United States Office of Air Quality FINAL REPORT
Environmental Protection Planning and Standards EPA-452/R-96-012
Agency Research Triangle Park, NC 27711 September 1996
Air
ECONOMIC IMPACT ANALYSIS
OF THE PROPOSED NESHAP FOR
FLEXIBLE POLYURETHANE
FOAM
Final Report
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Economic Impact Analysis
of the Proposed NESHAP for
Flexible Polyurethane Foam
U.S. Environmental Protection Agency
Office of Air and Radiation
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
MD-15; Research Triangle Park, N.C. 27711
Prepared by:
Mathtech, Inc.
202 Carnegie Center, Suite 111
Princeton, N.J.
under subcontract to:
E.H. Pechan and Associates
5527 Hempstead Way
Springfield, Va.
Final Report
September 1996
EXECUTIVE SUMMARY
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The U.S. Environmental Protection Agency (EPA) is developing National Emission
Standards for Hazardous Air Pollutants (NESHAP) for new and existing producers of
flexible polyurethane foam. The flexible polyurethane foam industry includes producers
of flexible slabstock foam and flexible molded foam. Both slabstock and molded foam
are used as intermediate products in a number of industries. The primary uses of
flexible slabstock foam are in the furniture, automobile, carpet and bedding industries.
Among the industries which use flexible molded foam are automobile, furniture,
packaging, and textiles and fiber manufacturing. Both slabstock and molded foam
producers emit hazardous air pollutants (HAPs)1 identified by the Clean Air Act
Amendments of 1990.
Accordingly, this Economic Impact Analysis (EIA) has been conducted to satisfy
the requirements of the Clean Air Act (Section 317), and the Regulatory Flexibility Act.
ANALYSIS OBJECTIVES
The primary objective of this analysis is to describe the magnitude and
distribution of adverse impacts associated with alternative NESHAPs among various
members of society. This study estimates the costs to society and describes the
adverse impacts associated with the alternative NESHAPs. Those members of society
who could potentially suffer adverse impacts include:
• Producers whose facilities require emission controls.
• Buyers of goods produced by industries requiring controls.
• Employees at plants requiring controls.
• Individuals who could be affected indirectly such as residents of
communities proximate to controlled facilities, and producers and
1 These HAPs are methylene chloride (MeCI2) and toluene diisocyanate (TDI).
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employees in industries that sell inputs to or purchase inputs from directly
affected firms.
BACKGROUND
Affected Markets
EPA expects the alternative NESHAPs to affect two sectors of the foam
production industry included in Standard Industrial Classification (SIC) 3086. These
are:
• Producers of flexible polyurethane slabstock foam.
• Producers of flexible polyurethane molded foam.
Foam Chemistry and Production
Polyurethane foams are made by adding water to a polyol/diisocyanate reaction
mixture. During the reaction, C02 is formed and acts as a "blowing agent" by creating
bubbles that expand and create a network of cells separated by thin membranes.
The formation of the cells I n the foam determine the foam's properties, such as
softness and durability. Because certain foam properties are limited when using CCb
as the sole blowing agent, auxiliary blowing agents (ABAs) are often used. The ABAs
vaporize due to the heat generated during the reaction and help the carbon dioxide
expand the foam, and also reduces the heat formation from the isocyanate reaction
(thus preventing scorching of the foam). Previously, the principal ABA used was
chlorofluorocarbon 11 (CFC-11). However, since this compound has been shown to
deplete the earth's ozone layer, U.S. producers have almost completely phased out its
use. Methylene chloride (MeCb), a listed HAP, has replaced CFC-11 as the principal
ABA. Since the role of the methylene chloride is simply to volatize and expand the
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foam, it does not directly participate in the polyurethane reaction. Therefore, all MeCI2
used in the reaction is eventually emitted.
As mentioned previously, there are two types of foam production processes:
slabstock and molded. While the chemistry and final products of slabstock and molded
foam production are similar, the production processes, emission sources, and control
techniques are very different. While molded foam is manufactured in a batch-type
process, slabstock is produced using a continuous method. The major emission
source for slabstock foam is from the use of ABAs, but there is no analogous emission
point for molded foam production. The only significant HAP emission point that the two
segments share is equipment cleaning. Generally, the reasons for emissions and
available control technologies are quite different for the two industry segments.
Regulatory Alternatives
The Clean Air Act Amendments of 1990 stipulate that HAP emission standards
for existing sources must at least match the percent reduction of HAPs achieved by
either (a) the best 12 percent of existing sources, or (b) the best five sources in a cate-
gory or subcategory consisting of fewer than 30 sources. This minimum standard is
called a MACT Floor.
Because of the technical differences in the flexible polyurethane foam production
industry noted above, EPA has separated the industry into several subcategories. This
analysis evaluates the molded foam production and slabstock foam production
subcategories. For each of these subcategories, three regulatory alternatives have
been analyzed. The first represents the maximum achievable control technology
(MACT) "floor" level of control. This level of control is the minimum stringency for a
NESHAP developed in accordance with section 112(d) of the Clean Air Act
Amendments. Existing source regulatory alternatives that achieve greater emission
reductions than the floor level were also developed for each of these subcategories
(Regulatory Alternative 1 and Regulatory Alternative 2).
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There are currently seventy-eight (78) facilities producing flexible slabstock foam
and approximately two-hundred-thirty-four (234) facilities producing molded foam. For
both sectors, the MACT Floor for existing sources was constructed by averaging the
emissions levels of the best 12 percent of existing sources. A source type is a piece of
equipment or component of production which produces HAPs. The MACT Floor
requires controls on HAP emissions from the following slabstock foam source types:
• Production processes.
• Storage/unloading processes.
• Equipment cleaning.
• Equipment leaks.
Molded foam source types controlled by the MACT Floor are:
• Mixhead cleaning, or "flushing."
• Mold release agent usage.
• The use of HAP-based adhesives to repair damaged foam.
Table ES-1 shows the three existing source regulatory alternatives for slabstock
foam. Regulatory Alternative 1 increases the stringency of the requirements for
equipment leak and ABA usage emissions in that it requires a combination of equipment
modifications and the execution of a leak detection and repair (LDAR) program to
reduce equipment leak emissions. Alternative 1 also includes a lower allowable HAP
ABA emission level. Regulatory Alternative 2 prohibits HAP ABA emissions. This
would, in effect, prohibit the usage of any MeCb as an ABA. Since no HAP ABA would
be allowed, there is no need for HAP ABA storage or equipment leak requirements.
Table ES-2 shows the three existing source regulatory alternatives for molded
foam production by source and type of control. Since the MACT Floor prohibits the use
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of HAP-based mold release agents and adhesives, the only emission source with the
potential for more stringent requirements is mixhead flushing. Regulatory Alternative 1
requires work practices to reduce mixhead flushing emissions and Regulatory
Alternative 2 prohibits the use of HAP-based mixhead flushes.
Table ES-1
REGULATORY ALTERNATIVES FOR SLABSTOCK FOAM EXISTING SOURCES
Reg.
Alt.
MACT
Floor
1
2
Storage/
Unloading
HAP ABA & TDI-
vapor balance/carbon
HAP ABA & TDI-
vapor balance/carbon
TDI- vapor
balance/carbon
Components in HAP
Service
Leakless TDI pumps
Leakless TDI pumps
Unique LDAR
Leakless TDI pumps
Equipment
Cleaning
HAP prohibition
HAP prohibition
HAP prohibition
HAP ABA
Emissions
Existing HAP ABA
emission limit
Intermediate HAP
ABA emission limit
HAP prohibition
Source: EC/R Incorporated (1996a).
Table ES-2
REGULATORY ALTERNATIVES FOR MOLDED FOAM EXISTING SOURCES
Regulatory
Alternative
MACT Floor
1
2
Mixhead
Flush
No control
Work practice
HAP prohibition
Mold Release
Agents
HAP prohibition
HAP prohibition
HAP prohibition
Repair
Adhesive
HAP prohibition
HAP prohibition
HAP prohibition
Source: EC/R Incorporated (1996a).
SUMMARY OF ESTIMATED IMPACTS
Primary and Secondary Impacts
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Table ES-3 summarizes the estimates of the primary and secondary economic
impacts associated with the MACT Floor and the two additional regulatory alternatives.
Primary impacts include price increases, reductions in market output levels, changes in
the value of shipments by domestic producers, and plant closures. Note that for the
slabstock sector, we report a range of plant closures based on a sensitivity analysis of
emission control technologies (found in Appendix D). Secondary impacts include em-
ployment losses, reduced energy use, changes in net exports, and potential regional
impacts.
Table ES-3
SUMMARY OF ESTIMATED ECONOMIC IMPACTS
Analysis
Estimated Impacts
Primary Impacts
Price Increases
Market Output
Value of Domestic Shipments
Plant Closures
Estimated price increases range from 2.20 to 3.82 percent for the
slabstock segment and from 0.07 to 1.14 percent for the molded foam
segment of the industry under the three regulatory alternatives.
Estimated reductions in market output range from 1 .08 to 1 .86 percent for
slabstock foam and from 0.04 to 0.56 percent for molded foam.
Increases in the value of domestic shipments range from 1 .1 0 to 1 .89
percent for slabstock foam and from 0.04 to 0.57 percent for molded
foam.
For the slabstock foam market segment, predicted closures range from
one to two under the MACT Floor, one to three under Regulatory
Alternative 1 , and one to four under Regulatory Alternative 2. Predicted
molded foam plant closures are zero under the MACT Floor, three under
Regulatory Alternative 1 , and zero under Regulatory Alternative 2.
These predicted closures are due in part to worst-case assumptions
adopted in the analyses.
Secondary Impacts
Employment
Energy Use
Net Exports
Regional Impacts
Under the three regulatory scenarios, employment losses are estimated
to range from 1 .08 to 1 .86 percent (95 to 164 jobs) in the slabstock
segment and 0.04 to 0.56 percent (2 to 31 jobs) in the molded segment.
Estimated industry-wide energy use to decline by 1 .08 to 1 .86 percent
($409.6 to $703.0 thousand) in the slabstock industry and by 0.04 to 0.56
percent ($8.9 to $133.5 thousand) in the molded industry.
No significant trade impacts are expected.
No significant regional impacts are expected.
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The market price for slabstock foam is estimated to increase by 2.28 percent
($0.03/lb) under the MACT Floor, 2.20 percent ($0.03/lb) under Regulatory Alternative
1, and 3.82 percent ($0.05/lb) under Regulatory Alternative 2. Corresponding
decreases in market output are estimated as: 1.12 percent under the MACT Floor,
1.08 percent under Regulatory Alternative 1, and 1.86 percent under Regulatory
Alternative 2.
The estimated impacts of the MACT Floor on price and output in the molded
foam sector are smaller than those predicted for the slabstock market. For the molded
foam industry, we estimate an increase in price of only 0.07 percent ($0.0017/lb) under
the MACT Floor, 0.84 percent ($0.02/lb) under Regulatory Alternative 1, and 1.14
percent ($0.03/lb) under Regulatory Alternative 2. Corresponding decreases in market
output are estimated as: 0.04 percent under the MACT Floor, 0.42 percent under
Regulatory Alternative 1, and 0.56 percent under Regulatory Alternative 2.
Note, however, that we expect increases in the value of shipments by both
domestic slabstock and molded foam producers under all regulatory alternatives. This
occurs because estimated price increases more than offset the lower production
volumes. The value of shipments of slabstock foam are estimated to increase by 1.14
percent ($19.53 million) under the MACT Floor, 1.10 percent ($18.82 million) under
Regulatory Alternative 1, and 1.89 percent ($32.56 million) under Regulatory Alternative
2. The value of shipments of molded foam is estimated to increase by 0.04 percent
($0.391 million) under the MACT Floor, 0.42 percent ($4.50 million) under Alternative 1,
and 0.57 percent ($6.10 million) under Alternative 2.
For the slabstock foam industry, the analysis predicts one to two plant closures
under the MACT Floor, one to three plant closures under Regulatory Alternative 1 and
one to four plant closures under Regulatory Alternative 2. These predicted closures,
however, are due in part to some of the "worst-case" assumptions adopted in the
analysis.2
2 For example, we assume that plants with the highest emission control costs are the least efficient
producers in the market. Also, our analysis does not consider that some plants are protected by regional
EXECUTIVE SUMMARY ES-8
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For the molded foam industry, the analysis predicts no plant closures under the
MACT Floor, three plant closures under Regulatory Alternative 1, and no plant closures
under Regulatory Alternative 2. Again, these predicted closures are due in part to the
worst-case assumptions adopted in the analysis.
trade barriers. Actual plant closures will be fewer than predicted closures if plants with high emission
control costs are not the least efficient producers or if these plants are protected by regional trade barriers.
We also note that predicted plant closures are sensitive to assignments of emission control technologies
(see Appendix D).
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The estimates of slabstock sector secondary impacts reported in Table ES-3 are
consistent with the primary impacts estimates described above. We estimate
reductions in employment and energy use of 1.12 percent under the MACT Floor, 1.08
percent under Regulatory Alternative 1, and 1.86 percent under Regulatory Alternative
2.3 Since no significant export or import markets for slabstock foam exist, no significant
trade impacts are expected.
The secondary impacts on the molded foam industry are less than those for the
slabstock segment. Reductions in employment and energy use are estimated to be
only 0.04 percent under the MACT Floor, 0.42 percent under Regulatory Alternative 1,
and 0.56 percent under Regulatory Alternative 2. As with slabstock foam, no
significant export or import markets for molded foam exist; accordingly, no significant
trade impacts are expected.
Financial Analysis
The analysis of financial data for a sample of firms indicates that capital and
annual emission control costs are small relative to the financial resources of the firms
producing flexible polyurethane slabstock and molded foam. As a result, we do not find
evidence that it will be difficult for these firms to raise the capital required to purchase
and install emission controls. We note, however, that data in not available for most
privately owned companies. The producers for which financial data are available tend
to be larger publicly held companies. As a result, these firms might not be
representative of all producers in the industry.
Sensitivity Analyses
3 As was the case for predicted plant closures, our estimates of employment and energy impacts are
due in part to the worst-case assumptions adopted in our analysis.
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Appendix C examines the sensitivity of the estimated primary impacts to
alternative assumptions about market demand and supply elasticities. The results
reported in Appendix C indicate that the primary impacts summarized in Table ES-3 are
relatively insensitive to reasonable ranges of elasticities.
Appendix D examines the sensitivity of the counts of predicted plant closures to
the assignment of compliance technologies for the slabstock industry segment. Given
that there exist multiple technologies (of different costs) which will bring a source type
into compliance with a regulatory scenario, altering the assignment of compliance
technologies to model plants affects the estimated impacts of the regulatory scenario.
Impacts can be reduced by assuming that more plants will opt for lower-cost emission
control technologies.
Potential Small Business Impacts
The Regulatory Flexibility Act (RFA) requires an analysis of potential impacts on
small entities, which are defined by the employment or sales level of the parent
company that owns a facility. Due to insufficient data on the ownership of numerous
plants in the flexible polyurethane foam industry, an analysis of each parent company in
the industry is not feasible. Alternatively, data collected in the section 114 survey is
used to evaluate the impact on small flexible foam businesses based on model facilities.
The Initial Regulatory Flexibility Analysis (IRFA) indicates that there are a total of 71
small businesses (18 slabstock, 53 molded) that are affected by the regulatory
alternatives.
For the molded foam sector, the IRFA indicates that the smallest model plant
does not incur any compliance costs, and the average change in operating costs as a
percentage of revenues for all other model plant sizes is less than one percent. This
impact is not considered to be significant to affected small businesses. In addition, the
economic analysis does not indicate any closures of molded foam facilities as a result of
EXECUTIVE SUMMARY ES-11
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the MACT floor and Regulatory Alternative 2, however, Regulatory Alternative 1
indicates 3 closures of the mid-sized model plant (LP2).
For the slabstock sector, the average change in operating costs as a percent of
revenues at the smallest model plant is 1.59 percent for the MACT floor, 1.84 percent
for Regulatory Alternative 1, and 2.29 for Regulatory Alternative 2. For all other model
plant sizes, this value is equal to or less than one percent. The economic analysis
estimates a range of closures for each slabstock model plant size. The smallest model
plant is estimated to have between 0 and 2 closures for the MACT floor, and between 0
and 3 closures for Regulatory Alternatives 1 and 2. The next largest model plant is
estimated to have between 0 and 1 closure for all regulatory alternatives. Because
there is insufficient data to determine the exact ownership of the plants that may close,
the analysis cannot determine if these impacts will occur at small businesses. Given
that any estimate of closures is based upon worst-case assumptions, it is likely that
these impacts are overestimated and the affect on small businesses will be minimal.
Social Costs and Economic Efficiency
Table ES-4 reports estimates of the social (economic) costs associated with the
alternative NESHAPs for the slabstock and molded foam segments of the industry. We
measure social costs as changes in economic surplus resulting from compliance costs.4
The total estimated annualized social costs for the slabstock and molded
subcategories combined range from $7.24 million (Regulatory Alternative 1) to $12.05
million (MACT Floor). The estimates of emission reductions reported in Table ES-4
include lower emission reductions due to controls as well as adjustments for predicted
plant closures. Specifically, we assume that emissions fall to zero at plants predicted
to close. Because the proposed options choose Regulatory Alternative 1 for the
slabstock subcategory and Regulatory Alternative 2 for the molded subcategory, this
equates to a total social cost of the proposed rule to be $7.89 million.
See Section 7 for a discussion of changes in economic surplus as a measure of social costs.
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Table ES-4
SOCIAL COSTS AND ECONOMIC EFFICIENCY OF
REGULATORY ALTERNATIVES
Regulatory
Alternative
MACT Floor
Regulatory Alternative
1
Regulatory Alternative
2
Annual Social Costs
($1994MM)
Slabstock
11.86
7.18
10.92
Molded
0.19
0.06
0.71
Total
12.05
7.24
11.63
Annual Emission Reduction
(tons)
Slabstock
9
,774
1
1,796
1
6,958
Molded
331
1,846
2,331
Total
10,
105
13,
642
19,
289
A regulatory alternative is economically efficient if it generates larger net benefits
(benefits minus costs) than other alternatives. A dominant alternative generates the
same or larger total emission reductions at a lower cost than any other alternative.
Since we presume that larger emission reductions yield higher benefits, a dominant
alternative is economically efficient relative to all other alternatives (since it produces
the same or larger benefits at a lower cost).
An inferior alternative, on the other hand, generates the same or smaller
emission reductions at a higher cost than at least one other alternative. An inferior
alternative is economically inefficient because at least one other alternative generates
higher net benefits.
As the results in Table ES-4 indicate, none of the three regulatory alternatives is
clearly dominant. However, the MACT Floor is inferior to both Alternative 1 and
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Alternative 2. The MACT Floor generates lower annual emission reductions at higher
annual costs than either Alternative 1 or Alternative 2. Therefore, we conclude that the
MACT Floor is economically inefficient relative to these two regulatory alternatives.
Note that Alternative 2 generates larger emission reductions than Alternative 1,
but at higher costs. As a result, the information provided in Table ES-4 is not sufficient
to evaluate the economic efficiency of Alternative 2 relative to Alternative 1. Alternative
2 would be efficient relative to Alternative 1 if the additional benefits associated with
higher emission reductions (5,647 tons annually) exceed its incremental costs ($4.39
million annually).
One final comment on why this analysis is worthwhile. Some of the estimated
economic impacts associated with Alternatives 1 and 2 are more adverse than for the
MACT Floor (e.g., more closures) even though the MACT Floor gives rise to higher
social costs. This occurs because, compared with the MACT Floor, Alternatives 1 and
2 impose higher compliance costs on marginal (higher cost) plants, but more than
offsetting lower costs on non-marginal plants. Thus, while the MACT Floor is inferior,
some of its economic impacts are less severe than those for Alternatives 1 and 2. In
other words, some of the distributional impacts of the MACT floor are less severe than
those of the other regulatory alternatives.
LIMITATIONS
Several limitations of the analyses used to estimate the impacts of the alternative
NESHAPs are described throughout this report. All of these limitations should be
considered in interpreting the estimated impacts summarized above. In particular,
many of the assumptions adopted in the analyses tend to cause the estimated adverse
impacts associated with the alternative NESHAPs to be overstated.
