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SAFE Rule Examined Part 3 Trump Agencies' Critique of Obama Auto Rule

The Trump administration’s Safer Affordable Fuel Efficient (SAFE) Vehicles rule contains a powerful critique of the 2012 Obama administration rule it repeals and replaces. In a nutshell, the 2012 rule was based on faulty forecasts and unreasonable assumptions that drastically inflated its estimated benefits.

Anti-Trump politicians, activists, and media ignore that critique, which is why you probably never heard about it. Hiding the 2012 rule’s defects advances the progressive narrative that the SAFE Rule serves no bona fide public purpose, hence must be a polluter-crafted plan to subvert critical climate and health protections.

Part 1 and Part 2 of this series debunked opponents’ claims that the SAFE Rule is a planet wrecker and health ravager. Today’s post spotlights the SAFE Rule’s argument that key assumptions underpinning the 2012 rule are invalid. Citations to the SAFE Rule are to the Federal Register version. In other citations, FRIA stands for Final Regulatory Impact Analysis. As in the previous posts, I have not reanalyzed (audited) the agencies’ models and data, so cannot vouch for their accuracy.

Quick Background

The 2012 rule established final carbon dioxide (CO2) emission standards for model year 2017-2025 light duty vehicles (passenger cars and light trucks), final corporate average fuel economy (CAFE) standards for model year 2017-2021 vehicles, and “augural” (planned but not final) CAFE standards for model year 2022-2025 vehicles. The SAFE Rule establishes final CO2 and CAFE standards for model year 2021-2026 vehicles. It is less stringent than the 2012 rule. The SAFE Rule requires average fuel economy to increase from 37 miles per gallon in 2020 to 40 mpg in 2026. In contrast, the 2012 rule, if still in effect today, would require average fuel economy to reach 47 mpg in 2025 (85 FR 24259). The Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) authored both rules.

Faulty Forecasts, Unreasonable Assumptions

The 2012 rule standards were based on flawed analytic premises. In some cases, the errors were inaccurate forecasts about fuel prices, energy security, and consumer preferences. In other cases, the errors were unreasonable assumptions about consumer and business behavior. All the analytic errors cut in one direction—to inflate the 2012 rule’s projected benefits. The Trump agencies estimate that two of those errors inflated the rule’s benefits by $385 billion.

Here are some of the details. Based on the Energy Information Administration’s 2011 Annual Energy Outlook, the 2012 rule assumed gasoline prices in 2025 would average $4.50 per gallon and would keep rising through 2050. “As it has turned out,” the agencies remark, “the observed fuel price in the years between the 2012 final rule and this rule has frequently been lower than the ‘Low Oil Price’ sensitivity case in the 2011 AEO, even when adjusted for inflation” (85 FR 25112).

The graph below compares the 2012 rule’s gasoline price projections (in 2010 $/gal.) in the low oil price sensitivity case to the agencies’ current analysis.

The monetary benefits of fuel savings decrease as fuel prices fall. The agencies find that “substituting the current (and observed) fuel price forecast for the forecast used in the 2012 final rule creates a significant difference in the value of fuel savings.” Plugging current fuel price estimates into the 2012 version of NHTSA’s CAFE Model “reduces the value of fuel savings by $150 billion—from $525 billion to $375 billion (in 2009 dollars)” (85 FR 24231).

In both the 2012 rule and the Obama administration’s 2010 rule, which set fuel economy standards for model years 2012-2016, the agencies assumed “new vehicle fuel economy never improves” unless automakers are subjected to legal compulsion. The agencies politely describe that assumption as “problematic”:

Despite the extensive set of recent academic studies showing, as discussed in Section VI.D.1.a)(2), that consumers value at least some portion, and in some studies nearly all, of the potential fuel savings from higher levels of fuel economy at the time they purchase vehicles, the agencies assumed in past rulemakings that buyers of new vehicles would never purchase, and manufacturers would never supply, vehicles with higher fuel economy than those in the baseline (MY 2016 in the 2012 analysis), regardless of technology cost or prevailing fuel prices in future model years. (85 FR 24231)

This exposé of the 2012 rule’s market behavior theory, completely ignored in media commentary, is worth the price of admission. The passage continues:

