
                                       
                                Presentation of
                        Jack Gillis, Executive Director
                          Mark Cooper, Senior Fellow
                        Consumer Federation of America
            Before the Office of Information and Regulatory Affairs
                                      on
            Freeze and Rollback of the Light Duty Vehicle Standards
                         New Executive Office Building
                                 Washington DC
                                       
                                 June 22, 2018
                                       
For the first five years after the passage of the Energy Independence and Security Act we would come to OMB during the rulemakings to explain why a 3% discount rate is the correct discount rate.  Our mission today is different.  We would like to help you and the administration avoid a catastrophic mistake.  If the administration does a bad job of writing a new rule, which recent experience and glimpses of what the EPA intends suggest is a high probability, it will get tossed out and a very important consumer, economic and environmental program will be thrown into chaos.
We do this by starting at a very high level with three observations.
          Policy makers, neither Congress nor agencies, cannot repeal the law of nature.
          The agencies cannot violate the substantive and procedural laws enacted by Congress.
          Neither the Congress nor the agencies should want to ignore the laws of economics.
Laws
NHTSA and EPA, in particular, appear to be intent upon making all three mistakes.  The second and the third mistakes are what will get you into trouble in the courts, but at the current moment, the first sets the tone.  It also establishes the basis for our claim that the fuel emissions standards are, first and foremost, a consumer issue. 
The Environmental Protection Agency is required to achieve maximum reductions in emissions of pollutants that are technically feasible and economically practicable.  In many cases, particularly those involving emissions from fossil fuels, the least cost approach is efficiency. By requiring technologies, for example, that get more miles per gallon, the agency can reduce the emission of pollutants per mile travelled.  NHTSA's legal obligation is to deliver maximum energy savings, subject to similar concerns about technological feasibility and economic practicability. There is a near perfect, one-to-one relationship between consumption and pollution.  
This law of nature applies to the emission of carbon dioxide. The act of lowering the emission of carbon dioxide through reduced energy consumption has the effect of also reducing the emission of other pollutants, e.g. sulfur dioxide and nitrous oxide.  EPA wants to ignore these other benefits, in the benefit/cost calculation, even though they are a certainty in nature.  At the same time, however, EPA and NHTSA want to make the much less inevitable (in fact inconsequential) harms of reducing pollution  -  vehicle safety  -  the centerpiece of its analysis.  
As a general proposition, such hypocrisy tends to get the court's attention, and in this instance a good case can, and will be made that the underlying substantive statute requires the agencies to take both economic and safety issues into account.  The procedural statute requires that the rule bear a reasonable relationship to reality through the record before the agency and the laws of nature are part of that reality.  
The three agencies built a massive record to adopt the National Program and two of the three agencies involved reached the technically correct, evidence-based conclusion that the standards should remain in force.  The radical hatchet job that the administration seems headed toward simply will not fly.  A new record might support some tweaks to 2022-2025, but not the rollback and freeze.  If anything, the evidence on the performance of the standards under the National Program supports a strengthening, not weakening, of the standards.
Consumer Benefits
When pollution reduction is accomplished by efficiency, it has the beneficial effect of lowering the cost of operating equipment to meet human needs.  The costs of operating a vehicle, for example, are significantly reduced when fuel economy improves.  There is a consumer pocketbook saving to offset the increase in the more environment-friendly equipment.  
The consumer pocketbook savings have another major economic benefit. When the total cost of driving goes down (vehicle ownership plus operating costs), consumers have more money to spend on other goods and services.  That consumer spending has a large stimulating effect on the economy.  This effect is widely recognized and modeled.    
Our research shows that the consumer pocketbook and macroeconomic benefits combine to create over 80% of the total benefits of the standard.  Falling costs increase the net benefit by as much as another 30%.  
Our research also shows that one group of consumers enjoy disproportionately large benefits from standards.  Standards benefit low income consumers disproportionately for three reasons.  First, because they tend to buy used cars, not new ones. This means operating costs are more important to them. Second, because the market for efficiency is very imperfect, the full value of fuel efficiency is not reflected in the used vehicle price.  Low income consumers get the benefit of capturing the value of efficiency not reflected in the price of used vehicles.  Third, since their incomes are lower and gasoline is a necessity, fuel cost savings are a larger part of their household budget.  
Our review of the literature also shows that low income consumers benefit disproportionately from the reduction of pollution.  Because they live closer to roadways and have less structurally sound residences, they suffer more exposure to pollution and the resulting health problems.  
Command-But-Not-Control Approach to Standards 
In fact, because efficiency has not been a focus of the auto industry (for example) and the social cost of pollution has never been included in the market transaction of buying and operating a vehicle, the auto market has never invested enough in efficiency.  Historically and now, when the EPA adopts a rule that pushes vehicle manufacturers to include more energy saving technology, the cost of the technology has always been far below the operating cost savings it delivers to consumers. This effect has been observed throughout the history of fuel economy standards in the U.S., remains in effect today, and is linked to another strong economic effect.  
Once agencies adopt standards that require energy saving technology, the automakers set about meeting the standard in the least cost manner possible.  The ultimate cost of standards has generally been a fraction of the initial estimates because capitalists are allowed to do what they are good at  -  finding least cost ways to deliver goods in the market. Well-crafted standards are technology and product neutral, long term, progressive, inframarginal, and consumer-friendly in terms of cost and choice, and balance producer needs. We call this a "command-but-not-control" approach.   The reforms in the fuel economy program signed into law by President Bush (The Energy Independence and Security Act of 2007) were particularly strong in unleashing those market forces.  It required attribute based standards that recognized the difference between types of vehicles.
Automaker Response to the National Program
      The elegance of the fuel economy standards, agreed to by 13 automakers, unions, consumers and environmentalists, is that it benefits both consumers and the industry. Rolling back the standards would serve only to give the Asian manufacturers, who are fully capable of meeting the standards, another marketing advantage over the American car companies. The current standards also provide flexibility for automakers, as CAFE compliance for vehicles is determined by its overall footprint, allowing larger vehicles to have lower fuel economy, compared to smaller vehicles. This allows automakers latitude to produce vehicles to match consumer preferences.
          Automaker Progress  -  Automakers are capable of meeting the standards. In 2018, 11 companies exceeded the average percentage (24%) of CAFE compliance for automakers as a whole.
         
