UMTRI Automotive Futures Highlights from the

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1 UMTRI Automotive Futures Highlights from the Draft Technical Assessment Report: Midterm Evaluation of Light- Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards for Model Years The draft Technical Assessment Report covers over 1200 pages. In this report we show what we consider the highlights of the report, including tables and figures. We have also highlighted specific quotes within the report to draw the reader s attention to points we think are particularly important. Of particular interest: Overall, the government is encouraged by the progress the industry has made in meeting or exceeding annual, compounding CAFE goals, and they expect the manufacturers to meet their 2025 goals without a lot of hybrids and electrics. (Our research based on powertrain experts primarily at the manufacturers and suppliers expect up to 31 percent hybrids, 9 percent diesels, and 5 percent pure electric powertrains in passenger cars, and 21 percent hybrids and 20 percent diesels in light trucks in order to meet their 2025 goals.) The government estimates fuel prices in 2025 to range from a low of $2.40 to a high of $4.56.(Page 27) (Our powertrain experts estimated 2025 regular gas to be $4.31) For their models, the EPA originally expected a passenger car/light truck new vehicle sales distribution of 67 percent cars/33 percent light trucks for 2015, but the distribution was 43 percent cars/57 percent light trucks. Their models for 2025 now have three scenarios: 48 percent cars/52 percent light trucks, 52 percent cars/48 percent trucks, and 62 percent cars/38 percent trucks. (Page 29) EPA estimates car and truck volume estimates for 2025 by manufacturer (Page 11) The EPA reports a 20 percent difference between laboratory MPG ratings and real world on-road MPG ratings. For 2025, they expect a fleet wide effective MPG of 46.7 and a real world, on-road MPG of 36.0 to meet GHG goals. (Page 27) NHTSA estimates what the passenger car and light truck fuel economy levels will be for each manufacturer in 2015, 2021, and 2030 (Page 38-39) By MY2030, all manufacturers assumed to be averse to paying CAFE fines (e.g., Ford, GM, FCA) are estimated to be able to reach compliance without the use of credits.

2 EPA estimates that 2025 vehicles will have an added average cost of $900 to $1000 in order to meet GHG goals and about $1,200 to meet CAFE goals, though both EPA and NHTSA provide a variety of scenarios representing different compliance costs. (Page 30) Consumer payback is estimated to be a net lifetime consumer savings of $1,460 - $1,620 and a payback of about 5 to 5 ½ years. (Page 32) The estimated per vehicle cost for manufacturers to comply with the 2021 and 2015 CAFE goals (Page 44) EPA and NHTSA report company level GHG/CAFE credit balances as of 2014 (Pages 9-10); recent legislation requires the civil penalty rate be increased from the current level of $5.50 per 0.1 mpg per vehicle to a considerably higher level of $14 per 0.1 mpg per vehicle. (Page 37) NHTSA estimated the safety effects of mass reductions in cars and trucks: more fatalities in cars and fewer in trucks (Page 25) Important technology assessments include: The technology changes that have taken place since the introduction of the CAFE regulations in 2012 (Pages 8-9) The differing effects of technology changes on GHG reductions and CAFE increases (Page 29) The estimates of the share of manufacturer redesigns from 2016 to 2030 (Page 35) The timing for when a new technology can be introduced into a new vehicle (Pages 35-37) Estimated passenger car technology penetration rates for engine, transmission, electrification, and load reduction technologies for the period 2015 to 2030 by manufacturer (Pages 40-44) 2

3 Chapter 1: Introduction The Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) have conducted two joint rulemakings to establish a coordinated National Program for stringent Federal corporate average fuel economy (CAFE) and greenhouse gas (GHG) emissions standards for lightduty vehicles. National Program establishes standards that increase in stringency year-over-year from MY2012 through MY2025. It is projected to reach a level by 2025 that nearly doubles fuel economy and cuts GHG emissions in half as compared to MY2008. In the October 2012 final rules, the National Program was estimated to save 6 billion metric tons of CO2 pollution and 12 billion barrels of oil over the lifetime of MY vehicles. EPA will determine whether the GHG standards for model years , established in 2012, are still appropriate. This Draft Technical Assessment Report (TAR) is the first formal step in the MTE (Midterm Evaluation) process and is being issued jointly by EPA, NHTSA, and CARB for public comment. The Draft TAR is a first step in the process that will ultimately inform: whether the MY GHG standards adopted by EPA in 2012 should remain in place or should change and what MY CAFE standards would be maximum feasible for NHTSA. The technologies addressing the CO2 emissions are those that reduce fuel consumption and thereby reduce CO2 emissions as well. The rates of increase in stringency for the CAFE standards are lower than EPA s rates of increase in stringency for GHG standards for purposes of harmonization and in reflection of several statutory constraints on the CAFE program. Figure 1.1 shows that as required fuel economy standards increase, passenger car and light truck fuel economy levels achieved by manufacturers improve. Figure 1.1 Average Required and Achieved Fuel Economy Levels Under the Clean Air Act, EPA is responsible for addressing emissions of air pollutants from motor vehicles. On December 15, 2009, EPA published two findings: emissions of GHGs from new motor vehicles and motor vehicle engine contribute to GHG air pollution and GHG air pollution may reasonably be anticipated to endanger public health and welfare of current and future generations in the U.S. The Federal GHG and fuel 3

4 economy standards for MY 2017 and beyond were developed in a joint effort with the California Air Resources Board (CARB). The National Program approach helps to better ensure that all manufacturers can build a single fleet of vehicles that satisfy all requirements under both federal programs and under California s program which helps to reduce costs and regulatory complexity for auto manufacturers. Light-duty vehicles are presently responsible for approximately 60 percent of all U.S. transportation-related GHG emissions and fuel consumption. The 2012 final rule projected that combined, the National Program standards, and NHTSA s MY 2011 CAFE standards, result in MY 2025 light-duty vehicles with nearly double the fuel economy and half the GHG emissions compared to MY 2010 vehicles. In the 2012 final rule, based on future assumptions including car/truck share, EPA projected that its standards would lead to an average industry fleet wide emissions level and 163 grams/mile of CO2 in model year 2025 (compared to 326 g/mile in MY 2011) which is equivalent to 54.5 mpg if this level were achieved solely through improvements in fuel economy. NHTSA estimated that, if proposed and subsequently finalized at levels announced on an augural basis for model years , CAFE standards could increase industry-wide fuel economy to mpg by model year 2025, depending on a range of factors. The National Program represents the most significant increase in fuel economy standards in over 30 years. The agencies estimated that some increased electrification of the fleet would occur through the expanded use of stop/start and mild hybrid technologies. Projected that meeting the MY 2025 standards would require only about five to nine percent of the fleet to be full hybrid electric vehicles (HEVs) and only about two to three percent of the fleet to be electric vehicles (EV) or plug-in hybrid electric vehicles (PHEVs). The MY and MY 2017 and beyond CAFE and GHG emissions standards are attribute-based standards, using vehicle footprint as the attribute. A manufacturer s calculation of its fleet average standards as well as its fleets average performance at the end of the model year will be based on the productionweighted average target performance of each model in its fleet. Figures 1.1 and 1.2 show the CAFE target curves for passenger cars and light trucks. 4

