, the average fuel economy of passenger cars had increased to 31.3 mpg, causing g/mi of CO2 to fall to 283.9. Similarly, in 1975, light trucks averaged 13.7 mpg (648.7 g/mi of CO2). By 2007, the average fuel economy of light trucks had risen to 23.1 mpg, causing g/mi of CO2 to fall to 384.7.
Table II2.Improvements in MPG/Reductions in G/MI of CO2 Passenger Cars
[19752007]
MPG G/MI of CO2 1975.......................................... 15.8 562.5 2007.......................................... 31.3 283.9 Table II3.Improvements in MPG/Reductions in G/MI of CO2 Light Trucks [19752007]
MPG G/MI of CO2 1975.......................................... 13.7 648.7 2007.......................................... 23.1 384.7

If fuel economy had not increased above the 1975 level, cars and light trucks would have emitted an additional 11 billion metric tons of CO2 into the atmosphere between 1975 and 2005. That is nearly the equivalent of emissions from all U.S. fossil fuel combustion for two years (2004 and 2005). The figure below shows the amount of CO2 emissions avoided due to increases in fuel economy.
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B. Chronology of Events Since the National Academy of Sciences Called for Reforming and Increasing CAFE Standards
1. National Academy of Sciences CAFE Report (February 2002) a. Significantly Increasing CAFE Standards Without Reforming Them Would Adversely Affect Safety

In the congressionallymandated report entitled ``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,'' \14\ a committee of the National Academy of Sciences (NAS) (``2002 NAS Report'') concluded that the thenexisting form of passenger car and light truck CAFE standards created an incentive for vehicle manufacturers to comply in part by downweighting and even downsizing their vehicles and that these actions had led to additional fatalities. The committee explained that these problems arose because the CAFE standards subjected all passenger cars to the same fuel economy target and all light trucks to the same target, regardless of their weight, size, or loadcarrying capacity. The committee said that this experience suggests that consideration should be given to developing a new system of fuel economy targets that reflects differences in such vehicle attributes.
\14\ National Research Council, ``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,'' National Academy Press, Washington, DC (2002). Available at http://www.nap.edu/ openbook.php?isbn=0309076013 (last accessed April 20, 2008). The conference committee report for the Department of Transportation and Related Agencies Appropriations Act for FY 2001 (Pub. L. 106346) directed NHTSA to fund a study by NAS to evaluate the effectiveness and impacts of CAFE standards (H. Rep. No. 106940, p. 117118). In response to the direction from Congress, NAS published this lengthy report.

Looking to the future, the committee said that while it is technically feasible and potentially economically practicable to improve fuel economy without reducing vehicle weight or size and, therefore, without significantly affecting the safety of motor vehicle travel, the actual strategies chosen by manufacturers to improve fuel economy will depend on a variety of factors. In the committee's judgment, the extensive downweighting and downsizing that occurred after fuel economy requirements were established in the 1970s suggested that the likelihood of a similar response to further increases in fuel economy requirements must be considered seriously. Any reduction in vehicle size and weight would have safety implications.

The committee cautioned that the safety effects of downsizing and downweighting are likely to be hidden by the generally increasing safety of the lightduty vehicle fleet.\15\ It said that some might argue that this improving safety picture means that there is room to improve fuel economy without adverse safety consequences; however, such an approach would not achieve the goal of avoiding the adverse safety consequences of fuel economy increases. Rather, the safety penalty imposed by increased fuel economy (if weight reduction is one of the measures) will be more difficult to identify in light of the continuing improvement in traffic safety. Although it is anticipated that these safety innovations will improve the safety of vehicles of all sizes, that does not mean that downsizing to achieve fuel economy improvements will not have any safety costs. If two vehicles of the same size are modified, one both by downsizing it and adding the safety innovations and the other just by adding the safety innovations, the latter vehicle will in all likelihood be safer.
\15\ Two of the 12 members of the committee dissented from the majority's safety analysis and conclusions.

The committee concluded that if an increase in fuel economy were implemented pursuant to standards that are structured in a way that encourages either downsizing or the increased production of smaller vehicles, some additional traffic fatalities would be expected. Without a thoughtful restructuring of the program, there would be the trade offs that must be made if CAFE standards were increased by any significant amount.\16\

\16\ NAS, p. 9.

In response to these conclusions, NHTSA began issuing attribute based CAFE standards for light trucks and sought legislative authority to issue attributebased CAFE standards for passenger cars before undertaking to raise the car standards. Congress went a step further in enacting EISA, not only authorizing the issuance of attributebased standards, but also mandating them.

Fully realizing all of the safety and other \17\ benefits of these reforms will depend in part on whether the unreformed, nonattribute based greenhouse standards adopted by California and other states are implemented. Apart from issues of relative stringency, the effects on vehicle manufacturers of implementing those state emission standards should be substantially similar to the effects of implementing non attributebased CAFE standards, given the nearly identical nature of most aspects of those emission standards and CAFE standards in terms of technological means of compliance and methods of measuring performance. \17\ Reformed CAFE has several advantages compared to Unreformed

FOR FURTHER INFORMATION CONTACT For policy and technical issues: Ms. Julie Abraham or Mr. Peter Feather, Office of Rulemaking, National Highway Traffic Safety Administration, 1200 New Jersey Avenue, SE., Washington, DC 20590. Telephone: Ms. Abraham (202) 3661455; Mr. Feather (202) 3660846.

For legal issues: Mr. Stephen Wood or Ms. Rebecca Schade, Office of the Chief Counsel, National Highway Traffic Safety Administration, 1200 New Jersey Avenue, SE., Washington, DC 20590. Telephone: (202) 366 2992.