          Fuel Economy vs Sales  -  SUV's, crossovers and light trucks that increased their fuel economy by more than 10% from 2011 to 2016 saw almost a 20% higher increase in sales, compared to those vehicles which increased their fuel economy by less than 10%. Over the past five years, an average of 16.9 million vehicles have entered the fleet, more than any other period of time in U.S. history. Sales have gone from 14.5 million in 2012, to a high of 17.6 million in 2016, for an overall increase of 19% by 2017.  Looking at 2018, first quarter vehicle sales have set a new record of 4.1 million, exceeding the previous first quarter record set in the first quarter of 2016 by over 20,000 vehicles.

          Gas Guzzlers vs Misers  -  58.3% of vehicles now get over 23 MPG, while only 3.4% of vehicles get under 16 MPG, a ten-fold decrease since 2006.
         
          Consistent Public Support  -  Over the last five years, consumer support for the standards was an average of 81%, with consistent support as the vehicle fleet has steadily increased in fuel efficiency, with 79% of consumers supporting the standards last year.
Vehicle Safety
Our recent report on vehicle safety shows that vehicles have become both more fuel efficient and safer under the National Program. While many vehicles have significantly increased their fuel efficiency over the past five years, the average fleet fuel efficiency has increased from 24.2 to 25.2.  At the same time, the average number of 15 high-tech safety features present in vehicles has increased from 19.5 percent to over 64 percent. Looking at "all-new" vehicles, which are the best indication of manufacturers' ability to improve fuel efficiency, 19 "all-new" 2018 vehicles contained an average of 12.3 important safety features out of 15 possible.  This is significantly more than the average of 7.4 safety features available in their 2011 versions. These same vehicles increased their fuel efficiency by 15% from an average of 21.8, to an average of 25.1 MPG. The bottom line  -  fuel efficiency is up and vehicles are safer.
This recent finding that fuel efficiency does not detract from vehicle safety is supported by long term evidence which we've shown in earlier testimony in support of higher standards.  Fuel economy and safety are distinct attributes of vehicles in which automakers invest simultaneously.  Technology makes it possible to improve both simultaneously, which they do because they understand that buyers value both safety and fuel economy.  The automakers also invest in other attributes of vehicles, like power and trim, which cost much more than safety and fuel economy.  Fuel economy has the unique quality of directly paying for itself by lowering the total cost of driving, making it possible to sell more fuel efficient, safer vehicles.  In fact, not only does increased fuel efficiency more than cover the cost of needed technological improvement, but it also covers the cost of new safety features and other manufacturer design improvements.
Denying the Facts Will Not Pass Judicial Scrutiny
The Trump administration can pretend that the laws of nature and economics do not apply, but that will impose a huge, inevitable and unjustified burden on consumers and the economy.  Our analysis of freeze and rollback concludes that it has a NEGATIVE benefit cost ratio  -  for every one dollar of costs saved by automakers  -  consumers, the economy and the environment lose 8 dollars.
Fortunately, in our view, the statutes that govern these standards require maximum feasible improvements and clearly recognize the economic issues.  The fact that the sector specific laws require a realistic approach that balances industry, consumer and the public interest is reinforced by the general laws governing administrative process (the Administrative Procedure Act of 1946).  The APA requires a reasonable link to reality and the record before the agency establishes a rulemaking.  For almost forty years, executive guidance from four presidents (Reagan, Clinton, Bush and Obama) has sought to refine and improve the analysis by requiring that all costs and benefits be rigorously identified and carefully measured for inclusion in the calculation.   The benefits we have identified cannot be ignored. 
Rather than suffer another huge defeat in court, the agencies should: 
 Identify a specific set of modifications that would allow automakers to comply with the standards;

 Stress that compliance of individual vehicles with their attribute-based standards is far more important than a national average goal; 

 Declare that it was not obligated to write new standards for the post 2025 period and will refrain from doing so; and,

 Leave the Clean Car States to continue to play their leadership role in innovation, as they have done for almost two decades, demonstrating American federalism at its best, rather than engage in another hypocritical debate in which the administration favors state and local action, only when the states and localities do what the federal government wants.


U:\CFA Gillis Folder\Statements Testimonies\Gillis & Cooper OIRA NPRM Presentation 6-22-18.docx