5 Figure 1.1 CAFE Target Curves for Passenger Cars Figure 1.2 CAFE Target Curves for Light Trucks 5

6 The agencies committed in the 2012 final rule to conduct a comprehensive mid-term evaluation for the MY standards. Public input on the Draft TAR, along with any new data information, will inform the next step in the MTE process EPA s Proposed Determination. Public input on the Proposed Determination will inform the next step EPA s Final Determination. The Final Determination will be the Administrator s final decision on whether or not the MY standards are appropriate. EPA is legally bound to make a final determination, by April 1,2018, on whether the MY GHG standards are appropriate. The U.S. average temperatures have increased by 1.3 to 1.9 degrees Fahrenheit since 1895, with most of that increase occurring since 1970, and the most recent decade was the U.S. s hottest as well as the world s hottest. Future warming is projected to be much larger than recent observed variations in temperature, with 2 to 4 degrees Fahrenheit warming expected in most areas of the U.S. over the next few decades, and up to 10 degrees Fahrenheit possible by the end of the century assuming continued increases in emissions. In 2009, President Obama adopted a goal of reducing U.S. GHG emissions by approximately 17 percent below 2005 levels by The National Program standards include reducing new car and light truck GHG emissions levels by 50 percent by In December 2015, the U.S. was one of over 190 signatories to the Paris Climate Agreement. With climate change threatening California s resources, economy, and quality of life, the State is squarely focused on addressing it and protecting its natural and built environments. In April 2016, California released a Proposed SLCP Reduction Strategy which is designed to meet planning targets of reducing CH4 and HFC emissions by 40 percent below 2013 levels by 2030, and reducing BC emissions by 50 percent below 2013 levels by CO2, CH4, and N2O emissions are present in vehicles tailpipe emissions. HFCs are used in automotive air conditioning systems. In recent years, the annual GHG emissions inventory due to light-duty vehicles has been slightly more than 1 billion metric tons per year. HFCs are the fastest growing source of GHG emissions in California. Cars, light trucks, and medium-duty passenger vehicles alone account for 16 percent of all U.S. GHG emissions.co2 emissions represent 96 percent of total mobile source GHG emissions. The Light-Duty GHG/CAFE National Program is a centerpiece of the U.S. climate change program. EPA projected that the cumulative GHG emissions savings over the lifetimes of the new light duty vehicles sold in the model years 2012 through 2025 would be 6 billion metric tons. EPA projected, in the 2012 Final Rule analysis, that the National Program would yield GHG emissions reductions of 180 million metric tons in the calendar year 2020, 380 MMT in 2025, 580 MMT in 2030, 860 MMT in 2040, and 1100 MMT in Dependence on imported petroleum leads to many risks: potential for oil suppliers to manipulate market mechanisms and raise prices, threat of supply disruptions which can have significant economic and national security ramifications, and the export of domestic capital to pay for imported petroleum which can have a wide variety of deleterious impacts on domestic economic growth and trade balances. Despite these concerns, net imports of petroleum grew fairly consistently for 3 decades from around 5 million barrels per day (MBPD) in the early 1970s to over 12 MBPD in Import share of U.S. oil consumption over the same period doubled from about 30 percent to about 60 percent. U.S. reliance on imported petroleum has decreased significantly in recent years as domestic oil and natural gas liquids production reversed its historical decline and increased from 6.8 MBPD in 2008 to 11.7 MBPD in Oil imports have declined in recent years. Gasoline prices have fallen since late 2014: averaged about $2.50 per gallon during most of 2015, expected average of $1.98 per gallon in 2016, and expected average of $2.21 per gallon in History of the oil market over the last few decades has been longer periods of relative stability interrupted by shorter periods of high market volatility. On March 30, 2011, the U.S. pledged to reduce oil imports by onethird by 2025, or by about 3.6 MBPD (achieved well in advance of 2025). The broader challenge will be to retain, or even build on, this successful reduction in oil imports over the next decade given the history of volatility in oil markets. 6

7 Chapter 2: Overview of the Agencies Approach to the Draft TAR Analysis The Midterm Evaluation (MTE) is a comprehensive assessment of all of the factors considered by the agencies in setting the MY standards. Some factors taken into account when creating the MY standards are the effectiveness and availability of technology, the cost on producers, the practicability of the standards, the impact on reduction on emissions. The preamble to the final rule listed ten factors that was considered at a minimum during the MTE; which include, development of powertrain improvements to gasoline and diesel powered vehicles, impacts on employment, availability and implementation of methods to reduce weight, actual and projected availability of public and private charging infrastructure for electric vehicles, costs, availability, and consumer acceptance of technologies to ensure compliance with the standards, payback periods for any incremental vehicle costs associated with meeting the standards, costs of gasoline, total light-duty vehicle sales and projected fleet mix, market penetration across the fleet of fuel efficient technologies, and any other factors that may be deemed relevant to the review. EPA also examines the California Zero Emission Vehicle program for potential impacts. Credits were taken into account for both the NHTSA and EPA s decisions on the standards. Chapter 3: Recent Trends in the Light-Duty Vehicle Fleet Since the 2012 Final Rule Since the final rulemaking, new vehicle sales, fuel economy, and horsepower are all at record highs. Average new fuel economy has increased by 5 mpg and GHG emissions has decreased by 21% in the last ten years. The average new vehicle fuel economy for MY2014 was 30.7 mpg and GHG were 290 grams of CO2 per mile on average. In MY 2014, average new vehicle fuel economy was unchanged from MY2013, largely due to an increasing percentage of truck sales. However, truck fuel economy in MY 2014 increased by 0.8 mpg over the previous year. Overall, in MY 2014, the improved fuel economy in trucks offset the market shift towards trucks to result in no change to the overall average fuel economy of new vehicles. Fuel economy is projected to increase to 31.2 mpg for MY Although the EPA does not expect that actual emissions will match projections made in 2012, for MY 2014, the actual vehicle GHG emissions of 290 g/mile did match the level projected in the 2012 Federal Rule Making (FRM). GHG emissions are projected to decrease to 284 g/mile for MY Manufacturers were able to increase sales while meeting the first three years of the CAFE and GHG standards, MY Gas prices have decreased by 40 percent since the promulgation of the final rulemaking in Instead of the price of gasoline being $3.87 per gallon as expected, gasoline prices dropped more than 40 percent in the United States, and ended 2015 at about $2.15 per gallon. The factors that affect supply and demand for crude oil include growing demand from developing countries, natural disasters, economic conditions, geopolitical events, and introduction of new technology. U.S. production of crude oil increased more than 70 percent between 2010 and The U.S. Energy Information Administration has provided three projections for gasoline prices through They estimate gasoline prices to increase to $3.90 by In the high scenario, gasoline prices will be $6.33, and in the low scenario, gasoline prices will be $2.60. Gasoline prices are difficult to predict because there are many factors that can have large impacts on the supply and demand of crude oil. The final rulemaking created footprint based standards to encourage improvements for all types of vehicles in order to maintain consumer choice. Footprint is defined as the area where the centers of the four tires touch the ground. Vehicle footprint is at its highest level on record because of the increase in truck sales. Pickup trucks have been increasing footprint while other vehicle footprints have been kept constant. Since 2012, there has been an increase in truck sales. The percentage of trucks sold, as shown in Figure3.4, increased 4.8 percent to 40.7 percent of all sales in MY Projected sales for MY 2015 predict a slight drop in the percentage of trucks sold; however, lower than expected gasoline prices may alter the final sales data. Sales of SUVs are continuing to grow and have increased from 20 percent of total sales in 2004 to 34 7

8 percent in MY The growth of SUVs looks to continue, especially as the market for small SUVs continues to develop. They are expecting truck sales to peak in 2015 and slowly drift back to lower levels. Gasoline prices could have a major impact on the future direction of cars and trucks. One recent, unexpected, and significant development in the automotive market has been the volatility in gasoline prices. Figure 3.4 Truck Production Share by Year Vehicle weight, horsepower, and footprint are correlated to vehicle fuel economy and GHG emissions. Vehicle horsepower was at record levels in MY2015 and it has been increasing since 1981 except 2009 and The average new vehicle sales weighted horsepower has increased 14 horsepower to a projected record high of 233 horsepower in MY Manufacturers are accomplishing more horsepower while simultaneously increasing fuel economy and decreasing GHG emissions. Vehicle weight has stayed relatively constant through the last decade. Pickup trucks have had a weight reduction from MY2014 to MY2015, but cars and SUVs has been more constant. The projected new vehicle average weight for vehicles in MY 2015 is 4076 pounds, which is less than a 1 percent difference from MY Projected data for MY 2015 shows a significant weight reduction for new pickup trucks compared to MY Overall new vehicle weight has remained nearly constant even given the continuing trend towards larger vehicles, and overall fuel economy has improved. In the 2012 final rulemaking, EPA presented pathways for most cost effective ways manufacturers could comply with the standards. This included continual improvement on the internal combustion engine. Since MY2008, there has been a significant increase in the use of VVT, GDI, and six speed transmissions in vehicles. There has also been in increase in multi-valve, turbo, cylinder deactivation, hybrid, EV and PHEVs, CVT, non-hybrid stop/start, diesel, and seven+ speed transmissions. Many of the technologies analyzed in the 2012 final rulemaking are on trend for reaching high penetration levels particularly direct injection and 8+ speed (and CVTs). To meet 2025 CAFE regulations, direct injection, 8+ speed (and CVTs), and turbodownsized engines must reach 90%+ production penetration. Transmission technology has also been changing rapidly. Six-speed transmissions increased from 19 percent in MY 2008 to a projected market share of 57 percent in MY Recent low gas prices may make hybrids less appealing to consumers, but plug-in hybrids and electric vehicles continue to enter the market. There are now 12 battery EVs and 13 PHEVs available, and more are scheduled to be released in the coming years. There are also 2 fuel cell electric vehicles (FCEVs) available to consumers. Overall, sales of 8

