Reducing Fuel Consumption and Greenhouse Gas Emissions of Medium- and Heavy-Duty Vehicles, Phase Two Final Report (2020) / Chapter Skim
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12 Costs and Benefits
12 Costs and Benefits
Pages 290-322
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Table 12-1 is from the Regulatory Impact Analysis and presents the agencies' summary estimates of costs and benefits of the Phase II rule -- a 2.5 percent annual reduction in fuel consumption. The improvement in fuel efficiency and the reduction in the greenhouse gas (GHG)
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Net private benefits amount to between 59 and 67 percent of total net benefits, depending upon the discount rate used.2 The reduced climate change impacts are valued at $33 billion, ranging from 50 1 In the Regulatory Impact Analysis NHTSA and EPA also present results measured against a slightly different baseline, reflecting different assumptions about technology deployment in response to the Phase I standards. The results differ slightly.
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and strong hybrids. These results are shown in the final Regulatory Impact Analysis (NHTSA and EPA, 2016, p.
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Required in MY 2030 5.25 4.91 4.91 4.77 Achieved in MY 2030 5.21 4.88 4.89 4.77 Estimated Average Greenhouse Gas Emissions (grams per mile) CO2 required in MY 2030 494 462 462 450 CO2 achieved in MY 2030 490 460 460 449 Technology Penetration in MY 2030 (percent)
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The capital costs are from Chapter 7 of this report. The capital costs include the direct manufacturing costs as well as the indirect costs such as R&D costs, corporate overheads, and sales and distribution costs.
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eForecasted fuel prices used in payback calculations and in break-even capital cost calculation are from Annual Energy Outlook, 2017, expressed in 2013 dollars.
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In other words, to achieve fuel efficiency gains beyond the improvements offered by stop-start technology, the larger gains from mild and strong hybrids likely would not be sufficient by themselves to drive widespread diffusion of the technology, given that the adoption decisions would be made based on relatively short payback period requirements. The break-even fuel price metric used here calculates what price of fuel would produce fuel savings such that the present value of those savings over a 10-year period equals the stated capital cost.
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As the graphs show, even at a VMT of 20,000 miles, strong and mild hybrid applications still have relatively high payback periods in the Class 2b and Class 4 van segments, again suggesting that private firms using this metric would not favor rapid adoption of these technologies.8 When capturing 10 years of potential fuel savings, however, the breakeven price of fuel, at 20,000 VMT, falls below the forecasted price of fuel of $3.52 for mild and strong hybrid applications in Class 4 vans. In the case of Class 2b pickups at 20,000 VMT, mild hybrids would be economic at the forecasted fuel price, while break-even fuel prices for full hybrids would still exceed the forecasted fuel price.
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FIGURE 12-3 Payback period sensitivity respect to vehicle miles traveled for different vehicle technologies implemented on class 2b-8 vehicles.
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Taking the median value of the cost of carbon of $0.50 per gallon, the median estimate of the national security premium of $0.17 per gallon and the estimate of health benefits using the 3 percent discount rate of $0.31 per gallon results in a total external cost of $0.98 per gallon. The forecast of fuel prices of $2.88 and $3.52 for gasoline and diesel fuel, respectively, results in social costs of fuel of approximately $3.86 and $4.50.
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Finding: Considering 10-year fuel savings, break-even fuel prices are below the social cost of fuel in most hybrid applications. These results suggest that hybridization is a technology that is "next up" for meeting more stringent post–Phase II standards.
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. Reduced CO2 emissions are valued using the social cost of carbon (SCC)
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The result was 450,000 estimates of the SCC, corresponding to the three IAMs, the 10,000 values of the climate sensitivity, the five alternative emissions scenarios, and the three alternative discount rates. The results were summarized by reference year and by discount rate, for the three IAMs combined.25 The IWG tabulated the average SCC value at each of the three discount rates, together with the 95th percentile value at the 3 percent discount rate (the results are reproduced in Table 12-4)
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The longer the time horizon, the greater the role of the discount rate in estimating the SCC.26 OMB's Circular A-4 identifies 3 and 7 percent as appropriate discount rates for regulatory impact analysis conducted pursuant to Executive Order 12866. The 7 percent rate is an estimate of the before-tax, real opportunity cost of capital for business borrowers in the United States.