ORGANIZATION OF REPORT
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Section 1 of this report is an industry profile of the flexible polyurethane foam
industry. In Section 2, we describe the model plants and report the estimated
compliance costs used in the analyses. We describe the analytical methods employed
to estimate the economic impacts associated with the alternative NESHAPs in Section
3. In Section 4, we report estimates of primary economic impacts, including those on
market prices, market output levels, value of shipments by domestic producers, and
plant closures. Section 5 presents estimates of secondary impacts, including the
effects on employment, foreign trade, energy use and regional economies. We
describe potential adverse impacts of small businesses in Section 6. In Section 7, we
report estimates of the social costs and assess the economic efficiency of the
alternative NESHAPs.
There are four appendices to this report. We describe the model plants used in
the analyses and report estimates of emission control costs and other baseline data in
Appendix A. Appendix B provides a detailed technical description of the analytical
methods employed to estimate economic impacts and costs. We report in Appendix C
the results of sensitivity analyses in which we consider ranges of demand and supply
elasticities. In Appendix D, we report the results of sensitivity analyses for the
slabstock sector in which assumptions regarding the assignment of compliance
technologies to model plants are modified.
REFERENCE
EC/R Incorporated (1996a). Technical memorandum from Phil Norwood and Amanda
Williams to David Svendsgaard (EPA/OAQPS), January 26.
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SECTION 1
INDUSTRY PROFILE
INTRODUCTION
The following is a profile of the industry segments affected by the Maximum
Achievable Control Technology (MACT) standards for producers of flexible polyurethane
foam. These are producers of flexible slabstock and flexible molded polyurethane foam.
Both slabstock and molded foam producers emit hazardous air pollutants (HAPs)
identified by the Clean Air Act Amendments of 1990. Information in this section is used
to conduct analyses that are required by Section 317 of the Clean Air Act, which requires
EPA to evaluate regulatory alternatives through an Economic Impact Analysis (EIA), and
the Regulatory Flexibility Act, which requires an evaluation of the impacts on small
entities.
The objective of this section is to describe the markets for flexible polyurethane
foams. Specifically, we:
• Describe flexible polyurethane foam products and their uses,
• Present data on foam prices and production levels,
• Describe the market outlook for flexible polyurethane foam,
• Characterize the industry's market structure,
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• Provide a brief description of the limited foreign trade in flexible
polyurethanefoam,
• Present financial data for foam producers, and
• Present data on industry employment and energy use.
PRODUCT DESCRIPTIONS
Polyurethanes are made by reacting a polyol with a diisocyanate. The polyol is
typically a polyester or a polyether with two or more -CH2OH functional groups. The
diisocyanate is usually a mixture of a 2, 4- and 2, 6- isomers of toluene diisocyanate
(TDI). Polyurethane foams are made by adding water to the reaction mixture.
Surfactants and catalysts are also added to the mixture. The surfactants aid in mixing
incompatible components of the reaction mixture, and also help control the size of the
foam cells by stabilizing the forming gas bubbles. Catalysts balance the
isocyanate/water and isocyanate/polyol reactions, and assist in driving the
polymerization reaction to completion.
The C02 formed in this reaction acts as the "blowing agent" creating bubbles that
expand. The bubbles eventually come into close contact, forming a network of cells
separated by thin membranes. At full foam rise, the cell membranes are stretched to
their limits and rupture, releasing the blowing agent and leaving open cells supported by
polymer "struts." The more water added, and C02 formed, the more expanded the
polymer network, and the lower the resultant foam density. However, the reaction of
isocyanate with water is extremely exothermic. The addition of too much water can
cause the foam to scorch or auto-ignite.
Because certain foam properties are limited when using C02 as the sole blowing
agent, auxiliary blowing agents (ABA's) are often used. The ABA's vaporize due to the
SECTION 1: INDUSTRY PROFILE 1-2
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heat generated during the reaction and help the carbon dioxide expand the foam. The
ABA also reduces the heat formation from the isocyanate reaction. Previously, the
principal ABA used was chlorofluorocarbon 11 (CFC-11). However, since this
compound has been shown to deplete the earth's ozone layer, U.S. producers have
almost completely phased out its use. Methylene chloride (MeCI2), a listed HAP, has
replaced CFC-11 as the principal ABA. Since the role of the methylene chloride is
simply to volatilize and expand the foam, it does not directly participate in the
polyurethane reaction. Therefore, all methylene chloride used in the reaction is
eventually emitted.
Polyurethane products can be classified into two major categories: foams and
non-foams. Non-foam polyurethanes are coatings, adhesives, sealants, and
elastomers. Polyurethane foams are produced in rigid and flexible forms. The
industry producing flexible polyurethane foams is separated into two distinct segments,
flexible slabstock foam and flexible molded foam. Although the foam chemistry in
these sectors of the industry is analogous, the equipment, emission sources, and
control technologies are different. Molded foam is produced by pouring, or "shooting"
the foam reaction mixture into a mold of the desired shape and size. Slabstock foam
is produced as large "buns" on semi-continuous moving conveyors. These buns are
then cut, glued, or otherwise fabricated into the desired sizes and shapes.5
Flexible Slabstock Foam
Toluene diisocyanate (TDI) and polyether polyol are the predominant raw
materials used to produce flexible slabstock foam. Catalysts, surfactants, blowing
agents and other additives comprise the balance of materials used in the production
process. The raw ingredients are pumped to a mixing head and discharged through
5 Fora further discussion of the technical processes involved in the manufacture of flexible
polyurethane foam, see Schultz (1989) and EC/R Incorporated (1995).
SECTION 1: INDUSTRY PROFILE 1-3
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the nozzle onto the front of a conveyor belt (called the foam line) at a rate of between
400 and 1,000 pounds per minute. The conveyor first passes through an enclosed,
ventilated tunnel, where the ingredients react quickly to form the foam bun. From the
point of its maximum expansion, the foam begins to release blowing agents and
unreacted chemicals. These chemicals are exhausted from the enclosed section. As
the bun leaves the conveyor, it is sawed into sections and transported to a curing area,
where the foam reaction continues to completion and the remainder of the blowing
agents leave the bun.
There are no standard dimensions for a slabstock bun. A typical bun can be 4
feet tall, 8 feet wide, and 50 to 100 feet long. However, buns can range from a width of
3 to 9 feet and may be up to hundreds of feet in length. Slabstock foam is produced on
a need basis, generally to fill existing orders. The size of the facility, more than the
speed of the foam line, acts as a constraint on how much foam can be produced. The
foam line production process generally takes between 2 and 4 hours before the bun is
ready for transport to the curing area. After the foam bun is transported to the curing
area, it must sit untouched for between 24 and 48 hours before any fabrication,
shipping, or movement to storage can occur. Foam production in smaller facilities is
thus limited by the amount of space available for foam curing and in some cases
storage (Peters, 1995).
Figure 3-1 illustrates the most popular machinery used in the production of
flexible polyurethane slabstock buns, the Maxfoam process. As the figure indicates,
the mixing head is fixed and the liquid coming from the head is fed into the bottom of a
trough where it begins to react. The reacting mass then flows over the forward edge of
the trough and onto the bottom paper, which is sliding on an inclined fall-plate. The
fall-plate is made up of five sections hinged together at pivot points. The angle of each
fall-plate section can be changed by raising or lowering the height of the pivot points.
By changing the configuration of the fall-plate sections, the rise of the foam can be
controlled. The foam, which expands downward, reaches the horizontal conveyor as a
fully expanded slab. When the fall-plate sections are properly adjusted, the reacting
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foaming mass flowing out of the trough will be evenly distributed between the sidewalls.
The surface of the slab will follow the side paper on a horizontal line at the same level
as the top of the foam expanding from the trough, thus producing a flat-topped block
(Harrington and Hack, 1991).
Prior to being delivered to the end-user, the large buns are fabricated according
to their end-use. The simplest method of fabrication is to cut the foam into the desired
shape and size. However, many customers require the gluing of foam-to-foam or foam
to some other non-foam product.
Figure 1-1. Maxfoam Process
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By altering the relative quantities of water, TDI, polyol, and auxiliary blowing
agent used in the reaction, slabstock properties can be changed significantly. Foam
properties and characteristics can be further altered by the addition of colorants,
combustion modifiers, and fillers.
The most important foam properties are density and Indentation Force Deflection
(IFD). Foam is graded, or categorized, with two numbers, representing these proper-
ties. The first, density, is measured in Ib/ft3 and is used to categorize slabstock into
three general groupings as follows:
• Foam with density less than 1.2 Ibs/ft3.
• Foam with density between 1.2 Ibs/ft3 and 1.8 Ibs/ft3.
• Foam with density greater than 1.8 Ibs/ft3 (Hull and Co., 1992).
The second grading measure, the IFD, is a measure of foam stiffness (or
softness). IFD is the amount of force (Ibs) it takes to push a 50 square inch disk down
25 percent of the total thickness of the foam. Density and IFD, although both
measuring physical foam characteristics, are independent of one another. For
example, a 1.0/30 foam is typically used in sofa arms and quilting. A 1.8/30 foam is
considered quality sofa seat foam. These pieces differ in their density to correspond
with their intended end use but are of the same softness. A foam with a given density
can have any IFD value, just as foam with any IFD may be of any density. Desired
density and IFD values are determined by the foam's application in the end-use market.
As previously stated, IFD is a direct indicator of foam stiffness. However,
density does not provide a direct measure of foam quality or durability. Generally, the
higher the foam density, the higher the quality, but this is not always the case. Quality
is often subjective to the end-use of the foam. Other foam properties and
characteristics may provide a relative measure of "quality" unrelated to density.
SECTION 1: INDUSTRY PROFILE 1-6
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Some slabstock facilities also have rebond operations on-site. Rebond is the
process by which scrap foam is ground up, placed in large molds and adhered together
using an isocyanate (methylene chloride) and heat. This causes the small pieces to
adhere and form a solid cylinder of foam. The cylinder is then peeled into sheets,
which is primarily used as carpet underlay (carpet padding). Bonded carpet underlay is
the major use for flexible polyurethane foam scrap. Because polyurethane foam
producers are generally not in the business of producing scrap, the amount of material
poured intentionally for bonded carpet underlay is limited by the amount of available
storage space as much as it is by economic considerations. Intentional scrap is often
made by using off-spec materials that would not be acceptable for use in cushions or
bedding material. Intentional scrap does not hold together well and is used as an
extender. Therefore, generally no more than 50 percent of the material used in a batch
of rebond carpet underlay can be intentionally poured scrap.
Flexible Molded Foam
Although the basic polyurethane foam reaction is the same, molded foam
production uses somewhat different chemical formulations from those used in slabstock
production. These foams have higher densities than flexible slabstock foams, and
therefore, seldom use an auxiliary blowing agent. In contrast to the slabstock process,
the molding method is an intermittent batch process where the raw ingredients are shot
into a mold and allowed to react. Unlike slabstock foam, where cutting and fabrication
is necessary for the creation of the final foam product, the result of the molded foam
production process is the final or intermediate product. Flexible molded foams are
categorized into three classes in accordance with variance in their properties:
• High resiliency (HR)
• Semi-flexible
SECTION 1: INDUSTRY PROFILE 1-7
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• Hot molded.
A typical foam molding line will consist of many functional parts. The majority of
floor space will be taken up by conveying systems for the molds, ovens and related
finished-foam handling systems. Conveyors for moving the foam molds from station to
station can be of any number of layouts. Long racetrack-style designs are still as
common as the newer, smaller, and more specialized carousel lines similar to that
shown in Figure 3-2. In most cases, the mold moves under the mixing head where it
received a charge of foam. It is
SECTION 1: INDUSTRY PROFILE 1-8
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Figure 1-2: Carousel Molding Line
common to find the mixing head mounted on a robot or other computerized pour bridge
for purposes of optimizing pour pattern for each individual mold cavity. After receiving
the correct dose of foam, the mold is moved to a curing/storage area where the reaction
continues to completion and the product is ready for delivery (Harrington and Hack,
1991).
END-USE MARKETS
Flexible slabstock and molded foams have a myriad of uses in six primary
markets. These markets, which are described below, are:
• Furniture
• Transportation
• Carpet
• Bedding
• Packaging
SECTION 1: INDUSTRY PROFILE 1-9
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• Textiles and Fibers.
Table 1-1 shows the 1991 distribution of slabstock foam to end-use markets. As
this table indicates, the major uses of slabstock foam include the manufacture of
furniture, vehicles, carpeting, and bedding. Table 1-2 shows the major uses of molded
flexible polyurethane foam. About 86 percent of molded foam is used in the
manufacture of vehicles.
Table 1-1
END-USE MARKET CONSUMPTION OF FLEXIBLE SLABSTOCK FOAM (1991)
INDUSTRY
SEGMENT
Furniture
Transportation
Carpet*
Bedding
Packaging
Textiles and Fibers
Other
Total
CONSUMPTION
(million Ibs.)
560
117
340
161
36
22
29
1,265
% TOTAL
44
9
27
13
3
2
2
100
* Carpet includes poured scrap and binder adhesives
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
SECTION 1: INDUSTRY PROFILE
1-10
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Table 1-2
END-USE MARKET CONSUMPTION OF FLEXIBLE MOLDED FOAM (1991)
INDUSTRY
SEGMENT
Transportation
Auto
Non-auto
Furniture
Packaging
Textiles & Fibers
Bedding
Other
Total
CONSUMPTION
(million Ibs.)
213
76
24
12
5
4
5
339
% TOTAL
63
23
7
4
1
1
1
100
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
Transportation
Uses in transportation include automobiles and light trucks, recreational vehicles,
trucks, trailers, and railroad and aerospace applications. Cushions, shock-absorbent
pads, and seating surfaces account for approximately 30 percent of total flexible foam
production, and represent 80 percent of the flexible foam used in automotive
applications. Typical automotive uses for flexible polyurethane foam are for such items
as seat cushions, seat backs, headrests, arm rests, headliners, and under carpet sound
insulation. Most of the parts are produced by molding rather than fabricating pieces cut
from slabstock.
In 1991, total production of flexible polyurethane molded foam products for the
U.S. transportation industry was reported at 289 million pounds. Table 1-3 shows
molded foam usage in a typical automobile.
SECTION 1: INDUSTRY PROFILE
1-11
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Table 1-3
MOLDED FOAM CONSUMPTION PER AUTOMOBILE
APPLICATION
Seating
Instrument Panels
Head Rests
Arm Rests
Consoles
Carpets (molded)
Other
Total
CONSUMPTION
PER VEHICLE
(pounds)
25.5
3.2
0.8
1.2
0.3
0.5
0.5
32.0
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
Furniture
Furniture is the largest end use of flexible polyurethane foam. In 1991, 584
million pounds, or 36 percent of total flexible foam produced, was used in the furniture
industry, mainly for cushions, pillows, and padding. Table 1-7 describes the distribution
of slabstock foam densities used in the furniture industry. The density and IFD chosen
will vary with the desired properties of the furniture. Fabrication processes used in the
manufacture of furniture generates a considerable amount of scrap during the
conversion of slabstock to finished products. This scrap goes through "rebond"
treatment and is used in the production of other flexible foam products, especially carpet
underlay. The furniture market is primarily served by six large companies.6
! This information is provided by Hull & Co. (1992). The six companies were not identified.
SECTION 1: INDUSTRY PROFILE
1-12
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Carpet Underlay
In 1991, the U.S. market for carpet underlay used an estimated 570 million
pounds of flexible polyurethane foam. Of this total, 119 million pounds represent virgin
carpet underlay while 451 million pounds is bonded carpet underlay (rebond). Carpet
underlay is produced by flexible slab foam producers and by stand-alone carpet
underlay producers. Approximately 52 plants, located in 26 states, manufacture
bonded carpet underlay in the U.S. (Hull & Co., 1992). In 1991, a total of 139 million
pounds of virgin flexible slab foam was produced for carpet underlay applications. Of
this quantity, 119 million pounds were used as produced and the remaining 20 million
pounds were sent as scrap to bonded carpet underlay manufacturers. Table 1 -4
shows the foam components and quantities of each used in the 1991 production of
bonded carpet underlay.
Table 1-4
FOAM COMPONENTS OF BONDED CARPET UNDERLAY
SCRAP SOURCE
Flexible Foam Scrap
Imported Foreign Scrap
Binder Adhesives
Molded Foam Scrap
Post-Consumer Scrap
Total Bonded Carpet Underlay
Production
MILLIONS OF POUNDS
251
133
40
17
10
451
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
SECTION 1: INDUSTRY PROFILE
1-13
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Bedding
The bedding industry is the fourth largest user of flexible polyurethane foam, con-
suming about 165 million pounds, or 5 percent of the total flexible foam produced. The
bedding market consists of toppers and mattresses. Toppers are typically less than 1.5
inches thick and account for about 51 million pounds of foam, or 35 percent of bedding
foam usage. Mattresses are 4 to 6 inches thick and use 94 million pounds of foam.
Six or seven large companies share most of the market (Hull & Co., 1992).
Packaging
The packaging industry uses a wide range of polyurethane materials. In 1991,
this industry used approximately 36 million pounds of flexible slab foam and 12 million
pounds of molded foam. Polyurethane for packaging is limited by its higher cost
relative to polystyrene. Flexible foams have important applications in packaging high
cost speciality items as well as uses in interiors of carts for in-plant transport of
speciality items.
Textiles and Fibers
In 1991, the textiles and fibers industry consumed approximately 27 million
pounds of flexible foam. Apparel applications use flexible foam, mostly 1 -1.5 Ib / ft3
based on polyester polyol, melt-bonded onto fabric. Relatively small quantities of
flexible foam are used as laminates to textile materials as backing.
PRICES
As previously discussed, flexible polyurethane slabstock foam is produced in
large buns. The buns are sold to fabricators where they are cut and or glued to form
SECTION 1: INDUSTRY PROFILE 1-14
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foam of the desired shape and size for use in the end-use market. Prices paid by
fabricators for slab foam varies with the grade (density) of the foam. They also vary
somewhat with the geographic location of the end-use market. For example, foam to
be used in California must adhere to stricter fire retardants and chemical use guidelines
than the rest of the country (Bush, 1995). The necessary modifications to the
production process results in higher production costs, and thus higher costs to the
fabricators.
Table 1-5 shows August 1995 median prices paid by fabricators for different
grades of bulk slabstock foam. As this table indicates, higher density slabstock foam
commands higher prices. Also, median California prices are moderately higher than
prices for the rest of the domestic market. Molded foam prices vary depending on the
amount of value added to the foam during the molding process. One industry source
reports that molded foam prices in the range of $2.25 to $2.45 per pound are typical.7
Table 1-5
BULK SLABSTOCK FOAM PRICES
Density
(Ibs/ft3)
1.00
1.20
1.45
1.80
Price
(per board foot)
$0.125
$0.145
$0.165
$0.200
California Price
(per board foot)
$0.135
$0.170
$0.185
$0.225
Source: Bobby Bush Jr., Hickory Springs Manufacturing Company, telecom with Jeffrey Sassin, 8/30/95.
7 Jody Bevilaqua, Woodbridge Foam, telecom with Jeffrey Sassin, Mathtech, Inc., 3/15/96.
SECTION 1: INDUSTRY PROFILE
1-15
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OUTPUT
From the period 1987 through 1994, production of flexible slabstock foam has
increased over 35 percent, with annual increases during that span averaging about 4.6
percent (Peters, 1995) Decreases from previous year production levels occurred in
1990, and again in 1991.8 Since that time, industry production figures have been
increasing, with the largest increase occurring from 1993 to 1994 (15.68 percent). In
1992, flexible molded foam production is estimated to have been approximately 339
million pounds, of which 58 percent was used in the automotive manufacturing industry
(Hull & Co., 1992). Flexible slabstock production quantities and yearly trends are
reported in Table 1 -6.
As discussed earlier, slabstock foam is classified into one of three foam grades
based upon its Ibs/ft3 density. Table 1-7 shows the distribution of slabstock foam, by
foam grade, to end-use market. The data in this table are consistent with our earlier
discussion that a variety of foam densities are often included in single end-use products.
Because several different grades are produced at a facility throughout the year, it
would be difficult to maintain control at specified emission limits for each foam grade.