9 these vehicles are still low, but appear to be slowly growing. Sales of EVs increased 9 percent in 2015 and increased to 22 percent in the first quarter of PHEV sales were down 24 percent in 2015, but are up over 80 percent in the first quarter of As noted earlier, the government does not expect a large penetration of alternative powertrains to meet CAFE regulations, and as shown in Figure 3.10, the penetration for diesels, hybrids, EVs, and PHEVs remain small. Figure 3.10 Light Duty Vehicle Technology Penetration Share since the 2012 Final Rule Manufacturers have outperformed the GHG standards for MY This means that consumers are buying vehicles with lower GHG emissions than required by the EPA standards. 20 out of 24 manufacturers are carrying positive credit balances into MY2015. Manufacturers with a deficit have three model years to offset that deficit. The status of manufacturers with deficits into MY2015 is neither compliance nor noncompliance. In the first three years of the GHG compliance program, the industry has outperformed the standards each year, all large manufacturers are carrying forward credits, and there has been active trading of credits between manufacturers. As shown in Table 3.1, Toyota more than doubles the second leading manufacturer, Honda, in the number of credits carried to

10 Table 3.1 Credit GHG Balances at Conclusion of the 2014 Model Year (Mg) On average, manufacturers have been in compliance with the CAFE program since MY2011. Fleets not meeting CAFE standard represented 44 percent of all fleets on average but represented only 33 percent of the total industry production volume for model years 2012 through The majority of these manufacturers failed to meet the standard for their light truck fleets for these model years but have rebounded for the 2014 compliance period. The CAFE program anticipates that not all manufacturers compliance fleets will meet the standards for each model year. The CAFE program was designed to allow manufacturers to comply by exercising one or more program flexibilities to leverage compliance over multiple model years or by eliminating the deficiencies of under complying fleets using the benefits gained by over performing fleets. To achieve compliance beyond applying fuel economy improving technologies, manufacturers can build dual and alternative fueled vehicles, bank, trade, and transfer credits earned, or pay civil penalties. NHTSA anticipates that credit trading will continue to be a major incentive for manufacturers in the upcoming model years as credit trading was the primary flexibility in model year Chapter 4: Baseline and Reference Vehicle Fleets American consumers have a great number of vehicle options to accommodate their needs and preferences. Although it is impossible to precisely predict the future fleets which are affected by CAFE and GHG emission standards, the agencies need to characterize and quantify the future fleet in order to assess the impacts of the GHG standards that would affect that future fleet. EPA has developed a baseline/reference fleet in two parts. The first step was to develop a baseline fleet which represents data from a single model year of actual vehicle sales. The second step was to project the baseline fleet sales into MYs which is called the reference fleet volumes, and it represents the fleet volumes that the EPA believes would exist in MYs absent the application of the GHG standards. After determining the reference fleet volumes, the third step is to account for technologies that could be added to the baseline technology vehicles in the future, taking into account previously-promulgated standards, and assuming MY 10

11 2021 standards apply at the same levels through MY Table 4.16 below contains the estimated sales volumes for MY 2014 and Table 4.16 Car and Truck Volumes Table 4.17 shows the sales volumes by manufacturer and Car/Truck type for MY2014 and MY and Table 4.18 shows the change in footprint that is expected by the change in fleet make up. 11

12 Table 4.17 Car and Truck Definition Manufacturer Volumes 12

13 Table 4.18 Production Weighted Foot Print Mean Table 4.19 below shows the changes in engine cylinders over the model years. The current assumptions show that engines shrink slightly between 2014 and 2017 and then remain relatively constant over the time frame with only a very slight shift to 4 cylinders in trucks (may be due to an increase in small SUVs). Table 4.19 Percentages of 4, 6, and 8 Cylinder Engines by Model Year Because the standards are based on the harmonic average of a manufacturer s fuel economy targets, which are themselves a function of vehicle footprint, the specific mix of vehicle footprints and regulatory classes that a manufacturer produces in each model year determines the standard for each manufacturer in that year. In order to analyze the impact of alternative fuel economy standards in future model years, it was necessary to estimate vehicle production volumes for each manufacturer in those years. To generate sales volumes for future model years, we combined three distinct sources of information about volumes. They include the Mid-Model Year reports and attribute data that manufacturers supplied to NHTSA. The second source is a proprietary production volume forecast that NHTSA purchased from IHS/Polk that covers the 13

14 years from 2013 to It contains volume projections for each vehicle model that is currently offered for sale in the U.S., as well as some legacy models that were phased out over the last two model years, and future models that have not yet been introduced in the U.S. market. The third source of volumes comes from a special set of runs of the National Energy Modeling System, NEMS, which forms the basis of the Energy Information Administration s Annual Energy Outlook Figure 4.17 shows the market shares for each manufacturer for MY2015 and Figure 4.18 shows the market shares for MY2025. Figure 4.17 MY 2015 Market Shares by Manufacturer 14

15 Figure 4.18 MY 2025 Market Shares by Manufacturer In considering potential new CAFE standards, NHTSA uses the CAFE model which relies on many inputs, including the analysis fleet. The analysis fleet is a forecast of the future vehicle market during the model years to be covered in the analysis. Once the analysis fleet is defined, NHTSA estimates how each manufacturer could potentially deploy additional fuel-saving technology in response to a given series of attribute-based standards. Table 4.37 calculates a sales-weighted average battery electric vehicles (BEVs) for MYs Although the projection results in an estimated 237 mile range, the final range of 200 miles was chosen to account for a potential slower-than-historical increase in range and to be consistent with an existing technology package in EPA s OMEGA model. Table 4.37 Projected Sales Weighted BEV Range for MY

16 The analysis summarized in Table 4.38 shows that, for MY , the sales-weighted average PHEV is projected to have a range of about 41 miles which was rounded down to a final range of 40 miles to be consistent with an existing PHEV40 technology package in OMEGA. Table 4.38 Projected Sales Weighted PHEV Range and US06 Capability for MY Also, Table 4.43 shows the estimated percentage of prevalence of major technologies by sales volume weighting in the MY 2015 Light Duty analysis fleet. Table 4.43 Engine Technologies by Manufacturer 16

17 Chapter 5: Technology Costs, Effectiveness, and Lead-Time Assessment The light-duty vehicle final rule analysis was based on the agencies' assessment of technologies as of the 2012 calendar year. Several new technologies or unforeseen application of technologies are now under active development and some have emerged into the light-duty vehicle market since the LD Final Rule was completed. These technologies include the application of direct injection Atkinson Cycle engines in non-hybrids, greater penetration of continuously variable transmissions (CVT) and greater market penetration of diesel engines. The development of several technologies has proceeded differently than was assumed in the FRM, including development of downsized turbo-charged engines, cylinder deactivation and vehicle electrification. Some manufacturers have chosen to adopt technology and use it to improve other vehicle attributes, other than solely improving vehicle efficiency. These other attributes include 0 to 60 mph acceleration, increased cargo capacity, increased towing capability, and/or increased vehicle size and mass. Notable updates from the FRM analysis include changes in direct injection Atkinson cycle engine, turbocharged, downsized engines, direct injection miller cycle engine, turbocharger improvements, cylinder deactivation, variable geometry valve train systems, continuously variable transmissions (CVT), dual clutch transmissions (DCT), and vehicle electrification. Since the MY GHG standards were established in 2012, efficiency technologies have been developed further and steadily implemented by manufacturers over a broad range of vehicles. Many of these are key technologies that factored prominently in the FRM analysis, such as direct injection, turbocharging and downsizing, and higher gear count transmissions. Other technologies that were known, but not included previously, have continued to evolve and are now being applied in ways that were not expected. Still other technologies have emerged since the FRM analysis which were previously thought to be beyond the MY timeframe, but now appear promising or even likely due to further innovation and development. The technologies considered in the Draft TAR fit into four general categories: engine, transmission, vehicle, and electrification. The types of engine technologies include low friction lubricants, reduction of engine friction losses, second level of low-friction lubricants and engine friction reduction, cylinder deactivation, variable valve timing, discrete variable valve lift, continuous variable valve lift, stoichiometric gasoline directinjection technology, turbocharging and downsizing, Atkinson cycle engines, direct injection Atkinson cycle engines, miller cycle engines, exhaust-gas recirculation with boost, and diesel engines. The types of transmission technologies include improved automatic transmission controls, six, seven, and eight-speed automatic transmissions, dual clutch transmissions (DCT) continuously variable transmission (CVT), shift optimization, manual 6-speed transmission, and high efficiency gearbox. The types of vehicle technologies include low-rolling resistance tires, low-drag and zero drag brakes, secondary axel disconnect for four-wheel drive systems, aerodynamic drag reduction, and mass reduction. The types of electrification and hybrid technologies include electric power steering (EPS), improved accessories (IACC), air conditioning systems, non-hybrid 12-volt stop-start, mild hybrid, P2 hybrid, power-split hybrid (PSHEV), plug-in hybrid electric vehicles (PHEV), and batter electric vehicles (BEV). EPA and NHTSA provide an opportunity for credits for off-cycle technologies. Off-cycle emission reductions and fuel consumption improvements can be achieved by employing off-cycle technologies that result in realworld benefits, but where that benefit is not adequately captured on the test procedures used by manufacturers to demonstrate compliance with emissions and fuel economy standards. The intent of the off-cycle provisions is to provide an incentive for CO2 and fuel consumption reducing off-cycle technologies that would otherwise not be developed because they do not offer a significant 2-cycle benefit. Technologies that are integral or inherent to the basic vehicle design including engine, transmission, mass reduction, passive aerodynamics, and base tires are not eligible. Any technology that was included in the agencies standard-setting analysis also may not generate off-cycle credits. Some of the ways to acquire off-cycle technology credits include following a predetermined list of credit values for specific off-cycle technologies 17