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Its choice of a discount rate is consistent with estimates in the literature. 12.2.1 Additional Environmental and Health Costs and Benefits from Different Fuel and Technology Strategies We discussed above the methods used by NHTSA and EPA to value the climate change externalities associated with the reductions in carbon dioxide emissions resulting from the fuel savings from the use of more efficient MHDV technologies and strategies.
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That task, however, is challenging because -- unlike GHG emission damages -- the health damages associated with the emissions of criteria air pollutants from MHDVs will be very dependent on where these emissions occur, the ambient baseline concentration of those pollutants, and who is exposed to them. Estimates of the damages associated with these mobile sources generally rely on integrated assessment models that relate the emissions sources to dispersion and reaction models, and to exposure to population, dose-response functions, and a monetized valuation of the health effects.
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Panel (a) shows the estimated damages in 2005 and panel (b)
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: (a) estimated damages in 2005; (b)
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12.3.2 The Oil Security Premium There are several aspects to the economic vulnerability associated with petroleum use. First is the negative impact of unanticipated oil price increases on economic activity.
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. The March 28, 2017, executive order issued by President Trump rescinds the Obama administration guidance on the use of the social cost of carbon in rulemaking and relies instead on previous guidance.
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These factors vary over time as do changes in oil market institutions so the premium also varies over time. Recent developments in oil markets likely have lowered the security premium.
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12.4 PROJECTING TOTAL CAPITAL COSTS 12.4.1 Indirect Cost Estimation Cost estimation, whether for regulatory purposes or for other reasons, makes a careful distinction between direct and indirect costs. Estimation of both cost categories is essential both for the manufacturer, which needs to know how to price a product to cover costs and generate an acceptable profit, and for the regulator, who is required to make estimates of the costs and benefits of regulation, including costs of compliance.
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• Net income to manufacturer (0.05) Of course, total indirect costs are reasonably easy to calculate: just identify the costs that are direct and subtract them from total costs (plus net income)
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Many of the indirect costs are likely to be one-time or short-term activities, such as educating dealers and upgrading mechanics' equipment. These costs will not appear in the long-term IC multipliers.
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Where 35 This point was also made by the study of light-duty vehicle fuel economy by the National Academies (NRC, 2015)
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12.4.4 Learning Effects on Capital Costs 12.4.4.1 Learning Curves Repetition drives learning. In business and economics the importance of this fundamental fact is enshrined in the concept of the learning curve.
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(2015) reviewed peer-reviewed existing studies on learning curves for 11 electricity-generation technologies and found that there was a wide disparity in one- and two-factor learning rates even within the same technology, time period, or region.
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The logic behind this strategy is that for complex multicomponent technologies, different components are likely at different levels of maturity, and therefore have different potential for cost reductions. Finally, for some technologies, such as nuclear, some researchers have actually found negative learning rates -- the unit costs actually increased as the cumulative production increased (see, for example, Cooper [2010]
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applying simple parametric one-factor learning curves, complemented with a sensitivity analysis to assess how high or low these learning factors would need to be for a technology to be more economically appealing than another. NHTSA and EPA also are encouraged to do ex post assessments of their forecasts of learning effects.
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oil security premium. Energy Economics 38:118-127.
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2015. Comments in Response to Greenhouse Gas Emissions and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles-Phase 2.
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2016. Regulatory Impact Analysis, Final Rule for Greenhouse Gas Emissions and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles, Phase II.
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International Journal of Greenhouse Gas Control 1:188-197. Rubin, E., I.L.
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