Therefore, the proposed MACT rule allows foam facilities to achieve compliance by
averaging emissions across foam grades. Some foam grades require less ABA and
therefore can meet emission limitations more easily than others. This raises the issue
of whether compliance with the proposed rule will cause relatively larger adverse
impacts in specific end-use markets. However, the data in Table 1-7 do not permit a
straightforward answer to this question as the major end-use markets use a variety of
foam densities.
8 The recession in 1990-91 caused a drop in production because the end-use markets for foam (i.e.,
automobiles, home furnishings, etc.) were severely affected by the slowed U.S. economy.
SECTION 1: INDUSTRY PROFILE 1-16
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Table 1-6
FLEXIBLE SLABSTOCK FOAM PRODUCTION
YEAR
1994
1993
1992
1991
1990
1989
1988
1987
PRODUCTION
(billion Ibs)
1.512
1.307
1.237
1.168
1.247
1.250
1.187
1.117
% CHANGE
15.68
5.66
5.91
-6.34
-0.24
5.31
6.27
—
Source: Lou Peters, Polyurethane Foam Association, telecom with Jeffrey Sassin, Mathtech, Inc.
8/8/95.
SUBSTITUTES
There are a limited number of products which serve as substitutes to flexible
polyurethane foam. Primary among these are polyester fibers. Other products which
may serve as substitutes to flexible foam are springs, rubber, and natural fibers. These
products do not have the same properties as foam but in some cases may be applicable
to similar uses.
Table 1-7
1991 DISTRIBUTION OF FLEXIBLE SLAB FOAM
TO END-USE MARKET BY FOAM GRADE
Industry Segment
<1.2
Ibs/ft3
1.2-1.8
Ibs/ft3
>1.8
Ibs/ft3
Total
% Total
SECTION 1: INDUSTRY PROFILE
1-17
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Furniture
Transportation
Carpet*
Bedding
Packaging
Textiles and Fibers
Other
Total
168
17
138
89
14
16
11
453
224
83
127
18
20
4
11
485
168
17
75
56
2
2
7
328
560
117
340
161
36
22
29
1,265
44
9
27
13
3
2
2
100
* Carpet includes poured scrap and binder adhesives
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
Since 1990, the use of polyester fiber as a substitute for flexible foams has been
increasing. Among the end-use markets which may potentially be impacted by the
substitution of polyester fiber for foam are the transportation, furniture, and bedding
markets. In the furniture market, which accounts for approximately 44 percent of
slabstock and 24 percent of molded foam consumption (see Tables 1-1 and 1-2), sheet
and rolled polyester fiber is finding uses in furniture cushions, backs, and arms
(McGovern, 1995). In the bedding market, which consumes almost 13 percent of
U.S. slabstock production, polyester fiber can be substituted for foam in pillows, stuffing,
mattress quilting, and fabric bulking for comforters.
Differences in foam and fiber properties and characteristics influence decisions
concerning which material to use. Reasons polyester fiber is chosen over flexible foam
include: styling trends, its high filling capacity, surface softness, fabrication ease, and
price. However, foam surpasses fiber when considering cushioning, recovery,
durability, shape retention, and recyclability traits.
SECTION 1: INDUSTRY PROFILE
1-18
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Although trends in the bedding end-use market may be toward some fiber for
foam substitution, bedding is the only major comfort application where full foam has yet
to achieve its potential as the principal support material (Schultz, 1989). Despite the
inherent advantages of the material, notably the availability of high quality grades,
durability, comfort, and price, the innerspring industry has pre-empted competition in
this multi-billion dollar market. A 1984 survey found that 78.1 percent of Americans still
used a traditional innerspring mattress, and only 7.1 percent used foam mattresses.
By contrast, nearly 50 percent of the bedding market in Europe is held by foam
mattresses (Schultz, 1989).
MARKET OUTLOOK
The data presented earlier show that flexible polyurethane foam is used
extensively in the manufacture of durable goods (e.g., vehicles and furniture). Since
the demand for these goods tends to be highly cyclical, the derived demand for flexible
polyurethane foam also tends to be cyclical, moving with the general economy.
Flexible foam was hit hard by the recession of the early 1990's. The furniture and
bedding market segments lost ground as consumers delayed making large purchases.
However, the market recovered in 1992-1993 and flexible foam has bounced back.
Unlike furniture and bedding, the carpet underlay market experienced stability
during the 1991 recession when volume in this segment was down only slightly. This is
a strong segment of the flexible foam market and should continue to see significant
growth, particularly the rebond carpet underlay segment, which uses scrap generated
from the automotive and furniture market (Friedrich, 1994). Although this application
takes market share from prime underlay, it is a useful outlet for scrap and recycled
foam.
The growth in the transportation industry's use of flexible foam in 1992 can be
expected to continue as long as car sales continue to rise. The 1993 model year was
SECTION 1: INDUSTRY PROFILE 1-19
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the best for passenger vehicles since 1989, with over 14 million cars, light trucks, and
vans sold. More polyurethane is used in the automotive industry than any other plastic,
and molded flexible foam seats and seatbacks are the largest application. A trend
toward flatter seat cushions to save head space in compact cars should not affect
polyurethane volume as cushions must be denser to offer the same comfort. Other
uses of flexible polyurethane foam that should see incremental growth in the future
include packaging, fabric laminates, weather stripping and household products.
After the healthy growth in the polyurethane market in the mid 1980s, a
slowdown in 1989 and a slump in 1990-1991, the future of the industry over the next
decade is mixed. With traditional polyurethane foam markets such as furniture and
automotive seat cushions at the saturation point, future growth is now more dependent
on the economy than it has ever been before. Housing starts, commercial
construction, consumer spending, and the domestic automotive industry will all help
determine the growth in sales of flexible foams for the remainder of the decade.
Nonetheless, some segments of the market are at an earlier point of the growth curve,
and stronger gains can be expected in these areas. Here, new applications and
systems technologies will continue to generate growth beyond incremental increases in
the traditional segments. While the healthy growth of the mid 1980s may not return,
modest increases in demand are expected for the remainder of the 1990s (Harrington,
1994).
MARKET STRUCTURE
Flexible foam products are large-volume, commodity products with little
proprietary differentiation. Although certain companies have developed their own
SECTION 1: INDUSTRY PROFILE 1-20
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specialities in which they are pre-eminent (either in product application or geographic
area), for the most part polyurethane foam produced by a manufacturer is
interchangeable with that produced by any other manufacturer. Within the flexible
polyurethane foam industry, vertical integration commonly exists from the raw materials
market to foam production. Also, some vertical integration exists from foam production
to end-product production.
The flexible foam market in the United States totaled 1,604 million pounds in
1991, or approximately 51 percent of all polyurethanes produced. This total compares
with a 1989 total of 1,735 pounds and represents an 8 percent drop in production
across those years. Flexible slab foam production was 1,265 million pounds and
accounted for 79 percent of this total. Flexible molded foam production was 339 million
pounds, 21 percent of the total (Friedrich, 1994).
Immediately below, we present data describing the horizontal structure of the
flexible polyurethane industry. Next, we provide a brief qualitative description of the
degree of vertical integration in the industry. Finally, we discuss industry demand and
supply elasticities.
HORIZONTAL MARKET STRUCTURE
Flexible Slabstock Foam
There are approximately seventy-eight facilities that produce slabstock flexible
polyurethane foam in the United States. In 1992, the 10 largest firms accounted for
almost 90 percent of industry-wide production of slabstock foam.9 Table 1 -8 shows the
10 largest slabstock producers in the United States, with the number of facilities each
9 Computed from Responses to the Industry Questionnaire 1993, issued under Section 114 of the
CAAA.
SECTION 1: INDUSTRY PROFILE 1-21
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own, 1992 production and company market share. The remaining companies indi-
vidually accounted for only small fractions of industry-wide output in 1992. However,
because slabstock is a homogeneous, undifferentiated product, it is unlikely that any
single producer commands significant market power. Slabstock is homogeneous in
that foam with a given technical specification (e.g., density and IFD) can be viewed as a
commodity.
Table 1-8
LARGEST SLABSTOCK FOAM PRODUCERS (1992)
COMPANY
RANK
1
2
3
4
5
6
7
8
9
10
Total
FACILITIES
OWNED
14
8
9
3
7
9
4
4
2
2
62
Production
(1000 Ibs)
265,996
216,472
132,586
107,150
102,256
95,706
44,716
44,178
33,648
33,000
1,075,708
MARKET
SHARE
(%)
22.1
17.99
11.02
8.9
8.5
7.95
3.75
3.67
2.8
2.74
89.38
Source: Responses to the Industry Questionnaire 1993, issued under Section 114 of the CAAA.
Due to the cost of shipping foam relative to its size and weight (typical slabstock
foam weighs one to two Ibs/ft3), shipping cost considerations and end-use market
location are important determinants in the location of foam production facilities.
SECTION 1: INDUSTRY PROFILE
1-22
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Production facilities are usually found within close proximity to their end-use market or
fabrication operation. It is economically advantageous for foam producing companies
to establish a number of smaller facilities in proximity to end-use markets, rather than
establish a single larger plant and incur greater transportation costs (Bush, 1995).
Because foam is large and bulky, yet light in weight, shipping costs are high relative to
the value of the foam. The economically feasible shipping distance of foam is limited to
about 300 miles.10 Table 1-9 shows the distribution of slabstock facilities by state.
While these facilities are geographically dispersed, they tend to be clustered close to
end-use markets (e.g., carpeting in California and furniture manufacturing in North
Carolina).
10
EC/R Incorporated (1993).
SECTION 1: INDUSTRY PROFILE 1-23
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Table 1-9
DISTRIBUTION OF SLABSTOCK FACILITIES BY STATE
State
Arkansas
California
Delaware
Florida
Georgia
Illinois
Indiana
Iowa
Kansas
Kentucky
Maryland
Massachusetts
Number of
Facilities
3
9
1
4
4
3
8
1
1
1
1
1
State
Michigan
Minnesota
Mississippi
New Jersey
New Mexico
North Carolina
Ohio
Oregon
Tennessee
Pennsylvania
Texas
Virginia
Number of
Facilities
2
1
8
2
1
7
2
1
6
3
5
1
Source: Responses to Industry Questionnaire 1993, issued under Section 114 of the CAAA.
Flexible Molded Foam
There are approximately 234 facilities in the United States that produce flexible
polyurethane molded foam. As of the date of this report, estimates of production for
some plants in this industry segment are unavailable. As a result, market shares of the
largest producers cannot be computed. However, because of the large number of
facilities in the industry and the largely homogeneous nature of the product, it is unlikely
that any single molded foam producer enjoys significant market power.
SECTION 1: INDUSTRY PROFILE
1-24
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VERTICAL MARKET STRUCTURE
As noted earlier, vertical integration from foam production to fabrication is fairly
commonplace in the industry. For example, 57 of the 78 slabstock facilities (about 73
percent) report having fabrication operations at their plants.11 Also, vertical integration
in the molded foam segment exists in that the molding process adds value to the foam.
DEMAND AND SUPPLY ELASTICITIES
Both demand and supply elasticities in markets affected by the alternative MACT
standards will determine the ability of affected plants to pass through control costs to
buyers. Other things being the same, highly elastic demand will be associated with
relatively small post-control price increases and with relatively large reductions in
post-control output. On the other hand, elastic supply will be associated with relatively
large post-control price increases and relatively large output reductions. Unfortunately,
we have not identified any previous studies that provide estimates of demand and
supply elasticities. Also, the data required to econometrically derive estimates for this
study are unavailable. Below, we provide a qualitative discussion of elasticities for the
flexible polyurethane industry.
Demand Elasticity
Three factors are important determinants of the demand elasticities faced by
firms operating in affected industries. These three factors are:
• The elasticity of demand for end-use products.
11 Computed from Responses to the Industry Questionnaire 1993, issued under Section 114 of the
CAAA.
SECTION 1: INDUSTRY PROFILE 1-25
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• The fraction of total end-use costs attributable to inputs provided by
affected plants.
• The potential for substitutability with other inputs.
In general, the elasticities of demand for end-use and intermediate products are directly
related; other things being the same, elastic (inelastic) demand for an end-use product
is associated with elastic (inelastic) demand for the primary or intermediate product.
The fraction of total end-use costs attributable to an intermediate product, on the other
hand, is inversely related to its demand elasticity; for example, an intermediate input
which accounts for only a small fraction of the total cost of producing an end-use
product will, other things being the same, have relatively inelastic demand, in part
because it will have little influence on the price of the end-use product. Finally, the
demand for an intermediate product will tend to be relatively elastic if substitute inputs
are available.
Earlier, we described the end uses of flexible polyurethane foam. The demand
for these end-use products probably ranges from unit elastic (i.e., a demand elasticity of
-1.0) to moderately elastic. For example, two major uses of flexible polyurethane foam
are the manufacture of automobiles and furniture. Several studies of the automobile
market are consistent with a long-run demand elasticity ranging from -1.0 to -1.5.12
There have been fewer studies of the furniture market, but a recent study by Mathtech
(1994) in support of the Wood Furniture MACT, reports an estimated demand elasticity
for the household sector of the wood furniture market of -3.36.
Flexible polyurethane foam probably constitutes a small fraction of the total cost
of manufacturing most end-use products. This is clearly the case for automobiles and
trucks. Based on the slabstock prices reported earlier, it is also no doubt true that the
12 This range is consistent with early estimates reported by Nerlove (1957) and Suits (1958) and
more recent estimates reported by Gallasch (1984).
SECTION 1: INDUSTRY PROFILE 1-26
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polyurethane foam content of furniture is a small fraction of total costs in the furniture
industry.
Finally, flexible polyurethane foam is superior to its substitutes in a number of
respects, including appearance, performance, durability and comfort. While some
substitutes exist (e.g., polyester fibers, natural fibers and "springs" in furniture
manufacturing), these mostly have inferior attributes relative to foam.
Taken as a whole, the evidence suggests that the demand for flexible
polyurethane foam is relatively inelastic. While the demand for some end-use products
might be moderately elastic, polyurethane foam constitutes a small fraction of the total
cost of producing most end-use products and close substitutes for foam are generally
unavailable.
SUPPLY ELASTICITY
The marginal cost of providing additional output in the relevant range of produc-
tion is the most important factor determining supply elasticity. If the marginal cost of
incremental output is relatively constant, then supply will be relatively elastic. However,
if marginal costs rise steeply, supply will be relatively inelastic. In the short run,
incremental costs will be determined largely by the properties of the production process
and the existence of excess capacity in the industry. Long-run incremental costs are
determined primarily by the production costs associated with newly constructed
facilities, and the opportunity costs associated with investments in existing facilities.
Unfortunately, our ability to characterize supply elasticity in the industry is
somewhat limited. We do know that the national market is served by a large number of
relatively small plants. This suggests the absence of significant scale economies in
production and that supply is relatively elastic, at least in the long run (i.e., output can
be added or deleted at about the same costs by constructing additional plants or closing
SECTION 1: INDUSTRY PROFILE 1-27
-------
existing plants).13 We caution, however, that the observed structure of the industry
(i.e., a large number of geographically dispersed plants) represents a trade-off between
scale economies in production and economizing on transportation costs (i.e., even if
production economies exist, they could be outweighed by transportation costs
associated with shipping greater distances).
FOREIGN TRADE
Given the nature of the product, foreign trade in flexible polyurethane foam is
negligible. It is a large volume product with very little cost (value) per weight.
Shipping a cargo of foam is quite similar to shipping 'air'. High transportation costs
relative to foam value makes long distance foam transport uneconomical. However,
some international trade in flexible polyurethane foam exists in the form of end-use
products (e.g., in automobiles).
Imports
Although there is no import market for flexible slabstock or molded foam, there is a
market for imports of flexible foam scrap for use in the rebond process. Foam scrap is
primarily imported in the form of slabstock scrap but does include a small amount of
molded scrap. In 1991, an estimated 133 million pounds of scrap foam was imported
from abroad. Approximately 60 percent of this total was imported by three large brokers.
The balance was imported directly by five large bonded carpet underlay
manufacturers.14
13 Ignoring transportation costs, significant scale economies in production would result in a small
number of relatively large facilities serving the national market.
14 This information is provided by Hull & Co. The five companies were not identified.
SECTION 1: INDUSTRY PROFILE 1-28
-------
Imported scrap competes with intentionally poured scrap. The quantity of scrap
that is imported varies from year to year, depending on relative economics. During the
first quarter of 1991, the price of imported scrap foam ranged from $0.45 to $0.60 per
pound. By comparison, "intentional scrap" ranged from $0.58 to $0.70 cents per
pound. The estimated volume of scrap imported to the United States in recent years is
shown in Table 1-10.
Table 1-10
ESTIMATED U.S. IMPORTS OF FLEXIBLE POLYURETHANE SCRAP
Year
1991
1990
1989
1988
1987
Million Pounds
133
96
134
80
74
Source: Hull & Co., End-Use Market Survey on the Polyurethane Industry in the U.S. and Canada, 1992.
Exports
Due to the nature of the product, there are no exports of domestically produced
flexible polyurethane foam to areas outside of the United States. As noted earlier, the
typical weight of flexible foam ranges from 1 to 2 Ibs/ft3, and shipping costs are
prohibitive. The flexible polyurethane foam industries in other countries produce foam
to satisfy domestic demand.
FINANCIAL DATA FOR FLEXIBLE POLYURETHANE FOAM FIRMS
SECTION 1: INDUSTRY PROFILE
1-29
-------
Financial data are needed to analyze the impact of the proposed regulations on
firm profitability and to provide insight regarding firms' abilities to raise capital to finance
the investment in emission control equipment. Immediately below, we present publicly
available financial data for SIC 3086. We caution, however, that SIC 3086 includes
other foam producers (e.g., rigid foam) in addition to flexible polyurethane foam. After
the industry data are presented, we report available firm-specific financial data. Note
that all financial data are reported at the firm level and therefore do not isolate the
contribution of foam production to a company's financial status.15
SIC 3086 FINANCIAL DATA
Financial data are available from Dun and Bradstreet, Inc. (D&B) and Robert
Morris Associates (RMA) for the affected industry, SIC code 3086 — Plastics Foam
Products. D&B and RMA present industry sector financial ratios that can be used to
characterize the baseline (pre-regulatory) profitability and capital availability of firms in
the affected industry. Both D&B and RMA compile profitability ratios for a sample of
firms in the industry, and each of these ratios are then independently ranked from "most
healthy" to "least healthy." The ratio that falls in the middle of the values represents the
median ratio, those that occur mid-way between that median and the least healthy
represent the lower quartile ratios, and those that fall mid-way between the median and
the most healthy represent the upper quartile. This methodology is expected to
adequately approximate the financial values of average firms in three relative states of
financial health. This ranking is not available for the capital availability measure — only
the average industry long term-debt to long-term debt plus equity ratio is available from
both of these sources.
15 We note that firm-level financial data do not pose an issue for conducting a financial analysis of the
impacts of the proposed MACT rule in the EIA. The purpose of this analysis is to assess the ability of
affected firms to raise the capital required to finance investments required to achieve compliance with the
proposed MACT rule. The financial resources available to the firm (not the foam facility) will determine
the ability to raise capital.
SECTION 1: INDUSTRY PROFILE 1-30
-------
RMA also presents financial ratios by company sales and company asset ranges.
However, only a portion of the applicable sales/asset ranges that are listed for the
affected SIC code are displayed because RMA only presents data for sales/asset
ranges with 10 or more financial statements. Table 1-11 presents both the overall
financial ratios calculated using all of the financial data, and the ratios for the available
individual size ranges. As with the D & B data, lower quartile, median, and upper
quartile ratios are presented for profitability. To reduce the effect of business cycles
and short-term perturbations, the profitability ratios are averaged over the 1991-1993
period (or 1992-1993 for RMA because data for SIC code 3086 were not available
before 1991). Because changes in the long-term debt ratio represent actual structural
changes, 1993 data are presented.
The Society of the Plastics Industry, Inc. (SPI) publishes financial data for plastic
product firms in different size ranges. However, these ratios are for the overall plastic
products industry, and are not specific to the industry subject to the regulation (i.e.,
ratios are based on data for SIC code 308, and not SIC code 3086). Table 1-12
presents the profitability and capital availability information from the SPI.