18 that may be used beginning in the model year 2014, use a broader array of emission tests to demonstrate and justify off-cycle CO2 credits, and seek EPA approval to use an alternative methodology for determining the off-cycle technology CO2 credits. The vast majority of credits in MY2014 were generated using the predefined menu. Table 5.29 shows some of the off-cycle technologies for cars and light trucks, and Table 5.30 shows the credits received for solar/thermal control technologies. Table 5.32 shows the off-cycle technology credits in grams per mile by manufacturer and technology. Technology Credit for Cars Credit for Light Trucks g/mi (gallons/mi) g/mi (gallons/mi) High Efficiency Exterior Lighting (at 100W) 1.0 ( ) 1.0 ( ) Waste Heat Recovery (at 100W; scalable) 0.7 ( ) 0.7 ( ) Solar Roof Panels (for 75 W, battery charging 3.3 ( ) 3.3 ( ) Solar l) Roof Panels (for 75 W, active cabin 2.5 ( ) 2.5 ( ) ventilation plus battery charging) Active Aerodynamic Improvements (scalable) 0.6 ( ) 1.0 ( ) Engine Idle Start-Stop w/ heater circulation 2.5 ( ) 4.4 ( ) Engine Idle Start-Stop without/ heater 1.5 ( ) 2.9 ( ) circulation system Active Transmission Warm-Up 1.5 ( ) 3.2 ( ) Active Engine Warm-Up 1.5 ( ) 3.2 ( ) Solar/Thermal Control Up to 3.0 ( ) Up to 4.3 ( ) Table 5.29 Off-cycle Technologies for Cars and Light Trucks Thermal Control Technology Credit (g CO2/mi) Car Truck Glass or Glazing Up to 2.9 ( ) Up to 3.9 ( ) Active Seat Ventilation 1.0 ( ) 1.3 ( ) Solar Reflective Paint 0.4 ( ) 0.5 ( ) Passive Cabin Ventilation 1.7 ( ) 2.3 ( ) Active Cabin Ventilation 2.1 ( ) 2.8 ( ) Table 5.30 Off-cycle Technologies and Credits for Solar/Thermal Control Technologies for Cars and Light Trucks 18

19 Manufacturer Active Aerody namics Thermal Control Technologies Engine & Transmission Warmup Other Grill shutters Ride height Passive cabin ventilatio Active cabin ventilati Active seat ventilati Glass or glazing Solar reflective surface Active engine warmup Active transmiss ion Engine idle High efficiency exterior li Solar ht panel(s) BMW Fiat Chrysler Ford GM Honda Hyundai Jaguar Land Rover Kia Mercedes Nissan Subaru Toyota Fleet Total indicates that the manufacturer did implement that technology, but that the overall penetration rate was not high enough to round to 0.1 grams/mile, whereas a dash indicates Table 5.32 Off-Cycle Technology Credits from the Menu, by Manufacturer and Technology (g/mi) Electrification technologies represent a particularly broad range of cost and effectiveness, ranging from relatively low-cost technologies offering incremental degrees of effectiveness, such as stop-start and mild hybrids, to higher-cost, highly effective technologies such as plug-in hybrids and pure electric vehicles. The costs associated with electrification are divided into battery and nonbattery costs. For the 2012 FRM analysis, the agencies' primary reference for effectiveness of stop-start technology was the Ricardo simulation study. Based on the study, it was estimated that on-cycle effectiveness of stop-start technology ranges from 1.8 to 2.4 percent depending on vehicle class. Table 5.84 shows the costs incremental to the baseline engine configuration for the different vehicle classes. 19

20 Tech Cost type DMC: base cost IC: complexity DMC: learning curve IC: near term thru Small car DMC $ $260 $246 $235 $227 $219 $213 $208 $203 $198 Standard car DMC $ $260 $246 $235 $227 $219 $213 $208 $203 $198 Large car DMC $ $294 $279 $267 $257 $248 $241 $235 $230 $225 Small MPV DMC $ $294 $279 $267 $257 $248 $241 $235 $230 $225 Large MPV DMC $ $294 $279 $267 $257 $248 $241 $235 $230 $225 Truck DMC $ $323 $306 $293 $282 $273 $265 $258 $252 $247 Small car IC Med $117 $116 $87 $87 $86 $86 $86 $86 $86 Standard car IC Med $117 $116 $87 $87 $86 $86 $86 $86 $86 Large car IC Med $133 $132 $99 $98 $98 $98 $98 $97 $97 Small MPV IC Med $133 $132 $99 $98 $98 $98 $98 $97 $97 Large MPV IC Med $133 $132 $99 $98 $98 $98 $98 $97 $97 Truck IC Med $146 $145 $108 $108 $107 $107 $107 $107 $107 Small car TC $377 $362 $322 $313 $306 $299 $294 $289 $284 Standard car TC $377 $362 $322 $313 $306 $299 $294 $289 $284 Large car TC $427 $411 $365 $355 $346 $339 $333 $327 $322 Small MPV TC $427 $411 $365 $355 $346 $339 $333 $327 $322 Large MPV TC $427 $411 $365 $355 $346 $339 $333 $327 $322 Truck TC $469 $451 $401 $389 $380 $372 $365 $359 $354 Note: DMC=direct manufacturing costs; IC=indirect costs; TC=total costs. Table 5.84 Costs for Stop-Start for Different Vehicle Classes (dollar values in 2013$) In the 2012 FRM analysis, the agencies based their cost and effectiveness estimates for mild hybrid technology on an analysis of Belt Integrated Starter Generator(BISG) technology as exemplified by the General Motors eassist. The absolute effectiveness for the CAFE analysis ranged from 8.5 to 11.6 percent depending on vehicle subclass. In the 2012 FRM, P2 hybrid was the only hybrid architecture that was applied in the EPA analysis. On this basis EPA estimated an absolute CO2 effectiveness for P2 strong hybrids ranging from 13.4 to 15.7 percent depending on vehicle class. EPA also calculated overall strong hybrid effectiveness by comparing the nonhybrid variants from the same vehicle manufacturers. Plug-in hybrid electric vehicles (PHEVs) utilize two sources of energy, electricity and liquid fuel, which are accounted for differently according to the effectiveness accounting methods established in the 2012 FRM. The assumed effectiveness for a PHEV20 would be approximately 58 percent GHG reduction for a midsize car and approximately 47 percent GHG reduction for a large truck. The 2012 FRM established an incentive multiplier for compliance purposes for PHEVs sold in MYs 2017 through The 2012 FRM also set the tailpipe compliance value for the electricity portion of PHEV energy usage to 0 g/mi for MYs , with no limit on the quantity of vehicles eligible for 0 g/mi tailpipe emissions accounting. The 2012 FRM established an incentive multiplier for compliance purposes for BEVs sold in MYs 2017 through The multiplier approach means that each BEV counts as more than one vehicle in the manufacturer s compliance calculation. The 2012 FRM also set the tailpipe compliance value for the electricity usage of BEVs to 0 g/mi for MYs , with no limit on the quantity of vehicles eligible for 0 g/mi tailpipe emissions accounting. In this Draft TAR analysis, the GHG effectiveness of BEVs is unchanged from that used in the FRM, which is 100 percent GHG reduction. 20