In calendar year 2025, the 2012 final rule assumed gasoline would cost nearly $4.50/gallon in today’s dollars, and continue to rise in subsequent years. Even recognizing that higher levels of fuel economy would be achieved under the augural/existing standards than without them, the assertion that fuel economy and CO2 emissions would not improve beyond 2016 levels in the presence of nearly $5/gallon gasoline is not supportable. (85 FR 24231)

On the next page we find that the EPA clung to those unreasonable ideas throughout the Obama administration. The 2012 rule required the EPA and NHTSA to undertake a Mid-Term Evaluation (MTE) prior to finalizing the model year 2022-2025 “augural” standards (77 FR 62628). For that exercise the EPA produced a Draft Technical Assessment Report (July 2016), a proposed MTE determination (December 2016), and a final MTE determination (January 2017). In all three documents, “EPA’s analysis assumed that the fuel economy levels achieved to reach compliance with MY 2021 standards would persist indefinitely, regardless of fuel prices or technology costs” (85 FR 24232).

The agencies’ assumption in 2012, and the EPA’s through the end of the Obama administration, that, absent coercive regulation, fuel economy would not improve “regardless of fuel prices or technology costs” is downright weird. It implies either that consumers ignore or even enjoy pain at the pump or that automakers do not care about profits and sales. 

There is a market demand for fuel economy, and automakers respond to it. As the SAFE Rule explains: “Manufacturers have consistently told the agencies that new vehicle buyers will pay for about 2 or 3 years’ worth of fuel savings before the price increase associated with providing those improvements begins to impact [or] affect sales” (85 FR 24606). Accordingly, the agencies assume that “consumers are willing to purchase fuel economy improvements that pay for themselves with avoided fuel expenditures over the first 2.5 years” (85 FR 24232).

Based on that reasonable assumption, the number of gallons saved by the 2012 rule “drops from about 180 billion to 50 billion once we acknowledge the existence of even a moderate market for fuel economy.” The value of each gallon saved “is similarly eroded, as higher fuel prices lead to correspondingly higher demand for fuel economy even in the baseline.” The result is that the value of the 2012 rule’s fuel savings drops by 64 percent, from $525 billion to $190 billion (85 FR 24232).

When the agencies replace the 2012 rule’s fuel price forecast with observed historical and current projected prices, and include in the baseline any technology that pays for itself in the first 2.5 years of ownership through avoided fuel expenditures, the value of the 2012 rule’s fuel savings drops by 73 percent, from $525 billion to $140 billion (85 FR 24234). In short, the 2012 rule’s estimated benefits were wildly inflated, making some degree of deregulation reasonable and appropriate.

Turning to the other side of the ledger, the Obama agencies underestimated the 2012 rule’s compliance costs because they underestimated consumer demand for larger heavier vehicles. In 2012, the EPA and NHTSA assumed “consumers would gravitate toward the purchase of compact sedans and coupes in response to exceedingly high fuel prices” (85 FR 25115). That would ease manufacturers’ compliance costs because lighter vehicles with lower aerodynamic drag combust less fuel per mile anyway. Instead, consumers increasingly demand heavier, taller vehicles. Sales of small SUVs and pickups increased from 52 percent of the total fleet in model year 2012 to 63 percent in model year 2017, and the number of small and standard SUVs sold nearly doubled (85 FR 25198).

Higher than forecast compliance costs would appear to explain why model year 2016 was the last year “achieved” average fuel economy exceeded “required” fuel economy (FRIA, 150), why model year 2016 was the “first time in regulatory history” when “the overall fleet failed to meet [CO2] emission targets—achieving 272 grams per mile, when the standard was 263 grams per mile” (85 FR 25103), and why industry increasingly relied on prior year credits to avoid penalties for failing to meet current year targets (FRIA, 162). See the figures below. In Figure IV-3, the solid line shows achieved average fuel economy, the dashed line shows required average fuel economy, and “DC” means domestic cars.

A manufacturer’s fleet that over-complies with its CAFE standard for a given year (“achieved” CAFE exceeds “required” CAFE) earns credits, while a fleet that does not meet the standard incurs debits. The shortfalls must be made up through various flexibilities such as using prior year credits and purchasing credits from other fleets, or be subject to civil penalties (85 FR 25188, 25222).

