March 4, 2010

MEMORANDUM

TO:  		Docket EPA-HQ-OAR-2009-0472

SUBJECT:	Economy-Wide Impacts of Greenhouse Gas Tailpipe Standards

EPA has undertaken an analysis of the economy-wide impacts of the
greenhouse gas emissions (GHG) tailpipe standards as an exploratory
exercise that EPA believes could provide additional insights into the
potential impacts of the rule.  This analysis updates the work done for
the rule to reflect the final rulemaking estimates of vehicle costs,
fuel savings, and world oil prices.  The results presented in this memo
were not a factor regarding the appropriateness of the GHG tailpipe
standards.  It is important to note that the results of this modeling
exercise are dependent on the assumptions associated with how consumers
will respond to increases in higher vehicle costs and improved vehicle
fuel economy as a result of the rule.  Please see Preamble Section III.H
of the rule for a discussion of the underlying distinctions and
implications.  

It is anticipated that the GHG tailpipe standards would have impacts on
the U.S. economy that extend beyond the transportation sector.  The
price of light-duty vehicles would increase with this rule.  This rule
would also lower the demand for transportation fuels, resulting in fuel
savings to vehicle users and a lower overall world oil price. This
combination of effects—price increases for vehicles and lower demand
and world oil prices—would impact all sectors of the economy that use
light-duty vehicles and fuels as intermediate inputs (e.g., delivery
vehicles) to produce final goods.  Households would also be impacted
indirectly as consumers of final goods, and directly as consumers of
fuels and light-duty vehicles. 

It is important to note, however, that these potential impacts do not
represent additional benefits or costs from the regulation.  Instead,
they represent the effects on the U.S. economy as its direct benefits
and costs are transmitted through changes in prices in the affected
markets, including those for vehicles and their components, fuel, and
the various resources used to supply them.

To estimate the impacts of this rule on U.S. Gross Domestic Product
(GDP) and personal consumption, EPA has used an economy-wide, computable
general equilibrium (CGE) model.  The economy-wide model used in this
analysis is the Intertemporal General Equilibrium Model (IGEM).  IGEM is
a model of the U.S. economy with an emphasis on the economy’s energy
and environmental aspects.  IGEM is a dynamic model which depicts growth
of the economy due to capital accumulation, technical change and
population change.  The model utilizes a unified accounting framework
consistent with the National Income and Product Accounts and the
Industry Classification System.  It is a detailed multi-sector model
covering thirty-five industries, consisting of five energy and thirty
non-energy sectors.  The model ensures market balances (supply equals
demand) in value and quantity terms, including limits placed on private
investment dictated by domestic and foreign saving behavior and by the
fiscal policies of federal, state and local governments.  Capital
accumulation in the model arises from the saving and investment behavior
of households and businesses and provides an essential input to
production and consumption.  Households in the model make choices
regarding present and future consumption (i.e., saving) and make choices
regarding the allocation of time between labor and leisure.  The model
covers all aspects of long-run growth including the supply of capital,
labor, imported and intermediate inputs to production; the rates and
directions of exogenous and endogenous technical change for each
producing sector; and the degrees of substitutability among inputs and
commodities in production and final demand (consumption, investment,
governments and foreign trade).  The substitution possibilities for both
producers and consumers in IGEM are driven by model parameters that are
based on observed market behavior revealed over the past forty to fifty
years.  

In order to model this rule, the CGE model uses outputs of the
transportation sector models as inputs to determine the economy-wide
impacts of this rule.  Specifically, the model uses information from
other models on incremental costs of vehicle technologies, reduction in
fuel consumption, and impacts on the world oil price.  The incremental
cost of vehicle technologies is used to generate a percentage change in
vehicle cost that is applied to the IGEM motor vehicles sector.  Since
cars and light duty trucks make up approximately 50% of the motor
vehicles sector, the cost increases represented here only apply to that
portion of the IGEM sector.  The data on reduction in fuel consumption
are used as inputs to IGEM in order to reduce the amount of refined
petroleum sector output required by the transportation sector and other
sectors in the model.  Finally, the estimates of reductions in the world
oil price are directly used to reduce the oil price in the model.  The
changes in world oil price are estimated using the Energy Security Oil
Premium Model maintained by Oak Ridge National Laboratory, which is
discussed in more detail in Chapter 4 of the Technical Support Document
(TSD).