21 At this time, EPA is continuing to use the 2012 FRM cost assumptions for non-battery components as a basis for draft OMEGA runs. For this Draft TAR, EPA has continued to use the same non-battery costs as used in the 2012 FRM with two exceptions: costs have been updated to 2013$; and, MHEV(Mild Hybrid) 48V non-battery costs are new since they were not considered in the 2012 FRM. Tables 5.89 through 5.95 show direct manufacturing costs, indirect costs, and total costs for MHEV 48V, strong hybrid, 20, 40, 75, 100, and 200 mile plug-in hybrid. Also, tables 5.96 through 5.99 look at the costs of in-home chargers and the cost of labor associated with all in-home chargers. In order to develop cost estimates for electrified vehicles, it is necessary to determine the specifications of battery and non-battery components that can deliver the desired energy management, driving range and acceleration performance goals. Battery costs have many drivers, and future cost projections derived by any methodology are subject to significant uncertainties. Chapter 6: Assessment of Consumer Acceptance of Technologies that Reduce Fuel Consumption and GHG Emissions As part of the midterm evaluation, the agencies examined Costs, availability, and consumer acceptance of technologies to ensure compliance with the standards, such as vehicle batteries and power electronics, mass reduction, and anticipated trends in these costs. It is difficult to separate the effects of the standards on vehicle sales and other characteristics from the impacts of macroeconomic or other forces on the auto market. Figure 6.1 shows that production fell with the reduction in economic activity in the 2009 recession and has increased as the economy has recovered. It is projected that in 2016, vehicle sales will exceed 17 million and domestic production to exceed 11.5 million. The factors that affect new vehicle production and sales include fuel prices, demographic factors, vehicle characteristics, and the 2012 light-duty vehicle standards. Figure 6.1 Gross Domestic Product Per Capita and Vehicle Production, In addition to their effect on overall sales and production, the standards could affect the mix of vehicles sold. Because the standards are based on the footprints of vehicles, shifts in the mix of vehicles sold do not necessarily affect automakers ability to meet the standards. The footprint-based standard provides some 21

22 incentive for automakers to increase the size of vehicles sold in order to face a less stringent and higher GFG emissions. As part of the exploration of vehicle choice modeling, EPA commissioned the development of a vehicle choice model that estimates the effects of changes in only fuel economy and price on vehicle sales and class mix. The EPA has put the model through a variety of tests intended to understand it better. These tests showed that imprecision in the initial fleet is not likely to have a major effect on the model s predictions. It also suggests that the results of changing fuel economy and price in the model may not have large effects on the vehicle fleet. Therefore, the EPA does not plan to use this vehicle choice model. Although the agencies estimate that fuel-saving technologies pay for themselves within a few years payback period, and thus save consumers money, the development and uptake of energy efficiency technologies lags behind adoption that might be expected under these circumstances. There are several hypotheses to explain this phenomenon. One hypothesis is that consumers may lack the information necessary to estimate the value of future fuel savings. In addition, fuel-saving technologies may impose hidden costs. Consumers also may be accounting for uncertainty in future fuel savings when comparing upfront costs to future returns. If consumers are doing a good job of getting their efficient amount of fuel economy, their willingness to pay for additional fuel savings should approximately equal expected future fuel savings. Consumers appear to take fuel economy into account when buying vehicles, but how precisely they do is not yet clear. Consumers cannot buy technologies that are not produced; some of the gap in energy efficiency may be explained from the producer s side. The two major themes that arise on the producer side include the role of market structure and business strategy, and the nature of technological invention and innovation. The existence of the gap depends on whether fuel-saving technologies that would not have been used in the absence of the standards provide net benefits to new vehicle buyers even when the externalities associated with the standards are not included. The net benefits calculation involves three components: the technology s effectiveness, the technology s cost, and whether there are any adverse unintended consequences of the technologies. One measure of consumer response to the vehicles subject to the standards is the effects of the standards on vehicle sales. The EPA is examining these effects through analysis of the evaluations that professional auto reviewers give to fuel-saving technologies. Although reviewers may not respond to vehicle technologies in the same way that vehicle owners will, it seems reasonable to expect that reviewers will comment on significant problems for particular technologies. Table 6.1 shows the results aggregated to the review level. Negative evaluations are less than 20 percent of the totals. Even the most negatively reviewed technologies, continuously variable transmissions and stop-start, have majority positive evaluations. 22

23 Table 6.1 Efficiency Technology s Positive, Negative, or Neutral Evaluations by Auto Reviews Vehicle sales are very strong, and evidence of inherent hidden costs of the technologies has not been found. As the standards become more stringent, there will be both more applications of existing technologies to new vehicles and new or improved technologies are likely to be developed. Because the standards are expected to increase the up-front costs of new vehicles with the fuel savings that recover those costs over time, questions arose about dealing with the GHG rule concerning the effects of the standards on affordability. Data suggests that lower income households are more affected by the impact of the rule on the used vehicle market than on the new vehicle market, and that they are more vulnerable to changes in fuel prices than they are to changes in vehicle prices. The benefits of the standards for buyers of used vehicles will depend on two countervailing effects from the improvement in fuel economy: the increased cost of the used vehicles attributed to fuel-saving technologies and the savings in fuel costs over time. Older vehicles are used less on average than new vehicles; therefore, fuel savings will accumulate more slowly. On net, in this current Draft TAR, reduced up-front costs exceed the reduction in fuel savings so that the payback period is shorter for used cars than for new cars. 23

24 EPA projected that the MY standards could be achieved using primarily gasoline vehicles. There should be no problem with consumer acceptance because the standards can be achieved with greater penetration of existing technologies and a few percent of Plug-in Hybrid and Battery Electric vehicles (PEVs). Range, cost, and lack of awareness are some of the barriers to adoption of PEVs. A survey conducted in 2015 found that less than half of respondents could name a specific PEV model. Uncertainty and risk are some of the factors that consumers consider about PEVs compared to gasoline models. Some studies suggest that experience with the technology increases acceptance. The NAS committee notes that PEV buyers are dissatisfied with their dealer experience more than buyers of conventional vehicles. Consumer acceptance of PEVs may depend, not only on technological advances, but also on the feedback loop associated with other consumers purchasing PEVs. Even though projected fuel savings are expected to outweigh increased vehicle costs, some concerns have been raised about whether higher vehicle prices may exclude prospective consumers from the new vehicle market through effects on consumers ability to finance vehicles. The financing market appears to be evolving. The available term length of auto loans has increased. Also, some lenders give discounts for loans to purchase more fuel-efficient vehicles. It is difficult to assess the effects of the LDV GHG standards on vehicle affordability, due to both challenges in defining affordability, and difficulties in separating the effects of the standards from other market changes. Because lower-income households are likely to buy used vehicles, the effects of the standards on lower-income households depend on its effects in both the new and used vehicles. In sum, if the standards have affected vehicle affordability, those effects do not appear to have been large enough to be obvious in our considerations of the data. Chapter 8: Assessment of Vehicle Safety Effects The primary goals of CAFE and GHG standards are to reduce fuel consumption and GHG emissions from the on-road light-duty vehicle fleet, but in addition to these intended effects, the agencies also consider the potential of the standards to affect vehicle safety. Safety trade-offs associated with fuel economy increases have occurred in the past, particularly before CAFE standards were attribute-based. Manufacturers have chosen to build smaller and lighter vehicles which do not fare as well in crashes as larger heavier vehicles. Manufacturers have stated that they will reduce vehicle mass as one of the cost-effective means of increasing fuel economy and reducing CO2 emissions in order to meet the standards. However, the footprint-based standards do not discourage downsizing the portions of a vehicle in front of the front axle and to the rear of the rear axle. The crush space provided can make important contributions to managing crash energy. The agencies seek to ensure that the standards are designed to encourage manufacturers to pursue a path toward compliance that is both cost-effective and safe. To estimate the possible safety effects of the MY standards, the agencies have undertaken research that studies the effect of vehicle mass reduction on safety historically. It also investigates what amount of mass reduction is affordable and feasible while maintaining vehicle safety and functionality. Finally, the study investigates the new challenges these lighter vehicles might bring to vehicle safety and potential countermeasures available to manage those challenges effectively. The purpose of the analysis is to find a statistical relationship between mass, footprint, and safety. Specifically, the analysis is to estimate the fatality risk effect per 100 pounds mass reduction while holding the vehicle footprint constant. The agencies have identified the specific areas to direct research in preparation for future CAFE/GHG rulemaking in regards to statistical analysis of historical data. First, NHTSA would contract with an independent institution to review the statistical methods that NHTSA and DRI (Dynamic Research, Inc.) have used to analyze historical data related to mass, size and safety, and to provide recommendations on whether the existing methods or other methods should be used for future statistical analysis of historical data. Second, NHTSA and EPA, in consultation with DOE, would update the MY database on which the safety analyses in the NPRM and final rule are based with newer vehicle data, and create a 24