In Figure IV-8, below, the dashed line shows the number of automobile fleets generating credits, the solid line shows the number of fleets incurring debits.

The Obama agencies also did not anticipate the shale revolution’s potential to boost U.S. energy production, lower fuel prices, and avoid or modulate disruptive spikes in crude oil prices. Indeed, the words “shale,” “hydraulic fracturing,” and “unconventional oil” occur nowhere in the 2012 rule. Consequently, the Obama agencies overestimated the 2012 rule’s energy security benefits.

Energy security concerns were the driving force behind Congress’s creation of the CAFE program. Thus, in setting fuel economy standards, Congress directed NHTSA to consider, among other factors, “the need of the Nation to conserve energy.” In assessing that need, the agencies consider, among other information, the extent of U.S. domestic oil production and the degree of the economy’s reliance on petroleum imports from adversarial or unstable foreign countries. As the Trump agencies observe, “the energy security position of the United States has changed dramatically since 2012” (FRIA, 1897). 

From 2012 to 2019, U.S. oil production increased by 87 percent. Net imports of petroleum products declined by 93 percent, from 7.39 million barrels per day in 2012 to 0.53 mbd in 2019. In 2019, domestic production accounted for 94 percent national consumption. Net U.S. petroleum product imports accounted for only 3 percent of national consumption. Thanks to the shale revolution, most of the oil Americans consume today generates income for private U.S.-based companies and tax revenues for state and local governments, rather than income for foreign state-owned enterprises (85 FR 25142).

Of the five top sources of petroleum product imports, friendly, stable, democratic Canada by far leads the pack, accounting for 49 percent of imports—eight times larger than Saudi Arabia’s six percent share.

The agencies do not argue that such facts eliminate energy security risks. However, “energy security concerns are reduced compared to the assessment in the 2012 rulemaking” (85 FR 25118). Consequently, there is less “need” to conserve energy than the agencies assumed in 2012.

A deficiency of the Obama agencies' CAFE model also biased their benefit and cost calculations. The SAFE Rule explains: “Previously, the agencies were unable to model the impact of the standards on new vehicle sales or the retirement of older vehicles in the fleet, and, instead, were forced to assume, contrary to economic theory and empirical evidence, that the number of new vehicles sold and older vehicles scrapped remained static across regulatory alternatives” (85 FR 24177).

In other words, in 2012, the agencies’ CAFE model implicitly assumed that requiring cars to incorporate increasingly costly fuel saving technology would not decrease new vehicle sales or slow fleet turnover from older to newer vehicles. As the SAFE Rule states, that is “contrary to economic theory and empirical evidence.”

The agencies’ new “dynamic” modeling estimates changes in vehicle sales and scrappage rates in response to changes in vehicle costs (85 FR 24225). Those estimates support the SAFE Rule’s core argument that reducing vehicle technology costs will accelerate fleet turnover from older to safer, cleaner, more fuel-efficient vehicles.

Citing the New York Times and Car and Driver, the EPA and NHTSA worry that “the average price of a vehicle is now beyond that which is affordable to the median household income of every city outside of Washington, D.C.” (85 FR 25115). Indeed, the average cost of a new light duty vehicle is close to $39,000. Rising vehicle cost is one reason “the on-road fleet is the oldest it has ever been, approaching an average of 12 years” (85 FR 24626). The agencies estimate the SAFE Rule will reduce average new car ownership costs by $1,428 compared to the 2012 rule baseline (85 FR 25176), enabling manufacturers to sell almost 2 million additional vehicles during model years 2021-2029 (85 FR 24618).

Conclusion

SAFE Rule opponents would have us believe the Trump agencies revised the 2012 rule’s CO2 and CAFE standards for no good reason. That is rubbish. The agencies reasonably determined that the 2012 rule’s fuel price, consumer preference, and energy security forecasts were in error. They further determined that the 2012 rule’s standards were based on unreasonable assumptions about how consumers and manufacturers respond to changes in fuel prices and technology costs. Accordingly, the EPA and NHTSA replaced the 2012 rule with a new rule based on updated forecasts and sound economic theory. They did so for the purpose of mitigating costs that are pricing middle-income households out of the market for new, safer, cleaner, fuel-efficient vehicles.