Impacts on U.S. GDP

In order to use IGEM to estimate the real U.S. GDP impacts of this rule,
we analyzed the impact of changes in the costs of light-duty vehicles,
changes in fuel consumption from the shift to a lower GHG-emitting
vehicle stock, and the impacts of changes in the demand for motor fuels
on fuel prices.  See the Regulatory Impact Analysis (RIA) Chapter 4 for
additional information on the change in vehicle technology costs, RIA
Chapter 6.3 for details on changes in fuel demand, and RIA Chapter 8.2
for a discussion on the monopsony effect.  It is important to note that
the economy-wide analysis does not include a representation of a number
of additional benefits (e.g. reducing greenhouse gas and non-GHG
emissions, reducing refueling time), and thus the GDP impacts presented
here do not incorporate the results of a complete cost benefit analysis.
 Table 1 and Figure 1 show the Reference Case GDP and GDP with this rule
from 2012 through 2050.

Table 1 Annual GDP Impacts Associated with This Rule (Billions of 2007
dollars)

year	reference case gdp	gdp with RULE	% change from reference case

2012	$15,582	$15,610	0.18%

2016	$17,214	$17,254	0.23%

2020	$18,920	$19,005	0.45%

2030	$24,315	$24,503	0.77%

2040	$30,459	$30,718	0.85%

2050	$37,904	$38,244	0.90%



Figure   SEQ Figure \* ARABIC  1  Gross Domestic Product

In the Reference Case, GDP rises from approximately $15.6 trillion in
2012 to $17.2 trillion in 2016, $18.9 trillion in 2020, $24.3 trillion
in 2030, $30.5 trillion in 2040, and $37.9 trillion in 2050.  With this
rule, GDP rises from approximately $15.6 trillion in 2012, to $17.3
trillion in 2016, $19.0 trillion in 2020, $24.5 trillion in 2030, $30.7
trillion in 2040, and $38.2 trillion in 2050.

The fuel savings and lower world oil prices that result from this rule
lead to lower prices economy-wide, even when the impact of higher
vehicle costs are factored into this analysis.  Lower prices allow for
additional purchases of investment goods which, in turn, lead to a
larger capital stock.  These price reductions also allow higher levels
of real government spending while improving U.S. competitiveness thus
promoting increased exports relative to the growth driven increase in
imports.  As a result, GDP is expected to increase as a result of this
rule.  

Impacts on U.S. Consumption

In addition to showing the impacts of the GHG vehicle rule on U.S. GDP,
EPA also shows the impacts on real U.S. personal consumption
expenditures.  Table 2 and Figure 2 show the Reference Case consumption
and consumption with this rule from 2012 through 2050.  

Table 2 Consumption Impacts of the Rule (Billions of 2007 dollars)

year	reference case consumption	consumption with RULE	% change from
reference case

2012	$9,559	$9,559	-0.01%

2016	$10,669	$10,687	0.18%

2020	$11,764	$11,806	0.36%

2030	$14,945	$15,083	0.92%

2040	$18,804	$19,040	1.26%

2050	$23,165	$23,505	1.47%



Figure   SEQ Figure \* ARABIC  2  Consumption

In the Reference Case, consumption rises from approximately $9.6
trillion in 2012 to $10.7 trillion in 2016, $11.8 trillion in 2020,
$14.9 trillion in 2030, $18.8 trillion in 2040, and $23.2 trillion in
2050.  With this rule, consumption rises from approximately $9.6
trillion in 2012 to $10.7 trillion in 2016, $11.8 trillion in 2020,
$15.1 trillion in 2030, $19.0 trillion in 2040, and $23.5 trillion in
2050.  The consumption impacts on a per household basis are presented in
Table 3 and Figure 3  REF _Ref238028495 \h   .

Higher vehicle costs are projected to reduce household consumption
slightly in the first few years of the rule implementation.  Over time,
fuel savings increase and the price of world oil decreases, which leads
to lower prices economy-wide.  As a result, household consumption
increases over the long term.     

Table 3 Consumption Impacts of This Rule per Household (2007$)

year	reference case consumption	consumption with RULE	change from
reference case

2012	$77,251	$77,246	-0.01%

2016	$82,016	$82,161	0.18%

2020	$86,174	$86,483	0.36%

2030	$98,140	$99,046	0.92%

2040	$112,607	$114,024	1.26%

2050	$127,556	$129,426	1.47%



Figure   SEQ Figure \* ARABIC  3  Consumption per Household

See the attached spreadsheet for additional information.

 The model is developed and run by Dale W. Jorgenson Associates for EPA.
  Model Homepage:  

  HYPERLINK "http://www.dja.insightworks.com/" 
http://www.dja.insightworks.com/  

 For the economy-wide analysis, the change in fuel consumption projected
in Section 6 was modeled relative to the AEO 2009 baseline projections. 
Thus, the Reference Case used in the economy-wide analysis differs from
the baseline used in other sections of this rule.  