25 common database that could be made publicly available to help address concerns that differences in data were leading to different results in statistical analyses by different researchers. Third, in order to assess if the design of recent model year vehicles that incorporate various mass reduction methods affect the relationships among vehicle mass, size and safety, the agencies sought to identify vehicles that are using material substitution and smart design, and to try to assess if there is sufficient crash data involving those vehicles for statistical analysis. The agencies consider the latest 2016 preliminary statistical analysis of historical crash data by NHTSA/Volpe to represent the current best estimates of the potential relationship between mass reduction and fatality increases in the future fleet. The results show that applying mass reduction to CUVs, minivans, and light duty s will generally decrease societal fatalities, while applying mass reduction to passenger cars will increase fatalities. The agencies believe that mass reduction of up to 20 percent is feasible on light trucks, CUVs and minivans. Table 8.12 shows the maximum amount of mass reduction in pounds for these percentage mass reduction levels for average vehicle weight in each subclass. Table 8.12 Examples of Mass Reduction (in Pounds) for Different Vehicle Subclasses Using the Percentage Information as Defined for the CAFE Draft TAR Analysis Table 8.14 shows CAFE model results for societal safety for each model year based on the application of the above mass reduction limits. Table 8.14 NHTSA Calculated Mass-Safety-Related Fatality Impacts of the Draft TAR Analysis over the Lifetime of the Vehicles Produced in each Model Year Using 2015 Baseline The ways in which future technological advances could potentially mitigate the safety effects estimated for this Draft TAR include the following: lightweight vehicles could be designed to be both stronger in materials without becoming more intrusive in crash force; restraint systems could be improved to deal with higher crash pulses in lighter vehicles; crash avoidance technologies could reduce the number of overall crashes; 25

26 roofs could be strengthened to improve safety in rollovers. NHTSA will closely monitor the safety data, the trends in vehicle weight and size, the trends in vehicle mass reduction, as well as the trend for the active and passive vehicle safety during the period between the release of this Draft TAR and the future rulemaking to establish final CAFE standards for MYs Chapter 9: Assessment of Alternative Fuel Infrastructure One of the relevant factors to be examined included actual and projected availability of public and private charging infrastructure for electric vehicles, and fueling infrastructure for alternative fueled vehicles. Although only a small fraction of PEVs are needed to meet the MY2025 standards, EPA, NHTSA, and CARB are expecting more BEV, PHEV, and FCEV to enter the market in order to meet the standards long term. Electric drive vehicles have entered the market with significant growth in the number of models offered and have proven to reduce or eliminate GHG emissions and improve fuel economy compared to conventional technologies. The agencies are projecting in this Draft TAR that only a very small fraction of the fleet will need to be PEVs to meet the MY2025 standards. Currently, the majority of charging is taking place at home. Public and workplace charging network infrastructure has greatly expanded, offering higher power charging in a greater number of locations. The increase in infrastructure may change the views on PEVs. With regard to hydrogen FCEVs, a robust network of hydrogen stations is required to facilitate widespread commercialization. California was the first state planning to fund and develop hydrogen stations which are needed for FCEVs. Currently, Northeast states are planning on developing these stations as well. Chapter 10: Economic and Other Key Inputs Used in the Agencies Analyses Real world tailpipe CO2 emissions are higher, and real world fuel economy levels are lower, than the values from the EPA standards compliance tests. The laboratory testing cannot reflect all of the factors that can affect real world operation. The EPA and NHTSA applied a 20 percent fleet-wide fuel economy gap which means that average, fleet-wide real world fuel economy would be 20 percent lower than EPA compliance test values. More recent data suggests that the gap between 2-cycle compliance test and 5-cycle methodology values may have increased very slightly in the last decade. One factor which has clearly changed and can be quantified is ethanol content in gasoline. For this Draft TAR analysis, EPA adjusts for projected differences in the energy content due to increased ethanol penetration of retail gasoline relative to test fuel for MY2022 and beyond. Ethanol contains about 35 percent less energy than gasoline, on a volumetric basis, and EPA projects that average in-use gasoline will contain about 3.5 percent less energy in 2025 than it did in the timeframe. Using the base 20 percent fuel economy gap between 2-cycle and 5-cycle data and the projected impact of the ethanol increase in 2025 yields an effective gap of 23 percent (or a fuel economy factor of 0.77), and this is the overall fuel economy gap that we use in this report. The EPA expects that the gap will likely increase, but on the other hand, it is possible that powertrain designs will be more robust in the future. Table 10.3 shows EPA s best projections of the real world CO2 emissions and fuel economy values associated with the projected CO2 standards compliance emissions levels presented throughout the report. EPA projects the industry-wide real world fuel economy associated with the MY2025 GHG standards to be 36 mpg. 26

27 MY CO2 Target (g/mi) CO2 Target As MPG A/C Leakage Credit (g/mi) 2-Cycle A/C Efficiency Credit (g/mi) Offcycle Credit (g/mi) Tailpipe CO2 (g/mi) MPG Adjustments to 2-Cycle to Reflect Real World Impacts A/C Efficiency & Offcycle Credits (g/mi) Effective CO2 (g/mi) Effective MPG Gap Onroad MPG On-road On-road Tailpipe CO2 (g/mi) Note: The on-road values reflect adjustments for both the historical 2-cycle-to-5-cycle gap as well as the projected ethanol content in retail gasoline, and corresponding energy content. The on-road CO2 is calculated by dividing 8488, the estimated CO2 grams/gallon from combustion of a gallon of retail gasoline, by the on-road MPG. The on-road CO2 e column subtracts from the on-road tailpipe CO2 values the A/C leakage value to yield a value that reflects overall real world CO2 e emissions performance. Onroad CO2e (g/mi) Table 10.3 EPA Projections for Fleet-wide CO2 Standards Compliance and On-road Performance for the Fleet Fuel prices and the projection of fuel prices remain critical in the analysis of GHG and fuel economy standards. Table 10.4 shows the comparison of several cases for gasoline prices. Measured in constant 2013 dollars, the Annual Energy Outlook (AEO) 2015 Reference Case projections of retail gasoline prices during calendar year 2025 is $2.95 per gallon, rising gradually to $3.90 by the year AEO 2015 Reference $ 2.95 $ 3.20 $ 3.90 AEO 2015 "Low" $ 2.40 $ 2.45 $ 2.60 AEO 2015 "High" $ 4.56 $ 5.05 $ 6.33 Table 10.4 Gasoline Prices for Selected Years in Various Annual Energy Outlook 2015 Cases Chapter 11: Credits, Incentives, and Flexibilities The National Program was designed with a wide range of optional flexibilities to allow manufacturers to maintain consumer choice, spur technology development, and minimize compliance costs, while achieving significant GHG and oil reductions. Averaging, banking, and trading (ABT) provisions define how credits may be used and are integral to the program. These ABT provisions include credit carry-forward, credit carry-back, credit transfers, and credit trading. Credit carry-forwards refers to saving credits. Credit carryback refers to using credits to offset a deficit. The CAFE programs limits credit carry-forward to 5 years and credit carry-back to 3 years. All unused credits from MY can be carried forward through MY2021. Transferring credits refers to exchanging credits between passenger cars and light trucks within a manufacturer. Although a manufacturer s use of the credit and incentive provisions is optional, EPA projected that the standards would be met on a fleet-wide basis by using a combination of reductions in tailpipe CO2 and some use of the additional optional credit and incentive provisions in the regulations. A manufacturer may have a deficit at the end of a model year which means the manufacturer s fleet average 27

28 level may fail to meet the required fleet average standard. Finally, accumulated credits may be traded to another manufacturer. Manufacturers are acquiring credits to offset immediate credit shortfalls and to bank for future compliance use. As standards become more stringent and total credit shortfalls increase, NHTSA projects an increase in credit trades and carry-forwards and a reduction in civil penalty payments as a result of these changes in flexibility usage. There are two mechanisms by which air conditioning (A/C) systems contribute to the emissions of greenhouse gases: through leakage of hydrofluorocarbon refrigerants into the atmosphere (direct emissions) and through the consumption of fuel to provide mechanical power to the A/C system (indirect emissions). The high global warming potential of the current automotive refrigerant means that leakage of a small amount of refrigerant will have a far greater impact on global warming than emissions of a similar amount of CO2. The impacts of refrigerant leakage can be reduced significantly by systems that incorporate leak-tight components. The A/C system also contributes to increased tailpipe CO2 emissions through the additional work required to operate the compressor, fans, and blowers. These emissions can be reduced by increasing the overall efficiency of an A/C system, thus reducing the additional load on the engine from A/C operation, which in turn means a reduction in fuel consumption and a commensurate reduction in GHG emissions. Manufacturers may generate credits for improved A/C systems in complying with the CO2 fleet average standards in the MY2012 and later model years. EPA included incentives for advanced technologies to promote the commercialization of technologies that have the potential to transform the light-duty vehicle sector by achieving zero or near-zero GHG emissions and oil consumption in the longer term, but which face major near term market barriers. The EPA believed it is worthwhile to forego modest additional emissions reductions in the near term in order to lay the foundation for the potential for much larger game-changing GHG emissions and oil reductions in the longer term. The EPA also believed that temporary regulatory incentives may help bring some technologies to market more quickly than in the absence of incentives. A multiplier incentive is available for MY electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), fuel cell vehicles (FCVs) and compressed natural gas (CNG) vehicles. The multiplier allows a vehicle to count as more than one vehicle in the manufacturer s compliance calculation. EPA included a second incentive for EVs, PHEVs, and FCVs by allowing temporary and limited 0 g/mile treatment of the electric operation of those vehicles. The agencies recognized that the MY standards will be challenging for large vehicles, including full-size pickup trucks that are often used for commercial purposes. In the MY final rule, EPA and NHTSA included a per-vehicle credit provision for manufacturers that hybridize a significant number of their full-size pickup trucks, or use other technologies that comparably reduce CO2 emissions and fuel consumption. Alternatively, manufacturers may generate performance-based credits for full-size pickups. This performance-based credit is 10 g/mi CO2 or 20 g/mi CO2 for full-size pickups achieving 15 percent or 20 percent, respectively, better CO2 than their footprint-based targets in a given model year. Chapter 12: EPA s Analysis of the MY GHG Standards EPA used the OMEGA model to help establish the GHG standards for MY and The OMEGA begins with information about vehicle fleet, sales, base CO2 emissions, vehicle footprint, and a list of GHG emissions reducing technologies currently in use. The model combines information on technology cost and effectiveness, fuel prices, discount rates, and estimated vehicle sales for each technology to predict which technologies manufacturers could use in order to meet the GHG standards. The result is a description of which technologies could be added to each vehicle and vehicle platform, along with the resulting costs and achieved CO2 levels. The model is available on the EPA website. The OMEGA model is designed to estimate the cost for each manufacturer to comply with the standards for a given year. EPA uses a 5 year redesign cycle for the OMEGA model. Once the model assigns the appropriate technologies for a specific manufacturer, it outputs information about resulting cost and emission levels for each vehicle. Table ES-1 shows the car and truck mix, the CO2 target levels, and the MPG equivalent. 28