FIRM-SPECIFIC DATA
Table 1-13 reports financial data (the ratio of net income to assets, long-term
debt to long-term debt plus equity ratios and sales) for 35 firms producing flexible
polyurethane foam. We report sales data in Table 1-13 for firms for which data on the
financial ratios are unavailable. Comparable firm-specific financial and sales data for
other firms in the industry are not publicly available.16 We caution that the firm-specific
data reported in Table 1-13 might not be representative of all firms in the flexible
16 A total of 57 firms report producing flexible polyurethane foam in Responses to Industry
Questionnaire 1993, issued under Section 114 of the CAAA. However, we understand that the survey
does not capture all molded foam facilities. Accordingly, the survey count of 57 firms might understate
the industry total.
SECTION 1: INDUSTRY PROFILE 1-31
-------
polyurethane foam industry. Specifically, financial data are more likely to be available
for publicly-held firms which may have greater financial resources than firms that are not
publicly held.
SECTION 1: INDUSTRY PROFILE 1-32
-------
Table 1-11
PROFITABILITY AND CAPITAL AVAILABILITY MEASURES FOR SIC CODE 3086
PLASTICS FOAM PRODUCTS
FINANCIAL
MEASURE
Profitability
(% Net Income to
Assets)2
Capital Availability
(% Long-term Debt
to
Long-term Debt +
Equity)
FINANCIAL
CONDITION
Lower
Upper
Median/
Average
Average
SALES
RANGE
(in millions)
All
$0-1
$1-3
$3-5
$5-10
$1 0-25
$25+
All
$0-1
$1-3
$3-5
$5-10
$1 0-25
$25+
All
$0-1
$1-3
$3-5
$5-10
$1 0-25
$25+
All
$0-1
$1-3
$3-5
$5-10
$1 0-25
$25+
Dun & Bradstreet
1991
2.9
20.2
9.0
NA
1992
0.2
23.0
4.0
NA
1993
1.6
13.6
7.1
19.4
•91 -'93
Averag
e
1.6
18.9
6.7
NA
Robert Morris Associates1
1992
2.4
n/a
n/a
n/a
n/a
n/a
7.9
15.4
n/a
n/a
n/a
n/a
n/a
12.3
8.7
n/a
n/a
n/a
n/a
n/a
18.8
NA
1993
3.3
n/a
-0.3
1.8
2.1
n/a
6.8
16.9
n/a
5.2
6.4
5.9
n/a
12.8
9.3
n/a
10.9
15.3
11.2
n/a
17.1
16.8
n/a
25.1
17.1
14.4
n/a
15.3
'92 -'93
Average
2.9
n/a
-0.3
1.8
2.1
n/a
7.4
16.2
n/a
5.2
6.4
5.9
n/a
12.6
9.0
n/a
10.9
15.3
11.2
n/a
18.0
NA
Notes: 1Pre-1992 data for SIC code 3086 are not available from this source.
2For Robert Morris Associates, profit before taxes to total assets.
n/a - not available.
NA- not applicable.
Sources: Dun and Bradstreet, Inc. Industry Norms and Key Business Ratios, 1992, 1993, and 1994; Robert Morris Associates,
Annual Statement Studies, 1992 and 1993.
SECTION 1: INDUSTRY PROFILE
1-33
-------
Table 1-12
PROFITABILITY AND CAPITAL AVAILABILITY MEASURES FOR
PLASTIC PRODUCTS PRODUCERS, 1991
FINANCIAL MEASURE
Profitability
(% Return on Assets before
Taxes)
Capital Availability
(% Long-term Debt to Long-term
Debt + Equity)
ALL
6.4
8.4
BY SALES VOLUME
< $5 million
5.8
10.1
$5-$ 10 million
1.4
10.1
$10-25 million
11.2
5.6
> $25 million
4.1
8.7
Sources: The Society of the Plastics Industry, Inc., Financial and Operating Ratios, Survey No. 30, Plastic Processing Companies,
July 1992.
Table 1-13
FIRM-SPECIFIC FINANCIAL INFORMATION FOR
FLEXIBLE POLYURETHANE FOAM INDUSTRY
FIRM
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Company 11
Company 12
Company 13
Company 14
Company 15
Company 16
% NET INCOME TO
ASSETS (averaged
over 1991 -1993)
2.57
-1.37
2.23
-0.65
2.22
4.02
6.79
% 1993 LONG-TERM
DEBT TO LONG-TERM
DEBT + EQUITY
13.41
19.41
11.21
23.56
21.40
15.53
15.17
SALES
(in $millions)
257.0
400.0
27.5
23.1
30.0
5.7
30.7
128.0
3.4
SECTION 1: INDUSTRY PROFILE
1-34
-------
FIRM
Company 17
Company 18
Company 19
Company 20
Company 21
Company 22
Company 23
Company 24
Company 25
Company 26
Company 27
Company 28
Company 29
Company 30
Company 31
Company 32
Company 33
Company 34
Company 35
% NET INCOME TO
ASSETS (averaged
over 1991 -1993)
4.49
-1.17
12.93
7.78
5.52
1.43
-0.87
% 1993 LONG-TERM
DEBT TO LONG-TERM
DEBT + EQUITY
26.32
11.13
21.70
10.59
31.84
42.22
9.99
SALES
(in $millions)
14.6
6.9
585.0
200.0
155.0
68.5
20.0
50.0
22.1
32.9
40.0
108.0
Notes: a Net income assets ratio represents 1992-1993 only (1991 data were unavailable).
b Net income assets ratio represents 1989-1991 (later data were unavailable).
Sources: Moody's Industrial Manual, 1994; Moody's OTC Industrial Manual, 1994; Moody's
OTC Unlisted Manual, Dun & Bradstreet's Million Dollar Directory, 1994; Herman Miller Annual
Reports, 1989-1991.
EMPLOYMENT
The production of flexible polyurethane foam industry is non-labor intensive.
Both large and small facilities need only a small number of specially trained employees
to operate the foam production line. Foam production is, for the most part, an
automated process requiring only monitoring once the proper mix of chemicals is
SECTION 1: INDUSTRY PROFILE
1-35
-------
completed and the production process is underway.17 Table 1-14 and 1-15 give
employment figures for the plastic foam industry (SIC 3086), of which the flexible
polyurethane foam industry is a subset. Due to data limitations, figures for the broader
plastic foam industry were used as a proxy for the flexible polyurethane foam industry.
Table 1-14
EMPLOYMENT STATISTICS (SIC 3086)
Year
1992
1991
1990
1989
1988
1987
Total
Employees
(1,000)
66.9
62
63.7
64.3
63.9
61.3
Production
Workers
(1,000)
52.3
47.8
49.6
48.8
50
47.7
Hours
(millions)
100.5
92.1
95.6
92.4
97.5
91.8
Wages
(million $)
1053.9
924.1
932.3
858.0
854.6
782.9
Payroll per
Employee
$23,735
$23,090
$21,911
$20,347
$19,892
$19,315
Source: 1992 Census of Manufactures, U.S. Department of Commerce
Table 1-15
VALUE OF SHIPMENTS AND VALUE-ADDED PER LABOR HOUR (SIC 3086)
Year
1992
1991
1990
Value of
Shipments
(million $)
9,488.4
8,578.0
8,988.2
Value Added
by Manufacture
(million $)
4,335.8
3,790.5
3,788.3
Value of Shipments
per Production
Worker Hour ($)
94.41
93.14
94.02
Value Added
per Production
Worker Hour ($)
43.14
41.16
39.63
17 While foam production is not labor intensive, foam fabrication is. This is an issue because the
proposed MACT rule could indirectly affect fabrication operations through its impacts on foam production.
SECTION 1: INDUSTRY PROFILE
1-36
-------
1989
1988
1987
8,108.9
7,506.5
6,912.8
3,271.0
3,290.3
3,045.6
87.76
76.99
75.30
35.40
33.75
33.18
Source: 1992 Census of Manufactures, U.S. Department of Commerce
ENERGY USE
As with employment data, disaggregate fuel and energy use data were not
available beyond the four-digit SIC level. Tables 3-16 and 3-17 report 1992
consumption of fuels and electricity for SIC 3086 (Plastic Foams) for the industry and
average facility, respectively.
Table 1-16
INDUSTRY ENERGY USE (SIC 3086)
Energy Source
Fuels
Purchased Electrici-
ty
Value
(million $)
61.2
146.6
Quantity
(million kWh)
—
2,475.7
Source: 1992 Census of Manufactures, U.S. Department of Commerce
Table 1-17
AVERAGE FACILITY ENERGY USE (SIC 3086)
Energy Source
Fuels
Purchased Elec-
Value ($)
50,288
120,460
Quantity
(million kWh)
—
2.034
SECTION 1: INDUSTRY PROFILE
1-37
-------
I! tricity |
Source: 1992 Census of Manufactures, U.S. Department of Commerce
REFERENCES
Bevilaqua, Jody (1996). Woodbridge Foam. Telecom with Jeffrey Sassin, Mathtech,
Inc., 3/15/96.
Bush, Bob Jr. (1995). Hickory Springs Manufacturing Company. Telecom with Jeffrey
Sassin, Mathtech, Inc., 8/30/95.
Dun and Bradstreet, Inc. Industry Norms and Key Business Ratios, 1992, 1992, 1994.
EC/R Incorporated (1995). Technical Memorandum from Amanda Williams and Phil
Norwood to David Svendsgaard, EPA/OAQPS/ESD/CPD, January 27.
EC/R Incorporated (1995). Technical Memorandum from Amanda Williams to David
Svendsgaard, EPA/OAPQS/ESD/CPD, July 7.
Environmental Consulting and Research (1995). Spreadsheet file "m-empts.wk4,"
7/12/95.
Environmental Consulting and Research (1995). Spreadsheet file "s-nmsort.wk4,"
7/13/95.
Friedrich,Wolfgang (1994). Polyurethane Foam Recovers from Recession, in 1994/95
U.S. Foamed Plastics Markets & Directory, Technomic Publishing Co., Inc.
Gallasch, H.F., Jr. (1984). "Price Elasticities of Demand at Retail and Wholesale
Levels: An Automotive Example." Business Economics, 19:1, pp. 61-62.
Harrington, James P. (1994). Review of the Plastic Foam Industry 1990-1993, in
1994/95 U.S. Foamed Plastics Markets & Directory, Technomic Publishing Co.,
Inc.
Harrington, Ron and Kathy Hack (1991). Flexible Polyurethane Foams.
Hull & Company (1992). End-Use Market Survey on the Polyurethane Industry in the
U.S. and Canada, The Society of the Plastics Industry, Inc., Polyurethane
Division, New York, New York.
SECTION 1: INDUSTRY PROFILE 1-38
-------
Mathtech (1994). Economic Impact and Regulatory Flexibility Analyses of the Wood
Furniture NESHAP, Revised Draft Report. Prepared for the Cost and Economic
Impact Section, Office of Air Quality Planning and Standards, U.S. Environmental
Protection Agency. June.
Nerlove, M. (1957). "A Note on the Long-Run Automobile Demand." Journal of
Marketing, 22:1, pp. 57-64.
Peters, Lou (1995). Telecomm. between Lou Peters and Jeffrey Sassin, 8/8/95.
Robert Morris Associates. Annual Statement Studies, 1992 and 1993.
Schultz, Steven A. (1989). Recent Developments in Flexible Polyurethane Foams
(1980-1989), Masters Thesis, University of Lowell.
Suite, D. (1958). "The Demand for New Automobiles in the United States, 1926-1956."
Review of Economics and Statistics, 40:3, pp. 273-280.
The Society of the Plastics Industry, Inc., Financial and Operating Ratios, Survey No.
30, Plastic Processing Companies, July 1992.
U.S. Department of Commerce (1994). Census of Manufactures, 1992, Economics
and Statistics Administration.
SECTION 1: INDUSTRY PROFILE 1-39
-------
SECTION 2
MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
Because plants in the flexible polyurethane industry are numerous, the analyses
in this EIA rely on model plants. These model plants are characterized by product type
(either molded or slabstock foam), production technology and production volume.
MOLDED FOAM
EPA estimates that there are approximately 234 molded foam production
facilities in the United States. Each of these facilities is represented as one of four
molded foam production model plants. One of these model plants (HP1) represents
larger molded foam facilities using high-pressure mixheads, primarily to produce
automobile seats. The remaining three model plants (LP1, LP2 and LP3) represent
smaller producers that use low-pressure mixheads to produce a variety of foam
products. Table 2-1 describes the baseline parameters of the molded foam model
plants. For example, model plant HP1 produces up to 15,000 tons of molded foam
annually (average annual production volume is 3,331 tons), represents 27 facilities
nationwide, and has average annual emissions of 2.09 tons.
SECTION 1: INDUSTRY PROFILE 1-40
-------
Molded Foam: Emission Controls
Only major sources of HAP will be subject to the foam production NESHAP.
Since the high-pressure molded foam plants and the smallest low-pressure molded foam
plants have emissions below the major source threshold, we assume that the facilities
represented by these model plants (HP1 and LP1) will not be affected by the NESHAP.
Therefore, the estimated impacts presented in this report for molded foam are based on
compliance costs and emission reductions associated with the production facilities
represented by model plants LP2 and LP3.
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES 2-41
-------
Table 2-1
MOLDED FOAM MODEL PLANT BASELINE PARAMETERS
Foam production range (tons/yr)
Average foam production (tons/yr)
Number of facilities represented
Model plant emissions (tons/yr)
HP1
0-15,000
3,331
27
2.09
LP1
0-99
26
109
5.29
LP2
100-499
308
54
19.81
LP3
>499
2,718
44
28.66
Source: EC/R Incorporated (1996a).
Model plant compliance costs and emission reductions were estimated for a
number of technologies to bring the following molded foam production source types into
compliance:
• Mixhead flushing.
• Mold release agents.
• Repair adhesive.
Mixhead flushing emissions require no control under the MACT Floor, while
Alternatives 1 and 2 prohibit the use of HAP flushes. Model plant compliance costs
were estimated for four compliance technologies for mixhead flushing emissions: work
practices for Regulatory Alternative 1; and non-HAP flushes, high pressure mixheads,
and self-cleaning mixheads for Regulatory Alternative 2.
All three regulatory alternatives prohibit the use of HAP-based mold release
agents, resulting in 100 percent emission reduction for this source type. Model plant
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-42
-------
compliance costs were estimated for three technologies that can achieve this result:
reduced volatile organic compound (VOC) mold release agents, naphtha-based mold
release agents, and water-based mold release agents.
All three regulatory alternatives also prohibit the use HAP-based adhesives.
Model plant costs were estimated for three technologies that can achieve this result:
hot-melt adhesives, water-based adhesives, and hydrofuse adhesives.
Molded Foam: Nationwide Compliance Costs and Emission Reductions
Since different technologies (with different costs) can bring a source type into
compliance, nationwide compliance costs depend on the compliance technologies
chosen by affected plants. Table 2-2 gives the distribution of technologies assigned to
model plants producing molded foam.
Table 2-2
DISTRIBUTION OF COMPLIANCE TECHNOLOGIES
FOR MOLDED FOAM MODEL PLANTS
Emission Source/Technology
Mixhead Flush
Reg Alt 1
Solvent recovery
Reg Alt II
Non-HAP flush
HP mixheads
Mold Release Agents
All Regulatory Alternatives
Reduced VOC agents
Naphtha-based agents
Water- based agents
Repair Adhesives
All Regulatory Alternatives
Hot-melt adhesives
Water- based adhesives
Number of Facilities with the Assigned Technology
LP2
54
54
0
18
18
18
N/A
N/A
LP3
44
35
9
15
14
15
22
22
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-2
-------
Sources: EC/R Incorporated (1996a and 1996b).
While Table 2-2 shows the assumed distributions of control technologies
assigned to model plants for each emission source separately, it does not give the
distribution for combinations of control technologies. For example, under Alternative 2,
35 of 44 LP3 type model plants are assumed to adopt non-HAP flush to control mixhead
flush and 15 to adopt reduced VOC agents to control mold release agents. However,
Table 2-2 does not show how many LP3 plants adopt non-HAP flush and reduced VOC
agents. For the economic impact analysis, we assume that model plants adopt
combinations of control technologies consistent with the proportions shown in Table 2-2.
For example, we assume that 34 percent (15 of 44) of the 35 plants using non-HAP
flush also use reduced VOC agents. We note, however, that the estimated impacts
presented in this report are not sensitive to assumptions about the distribution of
combinations of control technologies as long as some plants adopt the most costly
combinations. The economic impacts are driven by the level of control costs facing the
highest cost producers, and not necessarily the number of high cost producers.
We report estimates of the nationwide compliance costs and emission reductions
for molded foam plants in Table 2-3.18 For example, the MACT Floor would require
affected molded foam plants to incur total, nationwide capital costs of $149,688, annual
costs of $182,090, and would result in reduced HAP emissions of 331 tons annually.
Annual costs include annual operating and maintenance (O&M) costs and amortized
capital costs.19 Note that annual costs for the mixhead flush source type are negative
under Alternative 1. This compliance technology is expected to result in net cost
savings due to the salvaging and reuse of the mixhead flushing agent.
In addition to the compliance costs reported in Table 2-3, the estimated
economic impacts presented in this report include the effects of monitoring, inspection,
18 Appendix A provides detailed estimates of compliance costs and emission reductions by individual
model plants, source types and control technologies.
19 Capital costs are amortized at 10 percent, assuming a 10-year equipment life.
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES 2-3
-------
recordkeeping and reporting (MIRR) costs at affected plants. Total annual MIRR
costs are estimated as 10
Table 2-3
MOLDED FOAM NATIONWIDE COMPLIANCE COSTS
Regulatory Alternative
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Regulatory Alternative 2
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Impacts by Emission Source
Mixhead Flush
0
0
0
4,630,500
(115,038)
1,501
5,923,125
524,098
2,001
Mold Release
Agent
0
143,106
270
0
143,108
270
0
143,108
270
Repair
Adhesive
149,688
38,984
61
149,688
38,984
61
149,688
38,984
61
Total
149,688
182,090
331
4,780,188
67,052
1,832
6,072,813
706,188
2,332
Sources: EC/R Incorporated (1996b and 1996c).
percent of nationwide annual emission control costs.20 Annual MIRR costs per plant
are estimated as nationwide MIRR costs for the industry segment divided by the
number of affected plants in the industry segment.
SLABSTOCK FOAM
There are 78 slabstock facilities in the United States. Since slabstock foam is
produced as large "buns" which must be cut into the desired sizes and shapes,
fabrication operations are sometimes co-located with slabstock foam production
20
EC/R Incorporated (1996e).
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-4
-------
facilities. As with molded foam, model plants were constructed to characterize the
production volumes and production processes of the slabstock facilities.
There are five basic model plants for slabstock foam (MP1, MP2, MP3, MP4 and
MP5), each representing a range of production volume. Also, each basic model plant
is separated into facilities that use MeCb as an equipment cleaner, and those that do
not (e.g., MP1a uses MeCb as an equipment cleaner and MP1b does not). Table 2-4
describes the baseline parameters of the slabstock foam model plants. For example,
model plant MP1 averages 2,000 tons of foam production annually and represents 19
plants nationwide. Model plant MP1a averages 64.19 tons of HAP emissions a year,
while MP1b emits 59.19 tons annually.
Table 2-4
SLABSTOCK FOAM MODEL PLANT BASELINE PARAMETERS
Foam production range (tons/yr)
Average foam production (tons/yr)
Number of facilities represented
Model plant (a) emissions (tons/yr)
Model plant (b) emissions (tons/yr)
MP1
0-3.9
2,000
19
64.19
59.19
MP2
4.0-7.
9
6,000
28
174.16
169.16
MP3
8.0-11.9
10,000
14
339.42
334.42
MP4
12.0-15.9
13,750
11
343.93
338.93
MP5
>15.9
19,000
6
388.53
383.53
Source: EC/R Incorporated (1996a).
Slabstock Foam: Emission Controls
Model plant compliance costs and emission reductions were estimated for a
number of technologies to bring the following slabstock foam production source types
into compliance:
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-5
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• Storage/unloading.
• Equipment cleaning.
• Equipment leaks.
• HAP auxiliary blowing agent (ABA) emissions.
