Office of air quality management
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| r the cost of regulations is passed along to consumers. Rather, the finding relates to how automakers have passed along cost increases to consumers in ways that optimize sales. For example, automakers have used advertising to enhance the perceived value of required vehicle improvements such as airbags. The more highly consumers value compliance-related vehicle improvements, the less resistant they are to associated price increases. Other methods of minimizing the sales impact of cost pass-through may include adjusting the terms of vehicle financing or managing vehicle incentives.
523. Comment: Summary Paper #2 states, “Automaker response to new emissions regulations was not straightforward, uniform, nor transparent,” [2, page 23]. ARB staff says: “Automobile manufacturers that experience production cost increases as a result of new compliance requirements do not necessarily resort to new-car price increases to recover costs. The price sensitivity of new-car buyers (‘sticker shock’), is well known to automobile manufacturers, who can recover cost increases in ways that are less visible to consumers and therefore, less likely to impact purchase decisions...These more subtle approaches to cost recovery permit automobile manufacturers to recoup compliance costs without incurring the same revenue penalty as comparable changes to MSRP.” We have already addressed the allegedly “nontransparent” manufacturing responses to increases in regulatory costs, including vehicle de-contenting, and “creative” lease and financing programs. The Bureau of Labor Statistics scores all of these and other manufacturer marketing activities as either price reductions or price increases. None of these activities is missed by the watchful eyes of the nation’s auto buyers. None of them enables the automakers to avoid passing through the full costs of vehicle hardware regulations. No automaker can “fool” the extremely sophisticated automotive buyer in the Age of the Internet. (Comments of the Alliance of Automobile Manufacturers On the Proposed Rulemaking to Adopt Regulations to Control Greenhouse Gas Emissions from Motor Vehicles, Appendix G, p.18) Agency Response: We agree that the Bureau of Labor Statistics take incentives, equipment de-contenting and vehicle quality changes into account in developing its producer price index (PPI) for automobiles. But the BLS PPI estimates the price received by manufacturers; it does not accurately measure the proportion of producer cost increases that are passed on to consumers. We also agree that much information about new vehicle quality, pricing and financing is available to the “extremely sophisticated automotive buyer in the Age of the Internet.” But the availability of product information says nothing about the consumer’s ability to accurately analyze such information. Moreover, some of the information that matters most to consumers is not readily available. Information about vehicle de-contenting is not easily accessed by consumers, and the true cost of new vehicles is often buried in the fine print of auto loan or leasing agreements. Many consumers do not have the skills, the knowledge or the inclination to calculate the true cost of new vehicles or thoroughly compare their attributes. With limited time available to make decisions, new car buyers may choose new vehicles on the basis of cash rebates or the amount of monthly loan payments rather than on the basis of a thorough comparative analysis. 524. Comment: The ITS studies fail to demonstrate that manufacturers absorb the hardware costs of emissions and safety regulations and that these regulations have little or no impact on vehicle sales and consumer and manufacturer welfare. (Comments of the Alliance of Automobile Manufacturers On the Proposed Rulemaking to Adopt Regulations to Control Greenhouse Gas Emissions from Motor Vehicles, Appendix G, p. 38) The ITS case studies, regressions, and citations to the referred literature strongly support a full pass through of the costs of all vehicle regulations to consumers and a corresponding detrimental effect on vehicle sales, consumers, and manufacturers, depending on the type of regulation. (Comments of the Alliance of Automobile Manufacturers On the Proposed Rulemaking to Adopt Regulations to Control Greenhouse Gas Emissions from Motor Vehicles, Appendix G, p. 38) Agency Response: The ISOR’s quantitative analyses of compliance cost, pricing and sales assume that 100 percent of compliance costs are immediately, (and perpetually), passed on to consumers in the form of increased prices. The ISOR’s estimates of the cost and pricing impacts of the proposed climate-change emissions regulation did not rely on the findings of the ITS case studies. The ITS historical case studies did, however, identify methods used by auto manufacturers to soften the sales impact of compliance cost increases. The ITS case studies found evidence indicating that average per-vehicle compliance costs:
525. Comment: The ITS studies are self-contradictory on this point: they find, quite correctly, that there is only a weak demand for green technologies, but also conclude that vehicle manufacturers should be able to market those technologies. Agency Response: Contrary to the view expressed by the commenter, the ITS study doesn’t claim that there is only a week demand for green technologies. The ITS Executive Summary, comment # 11 states that surveys show strong policy support for air pollution (Public Policy Institute, 2002), although there is little understanding about demand for environmental attributes of vehicles. The summary also states that preliminary results from a UC Davis study of the hybrid electric vehicle indicates that buyers of the Toyota Prius value low air pollutant emissions equally with the high gas mileage (Kurani and Turrentine, 2004b). Many Prius buyers would have otherwise purchased larger and more expensive vehicles, and have been willing to downsize to the Prius because of its progressive technology. Many buyers speak of wanting to be part of a change, a movement. These findings do not indicate a weak demand for green technologies. Consequently, it is incorrect to conclude that the ARB proposal results in substantial welfare losses on California’s consumers. On the contrary, the Staff Report analysis shows that the proposed climate change regulations would bring about substantial gains to California’s consumers.