29 Table ES- 1 Projections for MY2025: Car/Truck Mix, CO2 Target Levels, and MPG-equivalent Table ES-3 shows fleet-wide penetration rates for a subset of the technologies the agencies project could be utilized to comply with the MY2025 standards. Table ES- 3 Selected Technology Penetrations to Meet MY2025 Standards 2025 vehicles are predicted to cost about $900 to $1,000 more than current vehicles because of the new GHG emissions reducing technology. These new vehicles are expected to lower fuel expenditures by requiring less fuel because of better fuel economy. To calculate the cumulative vehicle cost, they have included sales tax on the new car and the increased insurance premiums. Both a 3 and 7 percent discount rate with lifetime discounted costs were used for calculating the payback periods. Using ICMs (Indirect Cost Markups) relative to the reference case, payback is expected to occur in the 5th year of ownership, and 29

30 using RPEs relative to the reference case, payback is expected to occur in the 6th year. EPA also calculated payback periods using high and low fuel price scenarios presented in AEO 2015 and the payback periods were the same as without the high and low fuel price scenarios. In Table ES-2, NHTSA s estimates are provided for MY2028 because NHTSA s analysis, which is conducted on a year-by-year basis, indicates that manufacturers could make use of EPCA/EISA s provisions allowing credits to be earned and carried forward to be applied toward ensuing model years. 3 Note that Chapter 12 (GHG) and Chapter 13 (CAFE) include a wide range of sensitivity cases *RPE stands for retail price equivalent. ICM stands for indirect cost multiplier. Table ES- 2 Per-Vehicle Average Costs to Meet MY2025 Standards: Draft TAR Analysis Costs Shown are Incremental to the Costs to Meet the MY2021 Standards Table shows the cumulative lifetime savings using both discount rates and the high and low fuel prices. These analyses compare the lifetime savings associated with a vehicle meeting the MY2025 standards under the various control cases to a vehicle meeting the MY2021 standards in MY2025. Table Lifetime Net Savings Associated with the Indicated Control Case Relative to the Reference Case for the Sales-Weighted Average MY2025 Vehicle Tables and show the absolute and incremental costs for each manufacturer. Table shows costs for MY2025 vehicles meeting 2021 standards, and table shows costs for MY2025 vehicles meeting 2025 standards. 30

31 Table MY2021 Absolute and Incremental Costs per Vehicle in the Central Analysis Using AEO Reference Case Fuel Prices and Fleet Projections and Using both ICMs and RPEs (2013$) 31

32 Table MY2025 Absolute and Incremental Costs per Vehicle in the Central Analysis Using AEO Reference Case Fuel Prices and Fleet Projections and Using both ICMs and RPEs (2013$) Table ES-4 shows the payback period and lifetime net consumer savings for an average vehicle. EPA s analysis indicates that, compared to the MY2021 standards, the MY2025 standards will result in a net lifetime consumer savings of $1,460 - $1,620 and a payback of about 5 to 5 ½ years. Table ES- 4 Payback Period and Lifetime Net Consumer Savings for an Average Vehicle Compared to the MY2021 Standards Table shows the change in CO2 levels for each manufacturer for the combined fleet. The table also includes EPA s estimated costs per vehicle. The baseline case is MY2025 vehicles meeting the MY2014 standards. The central analysis control case is MY2025 vehicles meeting the MY2025 standards. The table 32

33 calculates costs per percentage reduction in CO2 emissions from the baseline case to the central analysis control case. Table CO2 and Cost Changes in MY2025 using the 2014 Standards as the Reference Case and the 2025 Standards as the Control Case for the Combined Fleet (CO2 in g/mi, dollar values in 2013$) Table ES-5 shows the cumulative GFG and oil reductions for meeting the MY standards. For the EPA GHG analysis, total industry-wide costs of meeting the MY GHG standards are estimated at $34 to $38 billion. Societal monetized benefits of the MY standards (exclusive of fuel savings to consumers) range from $40 to $41 billion. Table ES- 5 Cumulative GHG and Oil Reductions for Meeting the MY Standards Chapter 13: Analysis of Augural CAFE Standards For the CAFE model, the analysis fleet is the foundation of the NHTSA analysis. The characteristics of the analysis fleet have important implications for the simulation of what standard manufacturers are required to meet and for what technologies are applicable within the compliance simulation. For the Draft TAR, the MY2015 fleet was used as the analysis fleet. The standards are calculated from the sales-weighted, harmonic average of individual vehicle targets and these targets are determined from the footprint and regulatory class of a vehicle. Changes to an individual vehicle which alter either of these characteristics may result in different standards for the manufacturer fleet of that vehicle. The CAFE model currently does not attempt to estimate changes in vehicle footprint or changes in characteristics which would shift a given lightduty vehicle s fuel economy targets or even regulatory class, though the model does provide means to estimate the impact of mass reduction on fuel consumption targets for heavy-duty pickups and vans regulated separately from light-duty vehicles, and future analyses may consider allowing the footprint of individual vehicle models to change and thereby alter a given light-duty vehicle model s fuel economy target 33

34 under the standards (although doing so would likely also entail a fuel economy change to be balanced against the change in the target). A manufacturer s individual average requirement under the standard may change based on its decision to introduce or discontinue vehicles from a fleet. Also, shifts that affect the relative shares represented by passenger cars and light trucks change the requirement. Although the CAFE model can accommodate inputs that account for exogenously estimated shifts in product offerings, there is no way within the CAFE model to endogenously estimate the entrance or exiting of a model from a manufacturer s fleet, so, from the perspective of this analysis, the set of vehicles that exists in the analysis fleet (MY2015, in this case) is the set of vehicles to which technology may be added to achieve compliance. For most manufacturer s combined fleet, the simulated gap between the requirement and CAFE level achieved was fairly close to the observed gap. Figure 13.4 shows that the industry has exceeded the required CAFE level for both passenger cars and light trucks. Figure 13.4 Industry Average CAFE and Standard Past comments on the CAFE model have stressed the importance of product cadence i.e., the development and periodic redesign and freshening of vehicles in terms of involving technical, financial, and other practical constraints on applying new technologies. The NHTSA has steadily made changes to the CAFE model and its inputs with a view toward accounting for these considerations. Understanding manufacturers redesign schedules is valuable for planning purposes, including anticipating redesign schedules, as well as predicting when and how manufacturers may make use of crediting options. However, the manufacturers characterizations of product cadence are not known with certainty. The NHTSA staff meets with manufacturers to discuss their plans regarding CAFE requirements. Manufacturers are never certain about future plans, but they spend considerable effort developing them. For every model that appears in the MY2015 analysis fleet, NHTSA has estimated the model years in which future redesigns will occur. Figure 13.3 shows the share of manufacturer sales redesigned in each model year estimated by NHTSA. The different shadings represent the higher or lower percentage of redesigns by 34

35 a manufacturer for a certain year. Red means a low percentage of redesigns while green represents a high percentage of redesigns. The orange, yellow and light green shadings represent the continuum of redesigns from low to high. Figure 13.3 Share of Manufacturer Sales Redesigned In Each Model Year Table 13.3 and Table 13.4 contain all of the technology assumed to be available for manufacturers in the Draft TAR analysis. Each technology considered for application by the CAFE model is assigned to either a refresh or redesign that dictates when it can be applied to a vehicle. Technologies that are assigned to refresh can be applied at either a refresh or redesign, while technologies that are assigned to redesign can only be applied during a significant vehicle redesign. Most technologies are only assumed to be available during a vehicle redesign and nearly all engine and transmission improvements are assumed to be available only during redesign. 35