The MACT Floor level of control for storage and unloading of both TDI and HAP
ABA is an equipment standard that requires either a vapor balance system to return the
displaced HAP vapors to the tank truck or rail car, or a carbon canister through which
emissions must be routed prior to being emitted to the atmosphere. Regulatory
Alternatives 1 and 2 do not contain more stringent requirements for storage and
unloading. The estimated costs and economic impacts presented in this report are
based on the assumption that all affected plants adopt the vapor balance system.
The MACT Floor level of control for equipment cleaning is the complete
elimination of HAP emissions. Again, Regulatory Alternatives 1 and 2 do not contain
more stringent requirements.
The MACT Floor level of control for equipment leaks requires the use of sealless
pumps for TDI transfer pumps. Regulatory Alternative 1 adds a unique LDAR program
for HAP ABA components. Since Regulatory Alternative 2 does not allow the emission
of any HAP ABA (which, in effect, prohibits the use of MeCI2 or any other HAP as an
ABA), this alternative only contains the MACT Floor requirement for TDI pumps.
There are three levels of control for HAP ABA emissions, one for each regulatory
alternative. The MACT Floor and Regulatory Alternative 1 have emission limits based
on product formulations. Applying the two sets of formulation limitations to the product
mix of the model plants results in the emission reductions shown in Table 2-5.
Regulatory Alternative 2 requires the complete elimination of HAP ABA emissions.
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES 2-6
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Table 2-5
SLABSTOCK MODEL PLANT HAP ABA EMISSION REDUCTIONS
Model
Plant
Baseline HAP ABA
Emissions (tons/yr)
1
2
3
4
5
55.0
165.0
330.0
335.0
380.0
HAP ABA Emission Reduction
(tons/yr)
MACT Floor
31.3
93.8
184.0
195.9
220.4
Reg Alt 1
35.9
111.7
220.7
235.7
266.0
Reg Alt 2
55.0
165.0
330.0
335.0
380.0
Sources: EC/R Incorporated (1996a and 1996b).
There are several technologies available to reduce HAP ABA emissions to levels
required by the regulatory alternatives. Table 2-6 lists these technologies for each
regulatory alternative.
Table 2-6
TECHNOLOGIES CAPABLE OF ACHIEVING HAP ABA
REGULATORY ALTERNATIVE EMISSION LEVELS
Regulatory Alternative
MACT Floor Level
Regulatory Alternative 1
Regulatory Alternative 2
Technology
Chemical alternatives
Carbon dioxide as an ABA (CarDio)
Acetone as an ABA
Variable pressure foaming (VPF)
Forced cooling
Carbon dioxide as an ABA
Acetone as an ABA
Variable pressure foaming
Forced cooling
Carbon dioxide plus chemical
alternatives
Acetone as an ABA
Variable pressure foaming
Forced cooling plus chemical
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-7
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alternatives
Source: EC/R Incorporated (1996a).
As can be seen in Table 2-6, some technologies can be used to meet more than
one level of control. In these cases, it was assumed that the technologies would only
be used to the degree necessary to meet the level of the regulatory alternative. In
other words, although variable pressure foaming can be used to totally eliminate the use
of HAP ABA, it was assumed that for the MACT Floor, the allowable amount of MeCb
would still be used and emitted.
Table 2-7 gives the assumed distribution of HAP ABA emission control for
technologies for the slabstock model plants. Since different technologies (with different
costs) can bring a source type into compliance, nationwide compliance costs depend on
the compliance technologies assigned to the model plants. Appendix D contains a
sensitivity analysis of economic impacts when these compliance technology
assignments are modified.
Table 2-7
DISTRIBUTION OF HAP EMISSION REDUCTION TECHNOLOGIES
Technology
MACT Floor
CarDio
Acetone
VPF
Forced Cooling
Chem Alternatives
Reg Alt I
CarDio
Acetone
VPF
Forced Cooling
Reg Alt II
CarDio + Chem
Alternatives
Number of Facilities Using the Technology
MP1
4
1
0
2
12
13
3
0
3
10
3
MP2
9
1
0
4
14
18
4
0
6
15
3
MP3
4
1
0
3
6
6
3
0
5
5
2
MP4
4
1
0
3
3
5
2
0
4
3
2
MP5
1
0
2
2
1
1
1
2
2
1
1
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-8
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Acetone
VPF
Forced Cooling + Chem
Alts
0
6
1
9
1
6
2
4
2
2
Sources: EC/R Incorporated (1996a and 1996b).
Slabstock Foam: Nationwide Compliance Costs and Emission Reductions
Table 2-8 reports estimates of nationwide compliance costs and emission
reductions for the slabstock foam industry segment.21 For example, the MACT Floor
would require affected slabstock foam plants to incur nationwide capital costs of about
$47 million and annual costs of about $11 million. Annual costs include O&M costs and
amortized capital costs. The MACT Floor would reduce annual HAP emissions at
slabstock foam plants by an estimated 9,422 tons annually. Costs are negative for
equipment cleaning because this compliance technology is expected to result in net cost
savings primarily due to reduced wast disposal costs by switching to non-HAP cleaning
material.
In addition to the compliance costs reported in Table 2-8, the estimated
economic impacts presented in this report include the effects of monitoring, inspection,
recordkeeping and reporting (MIRR) costs at affected slabstock plants. Total annual
MIRR costs are
estimated as 10 percent of nationwide annual emission control costs. Annual MIRR
costs per plant are estimated as nationwide MIRR costs for the industry segment
divided by the number of affected plants in the industry segment.
21
Appendix A provides detailed estimates of compliance costs and emission reductions by individual
model plants, source types and control technologies.
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
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Table 2-8
SLABSTOCK FOAM NATIONWIDE COMPLIANCE COSTS
AND EMISSION REDUCTIONS
Regulatory Alternative
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Regulatory Alternative 2
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Impacts by Emission Source
Storage/
Unloading
558,960
105,119
15
558,960
105,119
15
308,250
65,447
0
Equipment
Leaks
95,000
24,035
3
682,754
489,455
80
95,000
24,035
3
Equipmen
t Cleaning
0
(7,150)
130
0
(7,150)
130
0
(7,150)
130
ABA
46,362,700
10,925,497
9,274
66,981,900
6,241,347
1 1 ,262
93,665,425
10,346,338
16,250
Total
47,016,660
11,047,501
9,422
68,858,534
7,111,821
1 1 ,644
94,068,675
10,428,670
16,383
Sources: EC/R Incorporated (1996b, 1996cand 1996d).
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES
2-10
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REFERENCES
EC/R Incorporated (1996a). Technical memorandum from Phil Norwood and Amanda
Williams to David Svendsgaard (EPA/OAQPS), January 26.
EC/R Incorporated (1996b). Technical memorandum from Phil Norwood to Jeffrey
Sassin (Mathtech), February 18.
EC/R Incorporated (1996c). Technical memorandum from Phil Norwood to David
Svendsgaard and Lisa Conner (EPA/OAQPS), March 26.
EC/R Incorporated (1996d). Technical memorandum from Phil Norwood to Jeffrey
Sassin (Mathtech), June 6.
EC/R Incorporated (1996e). Technical memorandum from Phil Norwood to Jeffrey
Sassin (Mathtech), March 25.
SECTION 3
SECTION 2 - MODEL PLANTS AND COMPLIANCE TECHNOLOGIES 2-11
-------
ECONOMIC IMPACT ANALYSIS METHODOLOGY
We assess the economic impacts associated with the alternative NESHAPs by
conducting studies of the affected industry segments. These industry segments are
flexible polyurethane slabstock foam and flexible polyurethane molded foam. We
describe the analytical methods employed in these studies below.
OVERVIEW OF DISTRIBUTIONAL IMPACTS
As noted earlier in the introduction to this report, several groups might potentially
suffer from adverse impacts associated with the alternative NESHAPs. These groups
include:
• Foam producers.
• Foam buyers.
• Employees at affected plants.
• Individuals affected indirectly by the NESHAP.
We describe the potential adverse impacts affecting each of these groups below.
Impacts on Producers
As affected producers purchase, install and operate emission control equipment
or change production practices to comply with the standard, their costs will increase,
reducing the profitability of at least some of the affected plants. However, a portion of
the compliance costs can be passed on to consumers through increased product prices.
Ultimately, the magnitude of the adverse impacts incurred by affected plants will
depend on the extent to which control costs can be passed on to buyers.
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Some plants in the affected industry may not suffer adverse impacts as a result
of the implementation of an emission control standard. The post-control profitability of
an affected plant will improve if post-control price increases more than offset the plant's
emission control costs. This could occur if control costs for some plants are
substantially higher, per unit of output, than those for other plants in the industry. Also,
plants not affected by the standard may enjoy the benefit of higher market prices
without incurring the additional operating costs associated with compliance.
An impact on producers that cannot be measured in this analysis is the affect of
a potential change in product quality. Industry representatives maintain that the effect
of a few of the control technologies on product quality is uncertain. If the use of these
technologies causes quality degradation, foam producers might face reduced demand
for their output.
Impacts on Consumers or Buyers
Both slabstock and molded foam are purchased primarily by firms which use
these products as inputs to produce other goods. These firms and the consumers of
the goods which they produce are likely to suffer from two related adverse impacts.
First, post- control prices for foam produced at the affected plants are likely to be higher
as sellers attempt to pass through some of the costs of emission controls. This will
cause profits to be smaller, at least in the short run, for firms which purchase slabstock
and molded foam as inputs to other final goods such as automobiles. It will also cause
prices of final goods to be higher as firms attempt to pass through some of the increase
in production costs. Second, the shift in supply caused by emission control costs is
likely to reduce the amount of foam sold in affected markets, as well as the level of
output sold in markets which use the foam as an input. These two effects are related in
that post-control equilibrium prices and output levels in affected markets will be
determined simultaneously. Also, customers of foam producers might suffer adverse
impacts if the use of a control technology causes quality degradation.
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Indirect or Secondary Impacts
Two countervailing impacts on employees of affected plants are likely to result
from the implementation of the alternative NESHAPs. Employment will fall if affected
plants either reduce output or close operations altogether. If this occurs, firms that
supply inputs to foam producers might also suffer adverse impacts. On the other hand,
increases in employment associated with the installation, operation, maintenance and
monitoring of emission controls are likely. Also, firms that produce substitutes to foam
products could benefit from reduced foam production.
A number of other indirect or secondary adverse impacts may be associated with
the implementation of a standard. The indirect impacts we consider in this study in-
clude: impacts on regional economies and effects on energy consumption. We also
assess potential small business impacts.
ECONOMIC IMPACT STUDIES
The industry segment studies that follow in this report include six major
components of analysis. These components or phases of analysis, which are designed
to measure and describe economic impacts, are:
• Industry profile.
• Direct impacts (market price and output, domestic production and plant
closures).
• Capital availability analysis.
• Evaluation of secondary impacts (employment, foreign trade, energy
consumption, and regional and local impacts).
• Analysis of potential small business impacts.
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Each of these phases of analysis is described below.
INDUSTRY PROFILE
The industry profile provided in Section 3 describes conditions in affected industry
segments that are likely to determine the nature of economic impacts associated with the
implementation of the NESHAP. We discuss the following seven topics in the industry
profile:
• Product descriptions.
• Prices and output.
• Market outlook.
• Market structure.
• Foreign trade.
• Financial conditions.
• Employment and energy use.
PRIMARY IMPACTS
We employ a partial equilibrium model of the slabstock and molded foam
segments to estimate the primary impacts of emission control costs, including market
equilibrium prices, market output levels, the value of domestic shipments, and the
number of potential plant closures.22 This analysis is so named because the predicted
impacts are driven by estimates of how the affected industries achieve market
equilibrium after the regulatory alternatives are implemented.
22 The results of the partial equilibrium analyses are also used to estimate employment, energy and
foreign trade impacts and the economic costs associated with the regulatory alternatives.
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In a competitive market, equilibrium price and output are determined by the inter-
section of demand and supply. The supply function is determined by the marginal
(avoidable) operating costs of existing plants and potential entrants. A plant will be
willing to supply output so long as market price exceeds its average (avoidable)
operating costs. The installation, operation, maintenance and monitoring of emission
controls will result in an increase in operating costs. An associated upward shift in the
supply function will occur. The procedures employed in the market analysis are illus-
trated in Figure 3-1. Constructing the model and predicting impacts requires
completing the following four tasks.
Pre-Control
Market Data
Specify Demand and
Supply Functions
Emissions
Control Costs
Discounted Cash
Flow Parameters
1
Estimate Pre-Control
Demand and Supply
Estimate per Unit
Emissions
Control Costs
Construct
Post-Control
Supply Function
Solve for Post Control
Price and Output, and
Predict Closures
SECTION 3: ECONOMIC IMPACT ANALYSIS METHODOLOGY
3-6
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Figure 3-1
Partial Equilibrium Analysis of Slabstock and
Molded Foam Industry Segments
• Estimate pre-control market demand and supply functions.
• Estimate per unit emission control costs.
• Construct the post-control supply function.
• Solve for post-control price, output and employment levels, and predict
plant closures.
We briefly describe each of these tasks below.23
Pre-Control Market Demand and Supply Functions
Pre-control equilibrium price and output levels in competitive markets are
determined by market demand and supply. When the supply curve shifts because of
compliance costs, the economic impacts are driven primarily by market demand and
supply elasticities. Unfortunately, estimates of demand and supply elasticities for the
affected industry segments are not available in the economic literature and the data
required to obtain estimates tailored for this study are unavailable.
We expect that the market demand for flexible foam is relatively inelastic (i.e.,
changes in price will have only a small affect on the level of output), because (1) close
substitutes for the product are unavailable, and (2) the foam content of final products
generally comprises only a small fraction of total product cost. The base case results
reported in the text of this report are based on an assumed demand elasticity of -0.5.
In Appendix C, we report the results of sensitivity analyses for which we assume a high
demand elasticity of -1.0 and a low demand elasticity of -0.25.
23 See Appendices A, and B for more detailed descriptions of the data and methods employed in the
partial equilibrium analysis.
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Unfortunately, we have little a priori basis for restricting the range for the market
supply elasticity. The base case results reported in the text of this report are based on
relatively elastic supply of 10.0. In Appendix C, we report the results of sensitivity
analyses for which we assume a high supply elasticity of 50.0 and a low supply elasticity
of 5.0.
Per Unit Emission Control Costs
Emission control costs will cause an upward vertical shift of the supply curves in
affected markets. The height of the vertical shift for each affected plant is given by the
after-tax cash flow required to offset the per unit increase in production costs resulting
from the installation, maintenance, operation and monitoring of emission control
equipment.
Estimates of the capital, operating, maintenance and monitoring costs associated
with emission controls for affected plants are reported in Appendix A. Per unit,
after-tax costs are estimated by dividing after-tax annualized costs by annual output.24
This cost reflects the offsetting cash flow requirement which, in turn, yields an estimate
of the post-control vertical shift in the supply function.
Computing per unit after-tax control costs requires, as inputs, estimates of the
following parameters:
• The useful life of emission control equipment.
• The discount rate (marginal cost of capital).
• The marginal corporate income tax rate.
24 Our use of after-tax costs is consistent with the assumption that firms attempt to maximize after-tax
profits. An alternative view is that what matters to the firm are costs net of any adjustments for taxes.
Thus, the use of after-tax costs is consistent both with rational behavior by affected firms and our objective
of predicting how the market will respond to implementation of the regulatory alternatives.
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The expected life of emission control equipment for slabstock and molded foam plants
is 10 years. The economic impacts presented in this report are based on a 10 percent
real private discount rate25 and a 25 percent marginal tax rate.
The Post-Control Supply Function
Estimated after-tax per unit control costs are added to pre-control supply prices
to determine the post-control supply prices for affected producers. We construct the
post-control domestic supply function by sorting affected plants, from highest to lowest,
by per unit post-control costs. We assume that plants with the highest per unit
emission control costs are marginal (i.e., have the highest cost) in the post-control
market. We define the "marginal" plant as the plant with the highest per unit operating
costs in the market. As price adjusts to competition among producers, unprofitable
producers exit the market until price rests at equilibrium. At equilibrium, the market
price must be high enough to cover the per unit avoidable costs of the marginal plant,
the highest-cost plant remaining in the market.
Post-Control Prices. Output, and Closures
The baseline, pre-control equilibrium output in an affected market is taken as the
level of observed national consumption. We compute post-control equilibrium price
and output levels in affected markets by solving for the intersection of the market
demand curve and the market post-control, segmented supply curve. The estimated
reduction in market output is given by the difference between the observed pre-control
output level and the predicted post-control output level. Similarly, the estimated in-
25 The discount rate referred to here measures the private marginal cost of capital to affected firms.
This rate, which is used to predict the market responses of affected firms to emission control costs, should
be distinguished from the social cost of capital. The social cost of capital is used to measure the
economic costs of emission controls. See Section 7 for a more detailed discussion of this issue.
SECTIONS: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-9
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crease in price is taken as the difference between the observed pre-control price and
the predicted post-control equilibrium price.
Reporting Results of Market Analyses
The results of the partial equilibrium market analyses for each of the affected
industries are presented in Section 4 of this report. In particular, estimates of the
following are reported:
• Price increase.
• Reduction in market output.
• Annual change in the value of domestic shipments.
• Number of plant closures.
Limitations of the Market Analysis
The partial equilibrium model has a number of limitations. First, a single national
market for homogeneous output is assumed in the analysis. However, as explained in
Section 2, due to the nature of the product, markets may be regional. Because of
transportation costs, foam producers tend to be located proximate to end-use markets.
Each regional market will be affected primarily by cost changes of plants in the region,
rather than all plants in the national market. Output reductions and price effects will
vary across regions depending on locations of affected plants. The assumption of a
national market is likely to cause predicted closures to be overstated to the extent that
affected firms are protected somewhat by regional trade barriers.
Second, the analysis assumes that plants with the highest per unit compliance
costs are marginal post-control. This assumption produces an upward bias in
estimated effects on industry output and price changes because the control costs of
non-marginal plants will not affect market price. This also results in predicted closures
SECTIONS: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-10
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to be overstated. Plants with the highest per unit emission control costs might not be
marginal if other plants with lower per unit emission control costs experience higher
baseline costs. These other plants would be marginal if higher baseline costs more
than offset the lower compliance costs.
Third, the analysis assumes that the implementation of controls does not induce
any domestic producers to expand production. An incentive for expansion would exist
if some plants have post-control incremental unit costs between the baseline price and
the post-control price predicted by the partial equilibrium analysis. Plants unaffected by
the standard may indeed face this incentive to expand production. Expansion by
domestic producers will result in reduced impacts on industry output and price levels.
While plant closures will increase as expanding producers squeeze out plants with
higher post-control costs, net closures (closures minus expansions) will be reduced.
Fourth, the effect of using chemical alternatives on product quality is uncertain.
If using chemical alternatives as a control strategy causes quality degradation, the
estimates of impacts presented in this report could be understated.
Finally, estimates of demand and supply elasticities are unavailable and the base
case results presented in the text of this report are based on assumed values to
characterize the relative importance of elasticity. In the analyses reported in Appendix
C, we assess the sensitivity of the estimated impacts to ranges of assumed values for
the elasticities. In addition, it is likely that uncertainty in the estimates of compliance
costs exist, causing costs for some plants to be either overstated or understated. The
estimated impacts also depend on assumptions about which control strategies plants
adopt. We report estimates of impacts based on alternative assumption about control
strategy selections in Appendix D.
CAPITAL AVAILABILITY ANALYSIS
SECTION 3: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-11
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We assume in the market analysis that affected firms will be able to raise the
capital associated with controlling emissions at a specified marginal cost of capital.
The capital availability analysis, on the other hand, examines the variation in firms'
ability to raise the capital necessary for the purchase, installation, and testing of
emission control equipment.
The capital availability analysis also serves three other purposes. First, it
provides information for evaluating the appropriateness of the selected discount rate as
a proxy for the marginal cost of capital of the industry; implications for bias in the partial
equilibrium analysis follow. Second, it provides information on potential variation in
capital costs across firms. Third, it provides measures of the potential impacts of
controls on the profitability of affected firms.
Evaluation of Impacts on Capital Availability
For each model plant26 included in the capital availability analysis, the impact of
the regulatory alternatives on the following two measures is evaluated:
• Net income/assets.