Agency Response: The ITS papers, as they should, comprehend a diversity of opinion regarding consumer preferences. Consumer preferences change in response to changing conditions and events. Much has changed since the 1999 survey of European motorists cited above, which has questionable relevance to the U.S. consumers of 2009. Changes such as growing public awareness of the causes and risks of climate change, costly U.S. military involvement in oil-producing nations, and dramatic spikes in world oil prices will impact consumer preferences. A July 21, 2004 U.S. Department of Energy survey found that 44% of prospective new car buyers consider themselves likely to buy hybrid electric vehicles – vehicles which have been marketed on the basis of their environmental attributes. Five years ago, few consumers had even heard of hybrid electric vehicles. Years before airbags became required equipment, automakers claimed they couldn’t be sold. After airbags became required equipment, automakers aggressively marketed airbags. Changing consumer preferences could very well result in more aggressive marketing of environmental vehicle attributes by 2009. j. ISOR Appendix A: Regulatory Language and Test Procedures 527. Comment: The definition of an “intermediate volume manufacturer” in the greenhouse gas proposal contains new criteria governing when sales must be aggregated among companies with joint ownership. In the ARB greenhouse gas proposal the aggregation criteria are based on a “more than 10 percent” ownership criterion. This differs substantially from the recently adopted zero emission vehicle (ZEV) regulatory amendments which adopted a “more than 50 percent” ownership criterion. The Staff Report does not explain this departure from the ARB’s other regulatory position. (Statement of John Cabaniss, Association of International Automobile Manufacturers, and American Honda Motor Co.) Agency Response: The LEV II regulations, on which the greenhouse gas regulations are based, currently provide less stringent emissions and certification requirements for two classifications of vehicle manufacturers, “small volume manufacturers” and “independent low volume manufacturers,” which are defined based on a manufacturer’s California vehicle sales. Each of these definitions requires that automobile manufacturers be grouped together for compliance purposes in cases where one company has at least a 10% equity ownership in the other, or in cases where a third party owns at least 10% of the equity in two or more automobile manufacturers. The definition of a “small volume manufacturer” used for the LEV II regulations is consistent with the federal definition. There is no federal equivalent of the “independent low volume manufacturer” definition. The category “intermediate volume manufacturer” is not currently applicable for the purpose of complying with LEV II regulations. The zero-emission vehicle (ZEV) regulations incorporate both the “small volume manufacturer” and the “independent low volume manufacturer” classifications and added the category “intermediate volume manufacturer.” The ZEV regulations also increased the criterion above which a manufacturer must aggregate vehicle sales from 10 percent to 50 percent solely due to the unique technical nature of this program. Traditionally, regulations such as the LEV II program focus on reducing emissions from vehicles that are equipped with conventional gasoline and diesel-fueled internal combustion engines. The ZEV program, however, requires a manufacturer to develop, manufacture, and sell vehicles powered by entirely new power plants and propulsion designs (e.g., electric vehicles that use advanced batteries or fuel cells, or hybrid vehicles). Therefore, compliance with the ZEV program requires that a manufacturer expend considerably more research and development funding, developmental effort, and associated risk than is usually required. For this reason, ARB decided to provide latitude to intermediate volume manufacturers that fell into the 10 to 50 percent co-ownership category, and raise the aggregation criterion to 50 percent. This was purely a policy decision by ARB because of the unique nature of the ZEV program and was not intended to serve as a precedent for future rulemakings. Unlike the ZEV regulations, the greenhouse gas regulations were developed based on the emission reductions that are achievable using technology that is being used on vehicles today, although in limited applications. Therefore, the special circumstances that made it appropriate to apply a 50 percent ownership criterion within the context of the ZEV regulations do not apply to the greenhouse gas regulations. Consequently, it is more appropriate to retain the 10 percent aggregation provision used in the LEV II regulations than that applicable to the ZEV regulations. 