36 Table 13.3 CAFE Model Technologies (1) 36

37 Table 13.4 CAFE Model Technologies (2) While all previous CAFE analyses focus on manufacturer actions in response to the standards, there are important considerations regarding the impact of evaluated standards on consumer demand for new vehicles. One limitation of all CAFE analyses up to this point is a lack of dynamic demand response to the simulated changes in vehicle attributes importantly, fuel economy, price, electrification level, and perhaps curb weight that occur as manufacturers add technology to new vehicles to comply with standards. Although the current consumer choice model does not have satisfying resolutions to multiple issues, NHTSA continues to use the static volume approach it has used in the past while it continues to refine an approach to modeling the demand response to changing prices and tributes in the new vehicle market. NHTSA attempts to account for this observed consumer preference for fuel economy by allowing fuel price to influence the ranking of technologies when the model applies technology to vehicles in order to achieve compliance. In particular, the model ranks available technology not by cost, but by effective cost. The effective costs contains an assumption not about consumers actual willingness to pay for additional fuel 37

38 economy, but about what manufacturers believe consumers are willing to pay. The default assumption in the model is that manufacturers will treat all technologies that pay for themselves within the first three years of ownership as if the cost of that technology were negative. While these assumptions about desired payback period and consumer preferences for fuel economy may not affect the eventual level of achieved CAFE in the later years of the program, they will affect the amount of additional technology cost and fuel savings that are attributable to the standard. NHTSA considered the impact of implementing the Augural Standards described in the 2012 Final Rule for MYs relative to the current final standards through MY2021 as the reference point. EPCA/EISA constrains how NHTSA conducts its analysis in order to inform the actual determination of the maximum feasible stringency of CAFE standards. In recent CAFE rulemakings, NHTSA has included both a "standard setting" analysis and a "real world" analysis, with the latter accounting for some of these factors, as practicable. Today s analysis is all conducted on a real world basis. The analysis accounts for the potential that manufacturers could transfer CAFE credits between the passenger car and light truck fleet, or carry CAFE credits forward for later use. Today's analysis also accounts for the potential that some manufacturers might elect to pay civil penalties if doing so would likely be less expensive than applying additional fuel-saving technology. Recent legislation requires the civil penalty rate be increased from the current level of $5.50 per 0.1 mpg per vehicle to a considerably higher level of $14 per 0.1 mpg per vehicle, and today's analysis uses the updated rate. Today s analysis includes PHEVs and EVs estimated to be produced after MY2015. Today's analysis also allows that manufacturers may elect to produce additional PHEVs or EVs in response to new CAFE standards. However, PHEVs and EVs are not estimated to be a cost-effective response to the CAFE standards. The potential responses to the existing standards in place through MY2021 are also taken into account. The footprint-based CAFE standards finalized in 2012 will require manufacturers to improve the average fuel economy of their fleets between now and MY2021. The baseline case is where the standards are assumed to remain constant at the MY2021 level. Table 13.8 summarizes the expected CAFE levels and the expected manufacturer standards for each manufacturer in MY2015, MY2021, and MY2030. By MY2030, all manufacturers assumed to be averse to paying CAFE fines (e.g., Ford, GM, FCA) are estimated to be able to reach compliance without the use of credits. Total industry average CAFE level and standard are lower using the MY2015 fleet in the current analysis than they were using the MY2010 fleet in the FRM, largely attributable to the shifts in sales between light trucks and passenger cars. 38

39 Table 13.8 Expected Manufacturer Standards and Expected CAFE levels with Augural Standards through MY2030 In the next analysis, the CAFE model projects how manufacturers can reach the Augural Standards for passenger cars and light trucks. It simulates the applications of fuel efficiency improving technologies, however does not change vehicle footprint or mix as a compliance strategy. Figures 13.30, 13.31, 13.2, and 13.3 show passenger car technology penetration rates for engine, transmission, electrification, and load reduction technologies. For the passenger car fleet, the Augural Standards are projected to result in large increases in a wide range of technologies over the 15 year period from MY 2015 through MY2030. All manufacturers are projected to exhibit consistent and heavy reliance on dynamic load reduction technologies like aerodynamic improvements and low rolling resistance tires, fully utilizing opportunities for improvement in those areas, as well as modest levels of mass reduction. 39

40 Passenger cars are projected to displace 6-speed automatic transmissions with 8-speed automatic transmissions over time, with the share of CVT and DCT remaining relatively steady over the study period. The penetration rates of transmission technologies for light trucks are broadly similar to those for passenger cars, with manufacturers generally projected to rely on the same mix of technologies for both classes. The analysis also projects a consistent and increasing reliance on start/stop, integrated starter generators (ISG), and strong hybrids, while the penetration rate of pure electric vehicles also increases over the period. As with passenger cars, dynamic load reduction technologies are simulated to reach high levels of penetration in the light truck market for all manufacturers by MY2030. The CAFE simulations project that manufacturers would be able to achieve compliance without any reliance on fuel cell vehicles (FCV). NHTSA concluded that compliance could be achieved primarily through transmission improvements and technological advances to the internal combustion engine without significant reliance on hybridization. Honda and Hyundai Kia have negligible levels of turbocharging in their passenger car fleets in MY2015, and are projected to include turbocharging in over 20 percent of their passenger car engines by MY2030. Turbocharged engines, whose penetration varies by manufacturer, are expected to be present, in some form, on over half of the light trucks offered for sale in MY2030 compared to slightly more than 10 percent of the MY2015 fleet. Ford, GM and Fiat-Chrysler are projected to increase market share for their full hybrid systems from 0-5 percent in MY2015 to percent in MY2030, and increase ISG systems from 0 percent in MY2015 to percent in MY2030. For passenger cars, FCA, Ford, and Honda are expected to have a mass reduction of 20 percent by Most manufacturers expect to have a mass reduction of 7.5 percent by For light trucks, FCA, Ford, General Motors, Honda, and Hyundai/KIA are expected to have a mass reduction of 20 percent by

41 Figure Passenger Car Engine Technology Penetration Rates By Manufacturer (sales weighted share of fleet) 41

42 Figure Passenger Car Transmission Penetration Rates By Manufacturer (sales weighted share of fleet) 42

43 Figure Passenger Car Electrification Technology Penetration Rates By Manufacturer (sales weighted share of fleet) 43

44 Figure Passenger Car Load Reduction Technology Penetration Rates By Manufacturer (sales weighted share of fleet) The technology changes described above carry associated costs. Table 13.9 divides aggregate annual average per vehicle manufacturers compliance costs into three categories: the investments manufacturers 44

45 would have to make to comply with current standards through 2016, costs to comply with current standards through MY2021, and the cost to comply with the MY Augural Standards. Table 13.9 Average Per Vehicle Cost for Primary Analysis Using Retail Price Equivalent (RPE) to Mark Up Direct Costs Table shows estimated model year 2028 CAFE levels under the No-Action Alternative and the Augural Standards. On an industry-wide basis, the Augural Standards are estimated to improve average fuel consumption by about 14 percent. 45

46 Table Estimated MY2028 CAFE Levels and Average Fuel Consumption Improvement The assumption with the highest influence on total cost is now product cadence where longer design cycles limit manufacturers choices and lead to cost increases approaching 30 percent over the central analysis. Battery costs, while less important than product cadence, influences total cost in the direction one would expect (as do mass reduction cost cases), though by less than 10 percent. As the stringency of CAFE standards increase over time, the average technology cost required for manufacturers to reach compliance will generally increase as well. To the extent that demand is elastic, manufacturers may absorb some of the increased technology costs or elect to cross-subsidize some vehicles. Since there is not sufficient information to model the way in which manufacturers actually price their current and future fleets, credible assumptions about what share of increased technology costs will be passed directly onto the buyer of a specific vehicle, absorbed by the manufacturer, and/or subsidized by the purchase of other vehicles cannot be made. Given the uncertainty about how manufacturers will actually allocate costs across their individual models, NHTSA uses the average per-vehicle regulatory cost increase as a means of characterizing the magnitude of the impact of increased technology costs at the manufacturing level. The CAFE model contains data on initial purchase cost and pro-forma final vehicle purchase cost for each specific vehicle model and configuration. NHTSA modeling suggests that Augural Standards will increase average vehicle technology costs by about $1,000 per vehicle relative to the average price of a new vehicle under continuation of the MY2021 standard, and we can reasonably expect that manufacturers will wish to raise vehicle prices on average. 46