• Long-term debt/long-term debt and equity.
Net income is measured before-tax and is defined to include all operations, continued
and discontinued.
The ratio of net income to assets is a measure of return on investment. The
implementation of emission controls is likely to reduce this ratio to the extent that net
income falls (e.g., because of higher operating costs) and assets increase (because of
investments in emission control equipment).
26 The model plants included in the analysis are described in more detail in Appendix A.
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The ratio of long-term debt to long-term debt plus equity is a measure of risk
perceived by potential investors. Other things being the same, a firm with a high
debt-equity ratio is likely to be perceived as being more risky, and as a result, may
encounter difficulty in raising capital. This ratio will increase if affected firms purchase
emission control equipment by issuing long-term debt.
Baseline Values for Capital Availability Analysis --
Baseline values for net income and net income/assets are derived by averaging
data that are available between 1991 and 1993. Data from several years are employed
to reduce distortions caused by year-to-year fluctuations. Since changes in the
long-term debt ratio represent actual structural changes, data for the most recent year
available are used.
Post-Control Values for Capital Availability Analysis --
Post-control values for the two measures identified above are computed to
evaluate the ability of affected firms to raise required capital. The post control values are
computed as follows:
• Post-control net income — pre-control before-tax net income plus
additional revenues due to higher post-control prices minus the annualized
compliance costs.
• Post-control return on assets — post-control net income divided by the
sum of pre-control assets plus investments in emission control equipment.
• Post-control long-term debt ratio — the sum of pre-control long-term debt
and investments in emission control equipment divided by the sum of
pre-control long-term debt, equity, and investments in emission control
equipment.
Note that post-control return on assets is adjusted for higher post-control prices
predicted in the partial equilibrium analysis. However, we adopt a worst-case
SECTIONS: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-13
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assumption for the debt ratio in that we assume that the total investment in emission
control equipment is debt-financed rather than paid for out of cash flow.
Limitations of the Capital-Availability Analysis -
The first limitation of the capital availability analysis is that future baseline perfor-
mance may deviate from past levels. The financial position of a firm during the period
1991-1993 may not be a good approximation of the company's position later during the
implementation period, even in the absence of the impacts of emission control costs.
Second, a limited set of measures is used to evaluate the impact of controls.
These measures reflect accounting conventions and provide only a rough approximation
of the factors that will influence capital availability.
Third, financial data are not available for all firms expected to be affected by the
regulatory alternatives. Financial data tend to be available for larger, publicly-held
firms. These companies might not be representative of all affected firms.
EVALUATION OF SECONDARY IMPACTS
The secondary impacts that we consider in this study include:
• Employment impacts.
• Energy impacts.
• Foreign trade impacts.
• Regional impacts.
Employment Impacts
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As equilibrium output in affected industry segments falls because of control
costs, employment in the industry will decrease. On the other hand, operating and
maintaining emission control equipment requires additional labor for some control
options. Direct net employment impacts are equal to the decrease in employment due
to output reductions, less the increase in employment associated with the operation and
maintenance of emission control equipment.
The estimates of the employment impacts associated with the alternative
NESHAPs are based on employment-output ratios and estimated changes in domestic
production. Specifically, we compute changes in employment proportional to estimated
changes in domestic production.27
Estimates of the labor hours required to operate and maintain emission control
equipment are unavailable. Accordingly, the employment impacts presented in this
report are overstated to the extent that potential employment gains attributable to oper-
ating and maintaining control equipment are not considered. Also, we do not include
estimates of employment impacts at firms indirectly affected by the regulatory
alternatives, such as those at firms selling inputs to the flexible foam industry.
The estimates of direct employment impacts are driven by estimates of output
reductions obtained in the market analyses. Biases in these estimates will likely cause
the estimates of employment impacts to be biased in the same direction.
Energy Effects
The energy effects associated with the alternative NESHAPs include reduced
energy consumption due to reduced output in affected industry segments plus the net
change in energy consumption associated with the operation of emission controls.
27
See Appendix B for descriptions of the data and methods used to estimate employment impacts.
SECTIONS: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-15
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The method we use to estimate reduced energy consumption due to output
reductions is similar to the approach employed for estimating employment impacts.28
Specifically, we assume that changes in energy use are proportional to estimated
changes in domestic production. Estimates of the net change in energy consumption
due to operating emission controls are unavailable.29
Regional Impacts
Substantial regional or community impacts may occur if a plant that employs a
significant percent of the local population or contributes importantly to the local tax base
is forced to close or to reduce output because of emission control costs.
Secondary employment impacts may be generated if a substantial number of
plants close as a result of emission control costs. Secondary employment impacts
include those suffered by employees of firms that provide inputs to the directly affected
industry, employees of firms that purchase inputs from directly affected firms for
end-use products, and employees of other local businesses.
28 See Appendix B for a more detailed description of this procedure.
29 We view these as short-run estimates of reduced energy consumption. In the long run, resources
diverted from the production of flexible foam will likely be directed to producing other goods and services.
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SECTION 4
PRIMARY ECONOMIC IMPACTS AND
CAPITAL AVAILABILITY ANALYSIS
INTRODUCTION
This section presents estimates of the primary economic impacts of the
alternative NESHAPs on the slabstock and molded foam segments of the flexible
polyurethane foam industry. Primary impacts include changes in market prices and
output levels, changes in the value of shipments by domestic producers, and plant
closures. For the slabstock industry sector, we report a range of plant closures based
on the results of a sensitivity analysis reported in Appendix D. We also present the
results of the capital availability analysis for the two industry segments. The capital
availability analysis assesses the ability of affected firms to raise capital and assesses
the impacts of control costs on plant profitability. We consider the three regulatory
alternatives, the MACT floor, Regulatory Alternative 1, and Regulatory Alternative 2 in
our analyses.
ESTIMATES OF PRIMARY IMPACTS
As explained earlier in Section 3, we use partial equilibrium models of the
affected industry segments to estimate primary impacts. The increase in production
costs resulting from the purchase and operation of emission control equipment causes
upward, vertical shifts in the industry supply curves. The height of these shifts is deter-
mined by the after tax cash flow required to offset the per unit increase in production
SECTION 3: ECONOMIC IMPACT ANALYSIS METHODOLOGY 3-17
-------
costs resulting from compliance. Because control costs vary across plants within each
industry segment, the post-control supply curves are segmented. We assume a worst
case scenario in which plants with the highest control costs (per unit of output) are
marginal (highest cost) in the post-control market.
We assume that the alternative NESHAPs will not affect foreign trade in foam
products. Given the nature of the product, foreign trade in flexible polyurethane foam is
negligible. It is a large volume product with very little cost (value) per unit weight.
Shipping a cargo of foam is similar to shipping "air." High transportation costs relative to
foam value makes long distance foam transport uneconomical. However, some
international trade in flexible polyurethane foam exists in the form of end-use products
(e.g., in automobiles).
Table 4-1 presents the primary impacts predicted by the partial equilibrium
analysis for the flexible slabstock and flexible molded foam segments. For example,
we estimate that the implementation of the MACT floor will result in a $0.03/lb (2.28 per-
cent) increase in the price of slabstock foam and an annual reduction in domestic
production of 6.87 thousand tons (1.12 percent of baseline production). Although the
industry faces compliance costs resulting from the rule, the analysis shows that the
MACT floor will cause the annual value of domestic shipments to increase by $19.53
million (1.14 percent). The value of shipments increases because the price increase
more than offsets the reduction in output. We estimate that the MACT Floor will result
in one to two slabstock plant closures. The range of estimates of plant closures
reflects alternative assumptions about which control strategies slabstock plants adopt.30
30
See Appendix D for a more detailed discussion of this issue.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL A VAILABILITY ANALYSIS 4-2
-------
Table 4-1
ESTIMATED PRIMARY IMPACTS
ON THE FLEXIBLE SLABSTOCK FOAM MARKET
Impact
Price Change
$/lb
percent
Annual Change in Domestic Output
1 000 tons/yr
percent
Annual Change in Value of Shipments
$milliona
percent
Plant Closures'3
MACT Floor
.03
2.28
-6.87
-1.12
19.53
1.14
1 to 2
Reg. Alt I
.03
2.20
-6.62
-1.08
18.82
1.10
1 to 3
Reg. Alt II
.05
3.82
-11.36
-1.86
32.56
1.89
1 to 4
1994 dollars.
Ranges of predicted plant closures reflect alternative assumptions about different control technologies
adopted by model plants.
Table 4-1 also shows the estimated primary impacts from the implementation of
Regulatory Alternatives 1 and 2. Slabstock foam price increases are estimated to be
$0.03/lb (2.20 percent) under Regulatory Alternative 1, and $0.05/lb (3.82 percent)
under Regulatory Alternative 2. We estimate decreases in annual domestic output of
6.62 thousand tons (1.08 percent) under Alternative 1, and 11.36 thousand tons (1.86
percent) under Alternative 2. Our analysis predicts one to three plant closures for
Regulatory Alternative 1 and one to four plant closures under Regulatory Alternative 2.
As with the MACT floor, increases in the value of shipments are predicted under both
regulatory alternatives. We estimate increases in the value of domestic shipments of
$18.82 million (1.10 percent) under Regulatory Alternative 1 and $32.56 million (1.89
percent) under Regulatory Alternative 2.
Table 4-2 displays estimated primary impacts on the molded foam industry. We
estimate that the implementation of the MACT floor will result in a $0.0017/lb (0.07
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS
4-3
-------
percent) increase in the price of molded foam. The associated reduction in domestic
production is estimated to be 0.09 thousand tons (0.04 percent), and no plant closures
are predicted. The estimated effect of the MACT floor on the value of domestic
shipments is small, about $390 thousand (0.04 percent).
Table 4-2
ESTIMATED PRIMARY IMPACTS
ON THE FLEXIBLE MOLDED FOAM MARKET
Impact
Price Change
$/lb
percent
Annual Change in Domestic Output
1 000 tons/yr
percent
Annual Change in Value of Shipments
$Milliona
percent
Plant Closures
MACT Floor
0.00
0.07
-0.09
-0.04
0.39
0.04
0
Reg. Alt 1
0.02
0.84
-0.95
-0.42
4.50
0.42
3
Reg. Alt 2
0.03
1.14
-1.29
-0.56
6.10
0.57
0
1994 dollars.
Table 4-2 also displays the estimated primary impacts of Regulatory Alternatives
1 and 2 on the molded foam segment. Foam price increases are estimated to be
$0.02/lb (0.84 percent) under Regulatory Alternative 1, and $0.03/lb (1.14 percent) under
Regulatory Alternative 2. We estimate decreases in annual domestic output of 0.95
thousand tons (0.42 percent) under Alternative 1, and 1.29 thousand tons (0.56 percent)
under Alternative 2. Annual increases in the value of shipments are expected under
both regulatory alternatives. We estimate increases in the value of domestic shipments
of $4.50 million (0.42 percent) under Regulatory Alternative 1 and $6.10 million (0.57
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS
4-4
-------
percent) under Regulatory Alternative 2. Our analysis predicts three plant closures
under Regulatory Alternative 1 and no plant closures under Regulatory Alternative 2.
We emphasize that many of the assumptions we adopt in the analysis are likely
to cause an overestimate of predicted plant closures. First, we assume that the plant
with the highest per unit emission control costs also is the least efficient in that it has the
highest baseline per unit production costs. Second, we assume a national market, but
regional trade barriers might afford some protection for some plants. The costs of the
available technologies for complying with the alternative NESHAPs vary substantially for
slabstock plants. Some plants might adopt less costly technologies than those
assigned in this analysis, thus reducing compliance costs and plant closures. By
altering the assumptions about the technologies some model plants employ to achieve
ABA emission reductions, the count of predicted plant closures changes. As Appendix
D demonstrates, replacing the Forced Cooling technology with Acetone will reduce
predicted slabstock closures from 2 to 1 under the MACT floor, from 3 to 1 under
Regulatory Alternative 1, and from 4 to 1 under Regulatory Alternative 2.
The estimated primary impacts reported above depend on a set of parameters
used in the partial equilibrium model of the slabstock and molded foam industries. One
of the parameters, the elasticity of demand, measures how sensitive buyers are to price
changes. A second parameter, the elasticity of supply, measures how sensitive
suppliers, or producers, are to price changes. For this analysis, we were not able to
find supply or demand elasticity estimates for either industry segment in the literature.
Also, we were unable to identify data required to derive our own estimates.
The estimated impacts reported above in Tables 4-1 and 4-2 are based on a
demand elasticity of -0.5 and a supply elasticity of 10.0 for both the slabstock and
molded foam segments. In Appendix C, we report the results of analyses that show
the sensitivity of the estimated impacts to changes in these elasticity estimates. The
"low" elasticity case adopts a demand elasticity of -0.25 and a supply elasticity of 5.0 for
both markets (slabstock and molded). These results show smaller reductions in market
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL A VAILABILITY ANALYSIS 4-5
-------
output and generally slightly less adverse impacts on domestic producers than results
reported above. The "high" elasticity case reported in Appendix C employs a demand
elasticity of -1.0 and a supply elasticity of 50.0 for both markets. In general, this case
shows slightly more adverse impacts on domestic producers. However, the sensitivity
analyses generally show that the estimated primary impacts are relatively insensitive to
reasonable ranges of demand and supply elasticity estimates.
CAPITAL AVAILABILITY ANALYSIS
The capital availability analysis involves examining pre- and post-control values
of selected financial ratios. These ratios include net income divided by assets and long
term debt divided by the sum of long term debt and equity. In order to reduce the
effects of year-to-year fluctuations in net income, a three-year average (1991 through
1993) of net income over assets was used as the baseline. Changes in the long term
debt ratio represent structural changes and so are not subject to the same cyclical
fluctuations. Long term debt ratios from 1993 were used as the baseline.
As explained in Section 3, these financial statistics lend insight into the ability of
affected firms to raise the capital needed to acquire emission controls. They also
provide estimates of the changes in profitability which would arise from the
implementation of the NESHAP.
To calculate the post-control ratio of net income to assets, additional revenues
due to higher post-control prices less annualized control costs were added to
pre-control net income, and capital control costs were added to pre-control assets. To
calculate the post-control long term debt ratio, capital control costs were added to
pre-control long term debt, both in the numerator and denominator of this ratio. Note
that we have adjusted the return on assets measure for higher post-control prices.
However, the post-control debt ratios reflect a worst-case assumption that affected firms
are required to finance emission controls entirely through debt. Second, for this
analysis we assume that production facilities will choose the highest cost (capital cost)
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL A VAILABILITY ANALYSIS 4-6
-------
compliance technology. In reality, some facilities may choose other technologies with
lower costs.
As discussed in Section 1, the slabstock and molded foam industries are
characterized by individual firms owning multiple production facilities. Financial data
are available for only 7 of the 28 firms which produce slabstock. This represents 26 of
the 78 production facilities nationwide. Data for the molded sector were only available
for 9 firms. These 9 firms operate 17 of the approximately 234 production facilities
nationwide.
Tables 4-3 through 4-5 show the results of the capital availability analyses
conducted for the three regulatory alternatives. Note that the company number
identification corresponds with those found in Table 1-13. In many cases, the
regulatory alternatives have a negligible effect on the ratio of net income to assets for
affected companies (i.e., the impacts round to zero at two significant digits). The
largest declines in this ratio are very small, in the neighborhood of about one-tenth of a
percent. Note that the post-control net income to assets ratio increases relative to the
baseline for some affected companies. This occurs when additional revenues from
higher post-control prices more than offset compliance costs.
Similarly, effects of the regulatory alternatives on the long-term debt ratios
appears to be negligible in most cases. Except for Companies 24 and 25, the
post-control debt ratios are all within one percent of pre-control levels. Even after
controls, Companies 24 and 25 appear to have long-term debt ratios typical of the
industry.
All of the companies with available data are large publicly held corporations. As
a result, emission controls costs, which are small relative to their overall financial
resources, have no significant impacts on the firms' financial ratios. Accordingly, we
conclude that the companies which we analyzed will not find it difficult to raise the
capital necessary to purchase and install the required emission controls. We note,
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL A VAILABILITY ANALYSIS 4-7
-------
however, that the firms for which financial data are available might not be representative
of other affected firms in the industry.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL A VAILABILITY ANALYSIS 4-8
-------
Table 4-3
CAPITAL AVAILABILITY ANALYSIS
MACT FLOOR
FIRM
Company 1
Company 3
Company 7
Company 8
Company 9
Company 10
Company 11
Company 19
Company 20
Company 24
Company 25
Company 27
Company 30
Company 35
PRE-CONTROL
NI/Aa
(Percent)
2.57
-1.37
2.23
-0.65
2.22
4.02
6.79
4.49
-1.17
12.93
7.78
5.52
1.43
-0.87
LTD/(LTD+E)b
(Percent)
13.41
19.41
11.21
23.56
21.40
15.53
15.17
26.32
11.13
21.70
10.59
31.84
42.22
9.99
POST-CONTROL
NI/Aa
(Percent)
2.57
-1.37
2.22
-0.65
3.60
4.02
6.79
4.47
-1.17
12.95
7.80
5.46
1.45
-0.87
LTD/(LTD+E)b
(Percent)
13.41
19.41
11.21
23.57
22.22
15.53
15.17
26.34
11.13
23.65
13.24
32.20
42.33
10.16
Notes:
a Net income divided by assets (1991-1993 average).
b Long-term debt divided by long-term debt plus equity (1993).
Sources: Moody's Industrial Manual, 1994; Moody's OTC Industrial Manual, 1994' Moody's OTC Unlisted
Manual, Dun & Bradstreet's Million Dollar Directory, 1994; Herman Miller Annual Reports,
1989-1991.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS
4-9
-------
Table 4-4
CAPITAL AVAILABILITY ANALYSIS
REGULATORY ALTERNATIVE 1
FIRM
Company 1
Company 3
Company 7
Company 8
Company 9
Company 10
Company 11
Company 19
Company 20
Company 24
Company 25
Company 27
Company 30
Company 35
PRE-CONTROL
NI/Aa
(Percent)
2.57
-1.37
2.23
-0.65
2.22
4.02
6.79
4.49
-1.17
12.93
7.78
5.52
1.43
-0.87
LTD/(LTD+E)b
(Percent)
13.41
19.41
11.21
23.56
21.40
15.53
15.17
26.32
11.13
21.70
10.59
31.84
42.22
9.99
POST-CONTROL
NI/Aa
(Percent)
2.61
-1.37
2.27
-0.65
3.86
4.04
6.79
4.47
-1.17
12.95
7.81
5.47
1.44
-0.87
LTD/(LTD+E)b
(Percent)
13.42
19.41
11.21
23.57
22.13
15.53
15.18
26.34
11.13
23.65
13.24
32.20
42.33
10.16
Notes:
3 Net income divided by assets (1991-1993 average).
b Long-term debt divided by long-term debt plus equity (1993).
Sources: Moody's Industrial Manual, 1994; Moody's OTC Industrial Manual, 1994' Moody's OTC Unlisted
Manual, Dun & Bradstreet's Million Dollar Directory, 1994; Herman Miller Annual Reports,
1989-1991.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS
4-10
-------
Table 4-5
CAPITAL AVAILABILITY ANALYSIS
REGULATORY ALTERNATIVE 2
FIRM
Company 1
Company 3
Company 7
Company 8
Company 9
Company 10
Company 11
Company 19
Company 20
Company 24
Company 25
Company 27
Company 30
Company 35
PRE-CONTROL
NI/Aa
(Percent)
2.57
-1.37
2.23
-0.65
2.22
4.02
6.79
4.49
-1.17
12.93
7.78
5.52
1.43
-0.87
LTD/(LTD+E)b
(Percent)
13.41
19.41
11.21
23.56
21.40
15.53
15.17
26.32
11.13
21.70
10.59
31.84
42.22
9.99
POST-CONTROL
NI/Aa
(Percent)
2.60
-1.37
2.10
-0.65
4.57
3.93
6.76
4.47
-1.17
13.05
7.74
5.54
1.44
-0.87
LTD/(LTD+E)b
(Percent)
13.50
19.41
11.23
23.59
22.52
15.63
15.28
26.34
11.13
24.07
16.35
32.34
42.46
10.16
Notes:
a Net income divided by assets (1991-1993 average).
b Long-term debt divided by long-term debt plus equity (1993).