528. Comment: The proposed regulation requires that automobile manufacturers be grouped together for compliance purposes in cases where one company has at least a 10% equity ownership in the other, or in cases where a third party owns at least 10% of the equity in two or more automobile manufacturers. The regulation also proposes to extend this provision beyond the greenhouse gas standards into other areas of emissions such as Non-Methane Organic gases (NMOG). Comprehensive coordination with these companies in some areas such as the numbers of vehicles offered for sale in California and product pricing could potentially be unlawful, yet comprehensive coordination would be necessary to manage fleet average emission levels. Because publicly owned corporations have no control over investor trading in their own shares which could trigger the third party provisions, sudden unexpected situations could develop that put manufacturers out of compliance with the regulation through developments that are not within the control of the manufacturers. In view of these considerations, ARB should modify the proposed 10% equity ownership threshold to at least 50%, which is a level more commonly associated with management control the is required to manage integrated fleet emissions and is consistent with NHTSA’s approach. (General Motors) Agency Response: Staff disagrees with the comment. Action by an individual or individuals, such as investor trading of company stock, would not affect whether a manufacturer’s sales should be aggregated with another. The requirement that automobile manufacturers be grouped together for compliance purposes in cases where one company has at least a 10% equity ownership in the other, or in cases where a third party owns at least 10% of the equity in two or more automobile manufacturers only applies to ownership of one company by another company. See response to Comment 527. 529. Comment: Under the proposed “more than 10 percent” criterion, nearly all manufacturers currently considered as intermediate volume manufacturers under the ZEV regulation would be required to meet the requirements for large manufacturers. However, generally these manufacturers do not derive any substantial technological or engineering expertise from their larger part-owner. Instead, the ownership relationship primarily represents a financial business interest. Thus, the small number of current intermediate volume manufacturers which could retain this classification under the ARB greenhouse gas proposal could gain a significant marketing advantage over the reclassified intermediate volume manufacturers by not having to comply until the 2016 MY. (Statement of John Cabaniss, Association of International Automobile Manufacturers, and American Honda Motor Co.) Agency Response: As noted in the response to comment 527, the aggregation provisions of the ZEV program were designed to address the unique technical burden placed on manufacturers by the program, not to serve as a precedent for other, more conventional emission control programs. Since the technical requirements of the greenhouse gas regulations do not approach the magnitude of the ZEV regulation, staff believes that the 10% criterion is appropriate. Of the manufacturers currently meeting the definition of “Intermediate Volume Manufacturer”, staff is aware of only two that can be said to be “independent manufacturers”, that is they are not partially or wholly owned by another manufacturer. Furthermore, even these manufacturers are expected to change their status to “Large Volume Manufacturer” before the greenhouse gas requirements are fully implemented. The remaining Intermediate Volume Manufacturers are in part owned by a “Large Volume Manufacturer” and share technologies such as engines and/or transmissions with their business partners. Accordingly, staff is unable to identify any manufacturer that may be disadvantaged by the 10% criterion.