Sources: Moody's Industrial Manual, 1994; Moody's OTC Industrial Manual, 1994' Moody's OTC Unlisted
Manual, Dun & Bradstreet's Million Dollar Directory, 1994; Herman Miller Annual Reports,
1989-1991.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS
4-11
-------
LIMITATIONS
Several qualifications of the results presented in this section need to be made.
A single market for homogeneous output is assumed in the partial equilibrium analysis.
However, there may be some regional trade barriers which would protect producers.
Furthermore, the analysis assumes that plants with the highest per unit emission control
costs are marginal post-control. This assumption will cause the impacts presented
above to be overstated since market impacts are determined by the costs of marginal
plants. Some plants may find that the price increase resulting from regulations make it
profitable to expand production. This would occur if a firm found its post-control
incremental unit costs to be smaller than the post-control market prices. Expansion by
these firms would result in smaller decreases in output and smaller increases in prices
than predicted by our analysis. For instance, plants that emit less than the major
source threshold do not have to comply with the standard. They enjoy price increases
without incurring of compliance costs.
Furthermore, some plants may choose to alter their production mix of different
foam grades, choosing to drop altogether or reduce certain foam grades and increase
production of other grades requiring and/or emitting less HAP. Plants unaffected by
the standard may increase production to produce those foam grades whose production
is reduced or dropped by other producers.
We have also noted that the estimated primary impacts depend on the
parameters of the partial equilibrium model. The results of the sensitivity analyses
presented in Appendix C, which are based on alternative estimates of demand and
supply elasticity, show slightly less adverse impacts on domestic producers in the case
of lower elasticities and slightly more adverse impacts in the case of more elastic supply
and demand estimates. Also note that in Appendix D, we report the results of a
sensitivity analysis which alters assumptions about the assignments of the control
technologies for the slabstock industry.
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS 4-12
-------
SUMMARY
Under the MACT Floor and Regulatory Alternative 1, we estimate that slabstock
foam prices will increase by about 2.2 percent and output is will fall by about 1 percent.
However, under both of these alternatives, the value of slabstock shipments will
increase by about 1 percent. One to two slabstock plant closures are predicted under
the MACT floor and one to three are predicted under Regulatory Alternative 1. We
predict more adverse impacts under Regulatory Alternative 2, with slabstock prices
increasing by about 3.8 percent and output declining by about 1.86 percent. One to
four plant closures are possible. Finally, because emission control costs are very small
relative to the financial resources of the affected producers examined, they should not
find it difficult to raise the capital necessary to finance the purchase and installation of
emission controls.
For the molded foam sector, the estimated economic impacts of the NESHAP are
relatively small. Predicted price increases and reductions in domestic output are
approximately 1 percent or less under all three regulatory alternatives. The estimated
value of shipments for the molded foam segment increases under all three alternatives.
No plant closures are expected under the MACT Floor or Alternative 2. However, three
closures are predicted under Regulatory Alternative 1.
SECTION 5
SECTION 4 - PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS 4-13
-------
SECONDARY ECONOMIC IMPACTS
INTRODUCTION
This section presents estimates of the secondary economic impacts that would
result from the implementation of the alternative NESHAPs. Secondary impacts
include changes in employment, energy use, foreign trade and regional impacts.
LABOR IMPACTS
The estimated labor impacts associated with the NESHAP are based on the
results of the partial equilibrium analyses of the two segments of the flexible
polyurethane foam industry. These impacts depend primarily on the estimates of
reduction in domestic production reported earlier in Section 4.31 Note that changes in
employment due to the operation and maintenance of control equipment have been
omitted from this analysis due to lack of data. Also, the estimated employment impacts
reported below do not include potential employment gains in industries which produce
substitute commodities that might benefit from reduced flexible slabstock and flexible
molded foam production or employment losses in industries supplying inputs to the
foam industry. Thus, the changes in employment estimated in this section reflect only
the direct employment losses due to reductions in domestic production of flexible
slabstock and flexible molded foam.
Table 5-1 presents estimates of employment losses for the two industry sectors.
As Table 5-1 indicates, estimated job losses in the slabstock industry segment range
from 95 jobs (in Regulatory Alternative 1) to 164 jobs (in Regulatory Alternative 2). As
31 More specifically, we estimate employment impacts by assuming that labor use per unit of output
will remain constant when the quantity of output changes. Production worker hours per dollar of output
was calculated from 1992 Census of Manufactures. See Appendix B for a more detailed discussion.
SECTION 5 - SECONDARY ECONOMIC IMPACTS 5-2
-------
expected, the estimated employment losses in Regulatory Alternative 1 are slightly less
than those predicted for the MACT Floor. This less severe labor impact occurs
primarily because smaller reductions in output are expected to occur as a result of the
implementation of Regulatory Alternative 1 than from the implementation of the MACT
Floor. As a result, the associated labor impacts are less.
Table 5-1 also displays labor impacts for the molded foam industry segment.
The estimated labor reductions associated with the implementation of the MACT floor
are quite small, with only two production job losses expected. We estimate the
implementation of Regulatory Alternatives 1 and 2 to result in 23 and 31 job losses,
respectively, in the molded foam segment.
Table 5-1
FLEXIBLE POLYURETHANE FOAM INDUSTRY
ESTIMATED EMPLOYMENT REDUCTIONS
Industry
Segment
Slabstock (jobs)
(% reduction)
Molded (jobs)
(% reduction)
MACT
Floor
99
1.12
2
0.04
Regulatory
Alternative 1
95
1.08
23
0.42
Regulatory
Alternative 2
164
1.86
31
0.56
Note: Estimates do not include potential employment gains due to operating and maintaining emission
controls.
As noted above, our estimates of employment impacts are driven by the
estimates of output reductions and plant closures reported in Section 4. This means
that the estimated employment impacts reflect the worst-case assumptions adopted in
the analysis for the same reasons provided earlier.
ENERGY USE IMPACTS
SECTION 5 - SECONDARY ECONOMIC IMPACTS
5-3
-------
The approach we employ to estimate reductions in energy use is similar to the
approach employed to estimate labor impacts. Again, these impacts depend primarily
on the estimated reductions in domestic output reported earlier in Section 4. Note that
the changes reported below do not account for the potential increases in energy use
due to operating and maintaining emission control equipment or possible changes in
production times for reformulated foam products. This omission is due to lack of data.
Table 5-2 presents changes in the use of energy for the two industry segments.
The change in the use of energy by the slabstock foam industry ranges from 1.08
percent (in Regulatory Alternative 1) to 1.86 percent (in Regulatory Alternative 2).
Given the magnitude of national production impacts on the molded sector, smaller
energy use reductions are expected for the molded foam industry under all three
regulatory alternatives. Energy impacts associated with the implementation of the
MACT Floor are estimated to be only 0.04 percent. We expect energy impacts under
Regulatory Alternatives 1 and 2 to be 0.42 percent and 0.56 percent respectively.
FOREIGN TRADE IMPACTS
Other factors being the same, the implementation of the NESHAP will raise the
production costs of domestic foam manufacturers relative to foreign producers. In an
industry with no barriers to international trade, this would cause U.S. imports to increase
and U.S. exports to decrease. However, as discussed previously, due to the nature of
the product, foreign trade in flexible polyurethane foam is negligible. It is a large
volume product with very little value per unit volume. High transportation costs relative
to foam value makes long distance foam transport financially prohibitive. As such,
flexible polyurethane foam industries in other countries produce foam to satisfy their
domestic demand. Due to the absence of international trade in flexible polyurethane
foam, no significant foreign trade impacts are anticipated.
Table 5-2
SECTION 5 - SECONDARY ECONOMIC IMPACTS 5-4
-------
ESTIMATED ENERGY USE REDUCTIONS
Industry
Segment
Slabstock(1000$94)
(% reduction)
Molded (1000$94)
(% reduction)
MACT
Floor
424.73
1.12
8.00
0.04
Regulatory
Alternative 1
409.57
1.08
98.00
0.42
Regulatory
Alternative 2
703.03
1.86
134.00
0.56
Note: Estimates do not include potential employment gains due to operating and maintaining emission
controls.
REGIONAL IMPACTS
Although it is not possible to identify the specific locations of plants that might
close as a result of the alternatives, our analysis of slabstock plant locations revealed
that, apart from a few exceptions, foam production facilities tend to be geographically
dispersed. As a result, we do not anticipate any significant regional impacts as a result
of the implementation of the proposed NESHAP. The flexible polyurethane foam
industry is non-labor intensive. Both large and small facilities need only a small
number of employees to operate the foam production line. Foam production is, for the
most part, an automated process requiring only monitoring once the production process
is underway. As such, labor utilization at production plants are small relative to
regional labor supplies. Therefore, even in cases where plant closures are predicted,
no significant labor or regional impacts are expected because employment impacts are
likely to be small relative to total local employment.
LIMITATIONS
The estimates of the secondary impacts associated with the NESHAP are based
on changes in market equilibria predicted by the partial equilibrium models of the two
affected markets. Accordingly, the caveats discussed earlier in Section 4 for the
SECTION 5 - SECONDARY ECONOMIC IMPACTS
5-5
-------
primary impacts apply as well to the estimates of secondary impacts. Also, we note
that the estimates of employment impacts are based on the average value of production
per worker hour for SIC 3086. Labor productivity in the slabstock and molded foam
segments could differ from the four-digit industry-wide level.
As noted earlier, the estimates of employment impacts do not include potential
employment gains due to operating and maintaining emission control equipment or
employment gains in the manufacturing of substitute products. Similarly, the estimates
we report exclude potential indirect employment losses in industries that supply inputs
to the flexible polyurethane foam industries and employment gains in industries
producing substitute products. In short, the reported estimates of employment impacts
include only direct production job losses in the flexible polyurethane slabstock and
molded industries.
SUMMARY
The estimated secondary economic impacts of the alternative NESHAP are
generally small for the molded foam segment of the industry because only small
reductions in industry output are expected for this sector. Impacts range from 0.04
percent to 0.56 percent under the three regulatory alternatives. There are no expected
foreign trade impacts because there is virtually no international trade in flexible
polyurethane molded foam. No significant impacts on regional economies are expect-
ed.
The estimated secondary economic impacts of the alternative NESHAPs are
somewhat larger for the slabstock segment of the industry because larger reductions in
domestic production are predicted for this industry segment. Estimated employment
and energy impacts range from 1.08 percent to 1.86 percent under the three regulatory
alternatives. As with the molded foam sector, there exists virtually no international
trade in slabstock foam. As such, no significant trade impacts are expected. Also, no
significant regional impacts are expected.
SECTION 5 - SECONDARY ECONOMIC IMPACTS 5-6
-------
SECTION 6
POTENTIAL SMALL BUSINESS IMPACTS
SECTION 5 - SECONDARY ECONOMIC IMPACTS 5-7
-------
INTRODUCTION
The Regulatory Flexibility Act (RFA) requires an analysis of the potential effects
of proposed regulations on small business entities. Specifically, the RFA requires that
a determination be made as to whether the subject regulation will significantly impact a
substantial number of small entities.
Firms are classified as small based on company-wide employment rather than
plant employment. The Small Business Administration (SBA) classifies firms in the
flexible polyurethane foam industry (SIC 3086) as small if total company-wide
employment is less than 500 employees.32 This definition is consistent with recent
guidance from EPA's General Counsel on the interpretation of the Small Business
Regulatory Enforcement Fairness Act of 1996.33
We describe below the results of two analyses designed to assess the potential
impacts of the regulatory alternatives on small businesses. In the first analysis, we
estimate the impact that the alternatives will have on the costs of differently sized plants.
In the second analysis, we predict, under a worst-case scenario, plant closures by plant
size. First, however, we explain how we matched model plants with firms to determine
small business status.
MATCHING MODEL PLANTS WITH FIRMS
As noted above, firms are classified as small entities based on company-wide
rather than plant-level employment. However, because plants in the flexible
polyurethane foam industry are so numerous, the analysis in this report is conducted
using model plants rather than actual plants whose identities can be linked to specific
32 See13CFR121.
33 See EPA (1996).
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS 6-2
-------
firms. Nonetheless, it is possible to draw some conclusion about the small business
status of affected facilities by matching model plants to companies responding to the
Industry Questionnaire 1993, issued under Section 114 of the CAAA.
The questionnaire reports company-wide employment and plant-level production
for each facility included in the survey. By matching annual production levels, it is
possible to assign probable model plant types to each facility included in the survey.
Because company-wide employment is reported for plants included in the sample, it is
possible to estimate the percent of each model plant type that satisfies the small
business criteria (i.e., company-wide employment under 500).
Table 6-1 shows the results of the matching exercise. For example, we
estimate that ten (50.0 percent) of model plant type MP1 slabstock facilities could be
owned by small businesses, based on the 500 employee criterion. Note that we cannot
determine the number of HP1 molded foam plants that could be small entities. This
model plant type is characterized by production technology (high-pressure mixhead)
and not production level. Also, note that some companies may own both slabstock and
molded facilities. In these cases, it is likely that the parent company is too large to be
considered a small business.
Based on our estimates, 71 possible small businesses could be affected by the
NESHAP, 18 slabstock and 53 molded foam producers. Recall that molded foam
facilities of the LP1 model plant type will not require controls and are therefore not
included in the count of affected small businesses.
We urge caution in interpreting the results reported in Table 6-1. First, we
assume that respondents to Industry Questionnaire 1993 interpreted "total employment"
as total company-wide employment rather than total plant employment. Fewer plants
would satisfy the small business employment criterion if respondents reported plant
employment. Second, some of the molded foam plants assigned to LP1, LP2 and LP3
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS 6-3
-------
could be HP1 type plants. This issue is significant since the HP1 plants are not
expected to incur any costs as a result of the regulatory
alternatives. Finally, the results for molded foam plants are based on a sample of
plants.
34
Table 6-1
ESTIMATED SMALL BUSINESS STATUS OF MODEL PLANTS
Model Plant Number
Slabstock
MP1
MP2
MP3
MP4
MP5
Molded
HP1
LP1
LP2
LP3
Estimated Small Busi-
nesses
(Percent)
50.0
26.7
6.7
0.0
7.7
a
76.9
80.0
22.2
Estimated Small
Businesses
(Count)
10
7
1
0
0
a
84
43
10
Source: Responses to Industry Questionnaire 1993, issued under Section 114 of the CAAA.
Notes: a The HP1 model plant is characterized by production technology (high-pressure mixhead) and
not production level. As a result, the percent of these plants that could be small businesses
cannot be estimated.
IMPACTS ON COSTS BY PLANT SIZE
The EPA estimates that about 234 plants produce molded foam nationwide, however, the
questionnaire includes only 47 plants. Data from the questionnaire were used to determine the
percentage of small businesses in each model plant classification. These percentages were then used to
extrapolate to the 234 plants to estimate the number (count) of small businesses in each model plant
classification.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS
6-4
-------
Compliance costs associated with the implementation of the regulatory
alternatives will increase the costs of producing flexible polyurethane foam. To place
these costs in perspective, we compute annualized compliance costs as a percent of
baseline revenues for each model plant.35 Tables 6-2 and 6-3 show the results of the
analysis for the slabstock and molded foam segments, respectively. For example,
under the MACT Floor, the smallest slabstock model plant, MP1, is expected to incur
average annualized compliance costs of about 1.59 percent of estimated baseline
revenues, which is the largest average compliance costs relative to baseline
revenues.36 The relative difference between compliance costs as a percent of
revenues for model plant MP1 and the next largest plant, MP2, is larger for Regulatory
Alternatives 1 and 2 than for the MACT Floor.
Table 6-2
IMPACT ON COSTS BY PLANT SIZE: SLABSTOCK
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Model Plant
Number
MP1
MP2
MP3
MP4
MP5
MP1
MP2
MP3
MP4
MP5
MP1
MP2
MP3
MP4
MP5
Number of
Plants
19
28
14
11
6
19
28
14
11
6
19
28
14
11
6
Average Change
in Costs
(% of Revenues)
1.59
0.92
0.67
0.46
0.76
1.84
0.65
0.29
0.22
0.57
2.29
1.02
0.54
0.54
0.52
The capital costs associated with compliance costs are amortized over a 10 year equipment life
at a 10 percent real private discount rate.
MP1 produces less than 100 tons of foam product annually. See Appendix A.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS
6-5
-------
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS 6-6
-------
Table 6-3
IMPACT ON COSTS BY PLANT SIZE: MOLDED
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Model Plant
Number
HP1
LP1
LP2
LP3
HP1
LP1
LP2
LP3
HP1
LP1
LP2
LP3
Number of
Plants
27
109
54
44
27
109
54
44
27
109
54
44
Average Change
in Costs
(% of Revenues)
0.0000
0.0000
0.0088
0.0328
0.0000
0.0000
0.7983
-0.0815
0.0000
0.0000
-0.2641
0.1891
As Table 6-3 indicates, the smallest mold foam model plant, LP1, is not
expected to incur any compliance costs as a result of the regulatory alternative. The
same is true for
model plant HP1, which could be very small or large.37 The largest molded foam model
plant, LP3, is expected to incur the highest compliance costs relative to baseline
revenues under the MACT Floor.38
Recall that MP1 is characterized by production process and not plant size.
38 Average compliance costs are negative for LP3 under Regulatory Alternative 1 and negative for
LP2 under Alternative 2 because of savings associated with control strategies.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS
6-7
-------
Table 6-1 shows that the smallest slabstock model plant, MP1, is more likely to
be operated by a small business than the other slabstock model plants. Accordingly,
the finding in Table 6-2 that this model plant is also likely to incur the highest relative
compliance costs suggests potential adverse impacts on small businesses. However,
we note that the results reported in Table 6-2 and 6-3 are average compliance costs for
each model plant. Because of variations in the costs of control technologies,
compliance costs vary within model plant categories, even for a given regulatory
alternative. Also, affected plants will be able to offset at least some compliance costs
by passing price increases to their customers. In fact, the slabstock price increases we
predict in Section 4 are sufficient to offset average compliance costs, even for the
smallest model plants.
39
PREDICTED PLANT CLOSURES BY PLANT SIZE
Earlier in Section 4, we used our partial equilibrium model to predict plant
closures caused by the implementation of the regulatory alternatives. Tables 6-4 and
6-5 report, respectively, predicted plant closures by model plants for the slabstock and
molded foam segments. For example, our analysis predicts that 0 to 2 of the 19 model
plants MP1 will close
Table 6-4
PREDICTED PLANT CLOSURES: SLABSTOCK
Regulatory
Alternative
MACT Floor
Model Plant
Number
MP1
MP2
MP3
MP4
MP5
Number of
Plants
19
28
14
11
6
Predicted
Closures
Oto2
Oto1
0
0
0
This does not mean that all plants of a given model plant type will be able to offset all
compliance costs through higher prices. Again, compliance costs vary within plant types due to
differences in costs of selected control technologies.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS
6-8
-------
Alternative 1
Alternative 2
MP1
MP2
MP3
MP4
MP5
MP1
MP2
MP3
MP4
MP5
19
28
14
11
6
19
28
14
11
6
Oto3
Oto1
0
0
0
Oto3
1
0
0
0
Table 6-5
PREDICTED PLANT CLOSURES: MOLDED
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Model Plant
Number
HP1
LP1
LP2
LP2
HP1
LP1
LP2
LP3
HP1
LP1
LP2
LP3
Number of
Plants
27
109
54
44
27
109
54
44
27
109
54
44
Predicted
Closures
0
0
0
0
0
0
3
0
0
0
0
0
and 0 to 1 of the 28 model plants MP2 will close under the MACT Floor40. There is
insufficient data to determine the exact ownership of the plants that may close. It is
estimated
that half of the MP1 plants, 27 percent of the MP2 plants, and 15 percent of the other
slabstock model plants are owned by small businesses. Without facility-specific data,
The range is dependent upon the assignment of control technology to the
model plants, with the least-cost technology yielding the lower value of the range
and the highest-cost technology yielding the upper value of the range.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS
6-9
-------
the analysis cannot determine if these impacts will occur at small businesses owning
these facilities.