Agency Response: A small volume manufacturer is defined as one that sells fewer than 4,500 vehicles in California each year. An independent low volume manufacturer is one with annual California sales of less than 10,000 vehicles. Small and independent low volume manufacturers generally offer limited product lines, which makes it very difficult to reasonably meet an increasingly stringent fleet average greenhouse standard each year. For this reason, it is entirely appropriate to provide additional compliance flexibility to these size manufacturers. This practice is also consistent with other California vehicle regulations, such as LEV II. Some of the same concerns that affect small and independent low volume manufacturers also apply to intermediate volume manufacturers (i.e., those manufacturers that sell fewer than 60,000 vehicles in California, other than small or independent low volume manufacturers) for the purpose of complying with the greenhouse gas regulations. For example, intermediate volume manufacturers generally offer limited product lines within California. This is a disadvantage for the manufacturer, since compliance with the greenhouse gas fleet average requirements requires that the manufacturer incorporate changes to the vehicle design. Since not all of the greenhouse gas-reducing technologies identified by staff can be applied to all engines and vehicle types, a manufacturer that does not offer a wide range of products is more limited than a larger manufacturer in terms of compliance choices. This problem becomes exacerbated if the intermediate volume manufacturer specialized in one specific type of vehicle, for example, high performance vehicles. Finally, ARB does not believe that providing compliance flexibility to small volume, independent low volume, and intermediate volume manufacturers will “generate long-term adverse economic impacts on General Motors and on U.S. states with automobile production-related economic sector.” The fleet average emissions reduction approach used in the greenhouse gas regulations provides large manufacturers with the flexibility to sell vehicles with greenhouse gas emission levels that are higher than the fleet average, provided those emissions are offset by vehicles with lower greenhouse gas emissions. This should provide sufficient flexibility to allow a large manufacturer (i.e., one that sells more than 60,000 vehicles in California each year) to both compete with the much smaller manufacturers and still be able meet its fleet average greenhouse gas obligations. 531. Comment: Given the multiple and conflicting emissions requirements presented by the ZEV mandate and these proposed greenhouse gas emissions standards and the additional lead time BMW would need to comply, we respectively request that CARB modify the intermediate volume manufacturer definition as follows:
Agency Response: Staff disagrees with the comment. The rationale for the commenters suggestion (allow a manufacturer with annual California sales volumes between 60,000 and 120,000 vehicles to qualify as an “intermediate volume manufacturer” based on whether or not “a manufacturer’s annual worldwide production is less than 17 times its California’s sales in each of the three previous consecutive model years.”) is unclear. Rather, this proposal seems arbitrarily designed around the commenter’s worldwide vehicle sales distribution, since there is no evidence to suggest why the criterion of “less than 17 times its California’s sales” is appropriate in terms of impacting a manufacturer’s ability to meet greenhouse gas requirements. Furthermore, the commenter provides no indication of how this proposed change could potentially affect other intermediate volume manufacturers in terms of economic competitiveness. Clearly, changing the definition of an intermediate volume manufacturer based on one manufacturer’s sales with no regard to how the change would impact others would be entirely inappropriate. Finally, from an enforcement standpoint, since neither ARB nor the U.S. EPA has ever based vehicle emission standards on worldwide sales we do not have an accurate means to track a manufacturer’s worldwide sales. It would, therefore, not be practical to add this criterion to the greenhouse gas regulations. Regarding the second point made by the commenter, the proposed greenhouse gas regulations state that when an intermediate volume manufacturer’s average California sales exceed 60,000 new vehicles based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall no longer be treated as an intermediate volume manufacturer and shall comply with the fleet average requirements applicable to large volume manufacturers beginning with the fourth model year after the last of the three consecutive model years. The requirement that when a manufacturer exceeds the specified maximum sales, that manufacturer must comply with the greenhouse gas requirements for a larger manufacturer beginning with the fourth model year after the last of the three consecutive model years also applies to small volume manufacturers and independent low volume manufacturers. These terms are consistent with the requirements of the LEV II regulations for small volume manufacturers and independent low volume manufacturers (the classification of “intermediate volume manufacturer” is not relevant for the purpose of complying with the LEV II regulations). As discussed in the response to Comment 521, it was appropriate to provide added flexibility and relaxed requirements for all but the large volume manufacturers under the ZEV regulations based on the unique technical nature of these regulations (i.e., development of entirely new power plants and propulsion designs) and their associated costs. These concerns, however, do not apply to the greenhouse gas regulations. Rather, the greenhouse gas regulations were developed based on staff’s assessment of the emission reductions that are possible using technology that is available today. It is, therefore, more appropriate to apply the lead time requirements used in the LEV II regulations to the greenhouse gas regulations than to provide the longer lead times used in the ZEV regulations. As discussed in the response to Comment 527, it was appropriate to provide added flexibility and relaxed requirements for all but the large volume manufacturers under the ZEV regulations based on the unique technical nature of these regulations (i.e., development of entirely new power plants and propulsion designs) and their associated costs. These concerns, however, do not apply to the greenhouse gas regulations. Rather, the greenhouse gas regulations were developed based on staff’s assessment of the emission reductions that are possible using technology that is available today. It is, therefore, more appropriate to apply the lead time requirements used in the LEV II regulations to the greenhouse gas regulations than to provide the longer lead times used in the ZEV regulations. 532. Comment: Greenhouse gas vehicle “groupings” should align with Federal CAFÉ groupings for “model type,” “vehicle configuration,” and “sub-configuration.” (Appendix A to letter from Alliance of Automobile Manufacturers) Agency Response: The Board recognizes the inherent efficiencies of such alignment for manufacturers. However, ARB did not and need not consider CAFE groupings, which serve a different federal purpose, with greenhouse gas vehicle test groupings, which here serve the state’s purpose of testing for greenhouse gas emission reductions. See also the response to comment 588. 533. Comment: The Alliance recommends that ARB align the greenhouse gas vehicle groupings, test vehicle selection criteria, and data requirements with current Federal fuel economy data requirements such that the data generated under the Federal program may be utilized in meeting the California greenhouse gas compliance requirements. This change would: 1) dramatically reduce unnecessary manufacturer testing and certification requirements; 2) have no impact on greenhouse gas emissions in the state; and 3) provide a more accurate estimate of fleet greenhouse gas emissions. (Appendix A to letter from Alliance of Automobile Manufacturers) Agency Response: If and when there are federal greenhouse gas test procedures, the Board will more closely evaluate the extent to which the same test vehicle can be used to meet California and federal greenhouse gas emission standards. Further, we note that manufacturers have the flexibility to structure their test groups as they wish to reduce their overall testing burden. 534. Comment: Test vehicle selection criteria should be based on “high sales” instead of “worst case.” Because ARB set the standards based on NHTSA data that is representative of high-sales configurations – not worst case – this effectively requires manufacturers to test all configurations in order to comply. This equates to an incremental testing burden of 50-100% over the Federal CAFÉ program. (Appendix A to letter from Alliance of Automobile Manufacturers) Agency Response: California’s greenhouse gas regulations are not synonymous with federal CAFÉ regulations. Comparisons to the federal program established by NHTSA are not relevant. Staff designed the program to minimize the testing burden on manufacturers while achieving the maximum feasible and cost effective greenhouse gas reduction. When staff were deciding on vehicle selection criteria to be used for calculating a manufacturer’s fleet average greenhouse gas emissions, it was important to ensure that what ever methodology that was chosen did not under represent emissions from the fleet. The first approach considered, which is the most accurate way to calculate the fleet average greenhouse gas emissions from a manufacturer’s fleet, was to require that manufacturer to test every engine and vehicle configuration within that manufacturer’s fleet. However, the amount of testing required to accomplish this would be expensive and time consuming. We then considered basing test vehicle selection on “highest sales,” as the commenter suggested. But, as shown in the following example, this approach does not necessarily work well for a manufacturer with multiple vehicle configurations. For example, assume a manufacturer has four possible vehicle configurations with the following sales percentages and CO2-equivalent emission levels. Clearly in this example allowing this manufacturer to assign the CO2-equivalent emissions from the highest sales volume configuration to the entire fleet would underestimate fleet emissions by almost 50 percent. Alternatively, the approach ultimately taken by ARB, whereby a manufacturer must test the “worst case” configuration but may also test other configurations as deemed appropriate, is more representative of the actual fleet emissions.
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