Table 6-5 shows that no plant closures are predicted for molded foam
producers under the MACT Floor or Regulatory Alternative 2. Also, no plant closures
are predicted for the smallest model plants, LP1, for Regulatory Alternative 1. Recall
that these small plants are not expected to incur compliance costs under any of the
regulatory alternatives.
The finding that the smallest slabstock plants are most likely to close under the
regulatory alternatives provides the potential adverse impacts on small businesses.
Given that any estimate of closures is based upon worst-case assumptions41, it is likely
that these impacts are overestimated and the affect on small businesses will be
minimal.
REFERENCE
EPA (1996). Memorandum from Jonathan Z. Cannon, EPA General Counsel, to the
Administrator, April 2.
41 See Section 4 for a discussion of these assumptions.
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS 6-10
-------
SECTION 7
SOCIAL COSTS AND ECONOMIC EFFICIENCY
Estimates of the social (economic) costs associated with the implementation of
the alternative NESHAPs for the flexible polyurethane slabstock and flexible
polyurethane molded foam industry segments are presented below in this section of the
report. We also present an analysis of the economic efficiency of the regulatory
alternatives.
SOCIAL COSTS OF EMISSION CONTROLS: CONCEPTUAL ISSUES
Air quality regulations affect society's economic well-being by causing a
reallocation of productive resources within the economy. Specifically, resources are
allocated to the production of cleaner air and away from other goods and services that
could otherwise be produced. Accordingly, the social, or economic, costs of emission
controls can be measured as the value that society places on those goods and services
not produced as a result of resources being diverted to the production of improved air
quality. According to economic theory, the conceptually correct valuation of these
costs requires the identification of society's willingness to be compensated for these
foregone consumption opportunities that would otherwise be available.42'43
42 Willingness to be compensated is the appropriate measure of economic costs, given the
convention of measuring benefits as willingness to pay. Under this convention, the potential to
compensate those members of society bearing the costs associated with a policy change is compared
SECTION 6: POTENTIAL SMALL BUSINESS IMPACTS 6-11
-------
In the discussion that follows, we distinguish between emission control costs and
the social or economic costs associated with the regulatory alternatives. The former
are measured simply as the annualized capital and annual operating and maintenance
costs of controls under the assumption that all affected plants install controls. As noted
above, economic costs reflect society's willingness to be compensated for foregone
consumption opportunities.
Estimates of emission control costs will correspond to the conceptually correct
measure of economic costs only if the following conditions hold:
• Marginal plants affected by an alternative standard must be able to pass
forward all emission control costs to buyers through price mark-ups
without reducing the quantity of goods and services demanded in the
market.
• The prices of emission control resources (e.g., pollution control
equipment, alternative materials, and labor) used to estimate costs must
correspond to the prices that would prevail if these factors were sold in
competitive markets.
• The discount rate employed to compute the present value of future costs
must correspond to the appropriate social discount rate.
• Emission controls do not affect the prices of goods imported to the
domestic economy.
Market Adjustments
A plant is marginal if it is among the least efficient producers in the market and,
as a result, the level of its costs determine the post-control equilibrium price. A
marginal plant can pass on to buyers the full burden of emission control costs only if
with the potential willingness of gainers to pay for benefits. See Mishan (1971).
43 These costs are often referred to as "Social Costs," as well as economic costs.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-2
-------
demand is perfectly inelastic. Otherwise, consumers will reduce quantity demanded
when faced with higher prices. If this occurs, estimated control costs will overstate the
economic costs associated with a given air quality standard.
The emission control costs estimates do not reflect any market adjustments that
are likely to occur as affected plants and their customers respond to higher post-control
production costs. As a result, the estimates of economic costs presented later in this
section will differ from the emission control costs to reflect estimates of such market
adjustments.
Markets for Emission Control Resources
Other things being the same, estimated emission control costs will overstate the
economic costs associated with an alternative air quality standard if the estimates are
based on factor prices (e.g., emission control equipment prices and wage rates) which
reflect monopoly profits earned in resource markets. Monopoly profits represent
a transfer from buyers to sellers in emission control markets, but do not reflect true
resource costs. We note that some of the available emission control technologies are
patented. To the extent that the patents confer monopoly power, the estimates of
compliance costs used in this analysis are higher than they would be if emission
controls were sold in competitive markets. If this is the case, the analysis overstates
true economic costs.
The Social Discount Rate
The estimates of annualized emission control costs presented earlier in this
report were computed by adding the annualized estimates of capital expenditures
associated with the purchase and installation of emission control equipment to
estimates of annual operating and maintenance costs. Capital expenditures were
annualized using a 7 percent discount rate. The private cost of capital is appropriate
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-3
-------
for estimating how producers adjust supply prices in response to control costs.44 In
order to estimate the economic costs associated with the alternative NESHAPs, an
appropriate measure of the social discount rate should be used in the amortization
schedule.
44 In other words, a discount rate reflecting the private cost of capital to affected firms should be used
in analyses designed to predict market adjustments associated with emission control costs. The private
cost of capital, assumed to be 10 percent in this analysis, is higher than the 7 percent social discount rate
because it reflects the greater risk faced by individual producers relative to the risk faced by society at
large.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-4
-------
There is considerable debate regarding the use of alternative discounting
procedures and discount rates to assess the economic benefits and costs associated
with public programs.45 The approach adopted here is a two-stage procedure
recommended by Kolb and Scheraga (1990).
First, annualized costs are computed by adding annualized capital expenditures
(over the expected life of emission controls) and annual operating costs. Capital
expenditures are annualized using a discount rate that reflects a risk-free marginal
return on investment.46 This discount rate, which is referred to below as the social cost
of capital, is intended to reflect the opportunity cost of resources displaced by invest-
ments in emissions controls. Kolb and Scheraga (1990) recommend a range of 5 to 10
percent for this rate. We adopt a midpoint value of 7.0 percent in this analysis.47
Second, the present value of the annualized stream of costs should be computed
using a consumption rate of interest which is taken as a proxy for the social rate of time
preference. This discount rate, which is referred to below as the social rate of time
preference, measures society's willingness to be compensated for postponing current
consumption to some future date. Kolb and Scheraga (1990) argue that the
consumption rate of interest probably lies between 1 and 5 percent. We do not,
however, present estimates of the present value of the costs associated with the
NESHAP in this report.
The resulting estimates of the present value of the economic costs associated
with the alternative NESHAPs can be compared with estimates of the present value of
corresponding benefits of the regulatory alternatives. The social rate of time
preference should be employed to discount the future stream of estimated benefits.
45 See Lind, et al. (1982) fora more detailed discussion of this debate.
46 The risk-free rate is appropriate if the NESHAP, as a program, does not add to the variance of the
return on society's investment portfolio.
47 The 7 percent discount rate is also consistent with recent OMB recommendations.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-5
-------
OTHER COSTS ASSOCIATED WITH NESHAP
It should be recognized that the estimates of costs reported later in this section
do not reflect all costs that might be associated with the NESHAP. Examples of these
include some administrative, monitoring, and enforcement costs (AME), and transition
costs.
AME costs may be borne by directly affected firms and by different government
agencies. These latter AME costs, which are likely to be incurred by state agencies
and EPA regional offices, for example, are reflected neither in the estimates of emission
control costs, nor in the estimates of economic costs. However, our estimates do
include administrative and monitoring costs incurred by affected firms.
Transition costs are also likely to be associated with the alternative standards.
Analyses described in previous sections of this report, for example, predict that some
plants will close because of emission control costs. This will cause some individuals to
suffer transition costs associated with temporary unemployment and affected firms to
incur shutdown costs. These transition costs are not reflected in the cost estimates
reported later in this section.
CHANGES IN ECONOMIC SURPLUS AS A MEASURE OF COSTS
As was noted earlier, the willingness to be compensated for foregone
consumption opportunities is taken here as the appropriate measure of the costs
associated with the alternative NESHAPs. In this case, compensating variation is an
exact measure of willingness to be compensated. In practice, however, compensating
variation is difficult to measure; consequently, the change in economic surplus
associated with the air quality standard is used as an approximation to compensating
variation.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-6
-------
The degree to which a change in economic surplus coincides with compensating
variation as a measure of willingness to be compensated depends on whether the
surplus change is measured in an input market or a final goods market. The surplus
change is an exact measure of compensating variation when it is measured in an input
market, but it is an approximation when measured in a final goods market.48
The direction of the bias in the approximation of compensating variation when the
surplus change is measured in a final goods market depends on whether affected
parties realize a welfare gain or suffer a welfare loss, but in either case, the bias is likely
to be small.49 Affected firms (and their customers) will suffer a welfare loss as the
result of the implementation of emission controls. In this case, the change in economic
surplus will exceed compensating variation, the exact measure of willingness to be
compensated.50 We note, however, that this study measures surplus changes in input
markets.
ESTIMATES OF SOCIAL COSTS
Estimates of the annualized total social costs associated with the NESHAP are
reported in Tables 7-1 and 7-2 (for a social cost of capital equal to 7.0 percent). For
the slabstock segment, estimates of total annual costs of the NESHAP are $11.86
million under the MACT Floor, $7.18 million under Regulatory Alternative 1, and $10.92
million under Regulatory Alternative 2. For the molded foam industry, estimates of total
annual costs are much smaller. They are $190 thousand under the MACT Floor, $60
thousand under Regulatory Alternative 1, and $710 thousand under Regulatory
Alternative 2.
48 See Just, Hueth, and Schmitz (1982) fora more detailed discussion.
49 See Willig (1974).
50 See Appendix B for a detailed, technical description of the methods employed to compute changes
in economic surplus.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-7
-------
We measure economic costs as net losses in economic surplus. Tables 7-1 and
7-2 show how losses in surplus are distributed among consumers, domestic producers
and society at large. The latter is referred to as "residual" surplus in the tables.
The loss in consumer surplus includes higher outlays for foam plus a dead
weight loss due to foregone consumption. As Tables 7-1 and 7-2 indicate, consumers
in each market suffer a loss in surplus. These losses are due mostly to higher
expenditures on slabstock and molded foam.
We compute the loss in producer surplus as annualized monitoring and emission
control costs incurred by plants remaining in operation plus the dead weight loss in
surplus due to reduced output less increased revenue due to higher post-control prices.
The estimated losses in producer surplus reported in Tables 7-1 and 7-2 are negative,
meaning that producers would realize a net gain in economic surplus. This occurs
because higher post-control market prices more than offset emission control costs.
Table 7-1
SLABSTOCK FOAM INDUSTRY
ESTIMATES OF ANNUALIZED ECONOMIC COSTS
Regulatory
Alternative
MACT Floor
Regulatory Alt. 1
Regulatory Alt. 2
Loss in
Consumer
Surplus
(MM$94)
39.05
37.64
65.12
Loss in
Producer
Surplus
(MM$94)
-19.03
-20.83
-37.97
Loss in
Residual
Surplus
(MM$94)
-8.16
-9.63
-16.24
Loss in
Surplus
Total
(MM$94)
11.86
7.18
10.92
SECTION 7- SOCIAL COSTS AND ECONOMIC EFFICIENCY
7-8
-------
Table 7-2
MOLDED FOAM INDUSTRY
ESTIMATES OF ANNUALIZED ECONOMIC COSTS
Regulatory
Alternative
MACT Floor
Regulatory Alt. 1
Regulatory Alt. 2
Loss in
Consumer
Surplus
(MM$94)
0.81
8.99
12.21
Loss in
Producer
Surplus
(MM$94)
-0.46
-6.56
-8.44
Loss in
Residual
Surplus
(MM$94)
-0.16
-2.38
-3.05
Loss in
Total
Surplus
(MM$94)
0.19
0.06
0.71
Surplus losses to society at large are computed as "residual" adjustments to
account for differences in private and social discount rates and transfer effects of taxes.
The estimates of changes in producer surplus reflect a 10 percent real private rate on
emission control capital costs. Recall that social costs are discounted at a 7.0 percent
real rate.51
We note that the distribution of economic costs between consumers and
domestic producers depends, in part, on the way we have constructed the post-control
supply curve. As explained earlier, we have assumed that plants with the highest
emission control costs (per unit of output) are marginal in the post-control market. This
assumption is worst case in that it results in large increases in prices (relative to an
alternative assumption that plants with high control costs are not marginal), thus shifting
the cost burden to consumers and away from plants that continue to operate in the
51
Since the loss in producer surplus measures the burden of the alternative borne by producers, we
calculate it using the private cost of capital.
SECTION 7- SOCIAL COSTS AND ECONOMIC EFFICIENCY
7-9
-------
post-control market. Any alternative construction of the post-control supply curve
would result in smaller price increases and shift a larger share of economic costs away
from consumers to domestic producers. In other words, smaller price increases would
reduce the economic rent realized by domestic producers in the post-control market.
Earlier, we explained that economic costs differ from emission control costs.
Recall that the latter are computed simply as annualized capital costs plus annual
operating and maintenance costs, assuming that all plants install controls. Table 7-3
reports estimates of annualized emission control and monitoring costs. These
estimates are higher than the economic costs reported in Tables 7-1 and 7-2. Recall
that the estimates of economic costs reflect market adjustments to higher prices, while
the estimates of emission control costs do not.
Table 7-3
ESTIMATES OF THE ANNUALIZED EMISSION CONTROL COSTS
(Millions of 1994 dollars)
Regulatory Alternative
MACT Floor
Regulatory Alternative 1
Regulatory Alternative 2
Slabstock Foam
12.14
7.53
11.46
Molded Foam
0.19
0.07
0.73
NOTE: Estimates are computed as annualized capital costs plus annual operating, monitoring and
maintenance costs, assuming all plants continue to operate after controls are installed. Capital
costs are annualized at a 7 percent discount rate.
ECONOMIC EFFICIENCY
A regulatory alternative is economically efficient if it generates larger net benefits
(benefits minus costs) than other alternatives. A dominant alternative generates the
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-10
-------
same or larger total emission reductions at a lower cost than any other alternative.
Since we presume that larger emission reductions yield higher benefits, a dominant
alternative is economically efficient relative to all other alternatives (since it produces
the same or larger benefits at a lower cost).
An inferior alternative, on the other hand, generates the same or smaller
emission reductions at a higher cost than at least one other alternative. An inferior
alternative is economically inefficient because at least one other alternative generates
higher net benefits.
We use the estimates of economic costs (reported in Tables 7-1 and 7-2) for the
efficiency analysis. Also, our estimates of emission reductions include lower emission
reductions due to controls as well as adjustments for predicted plant closures.
Specifically, we assume that emissions fall to zero at plants predicted to close.
Table 7-4 reports the results of the analysis. None of the three regulatory
alternatives is clearly dominant. However, the MACT Floor is inferior to both Alter-
native 1 and Alternative 2. The MACT Floor generates lower annual emission
reductions at a higher annual cost than either Alternative 1 or Alternative 2. Therefore,
we conclude that the MACT floor is economically inefficient relative to these two
regulatory alternatives.
Note that Alternative 2 generates larger emission reductions than Alternative 1,
but at higher costs. As a result, the information provided in Table 7-4 is not sufficient to
evaluate the economic efficiency of Alternative 2 relative to Alternative 1. Alternative 2
would be efficient relative to Alternative 1 if the additional benefits associated with
higher emission reductions (5,647 tons annually) exceed its incremental costs ($4.39
million annually).
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-11
-------
Table 7-4
ECONOMIC EFFICIENCY OF REGULATORY ALTERNATIVES
Regulatory
Alternative
MACT Floor
Regulatory Alternative
1
Regulatory Alternative
2
Annual Economic Costs
($1994MM)
12.05
7.24
11.63
Annual Emission
Reduction
(tons)
10,105
13,642
19,289
NOTE: Estimates include costs and emission reductions for both the slabstock and molded foam industry
segments.
One final comment on why this analysis is worthwhile. Some of the estimated
economic impacts associated with Alternatives 1 and 2 are more adverse than for the
MACT Floor (e.g., more closures) even though the MACT Floor gives rise to higher
social costs. This occurs because, compared with the MACT Floor, Alternatives 1 and
2 impose higher compliance costs on marginal (higher cost) plants, but more than
offsetting lower costs on non-marginal plants. Thus, while the MACT Floor is inferior,
some of its economic impacts are less severe than those for Alternatives 1 and 2. In
other words, some of the distributional impacts of the MACT floor are less severe than
those of the other regulatory alternatives.
REFERENCES
SECTION 7- SOCIAL COSTS AND ECONOMIC EFFICIENCY
7-12
-------
Just, R.E., D.L. Hueth and A. Schmitz (1982). Applied Welfare Economics and Public
Policy, Prentice Hall, Inc., Englewood Cliffs, NJ.
Kolb, J.A. and J.D. Scheraga (1990). "Discounting the Benefits and Costs of
Environmental Regulations." Journal of Policy Analysis and Management, Vol.
9, No. 3, Summer.
Lind, R.C., et_al., (1982). Discounting for Time and Risk in Energy Policy, Resources
for the Future, Inc., Washington, DC.
Mathtech (1985a). Corporate Income Taxes, Social Costs, and Distributional Impacts:
Implications for ElA's. Prepared for the Office of Air Quality Planning and Stan-
dards, U.S. Environmental Protection Agency.
Mathtech (1985b). Estimated Control Costs and Social Costs: Implications of
Investment Tax Credits for ElA's. Prepared for the Office of Air Quality Planning
and Standards, U.S. Environmental Protection Agency.
Mishan, E.J. (1971). Cost-Benefit Analysis, Praeger Publishers, Inc., New York.
Willig, R.D. (1976). "Consumer Surplus Without Apology," American Economic
Review, 66, No. 4, September, 589-97.
SECTION 7 - SOCIAL COSTS AND ECONOMIC EFFICIENCY 7-13
-------
APPENDIX A
AFFECTED PLANTS AND EMISSION CONTROL COSTS
This appendix describes the model plants and the estimates of emission control
and monitoring costs used in this study.
AFFECTED PLANTS
The model plants used in the analyses are characterized by product type (either
molded or slabstock foam) and production quantity. Tables A-1 and A-2 describe the
model plants used in the molded and slabstock sector analyses.
Table A-1
MOLDED FOAM MODEL PLANT BASELINE PARAMETERS
Foam production range (tons/yr)
Average foam production (tons/yr)
Number of facilities represented
Model plant emissions (tons/yr)
HP1
0-15,000
3,331
27
2.09
LP1
0-99
26
109
5.29
LP2
100-499
308
54
19.81
LP3
>499
2,718
44
28.66
Source: EC/R Incorporated (1996a).
Table A-2
SLABSTOCK FOAM MODEL PLANT BASELINE PARAMETERS
MP1
MP2
MP3
MP4
MP5
SECTION 7- SOCIAL COSTS AND ECONOMIC EFFICIENCY
7-14
-------
Foam production range (tons/yr)
Average foam production (tons/yr)
Number of facilities represented
Model plant (a) emissions (tons/yr)
Model plant (b) emissions (tons/yr)
0-3.9
2,000
19
64.19
59.19
4.0-7.
9
6,000
28
174.16
169.16
8.0-11.9
10,000
14
339.42
334.42
12.0-15.9
13,750
11
343.93
338.93
>15.9
19,000
6
388.53
383.53
Source: EC/R Incorporated (1996a).
MOLDED FOAM
There are four molded foam production model plants. One of these model
plants represents larger molded foam facilities using high-pressure mixheads (HP1),
primarily to produce automobile seats. The remaining three model plants represent
smaller producers that use low-pressure mixheads (LP1, LP2, LP3) to produce a variety
of foam products. Model plant impacts and compliance control costs were developed
for a number of technologies to bring the following source types into compliance:
• mixhead flushing,
• mold release agents,
• repair adhesive.
Emission Control Costs
Model plant impacts were developed for four technologies to reduce or eliminate
mixhead flushing emissions: work practices for Regulatory Alternative 1; and non-HAP
flushes, high pressure mixheads, and self-cleaning mixheads for Regulatory Alternative
2. Table A-3 presents a summary of the model plant costs and emission reductions for
mixhead flushing compliance.
For all regulatory alternatives, the level of control for mold release agents is the
prohibition of the use of HAP-based mold release agents, resulting in a 100 percent
emission reduction. Model plant impacts were developed for three technologies that
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-2
-------
can achieve this level: reduced volatile organic compound (VOC) mold release agents,
naphtha-based mold release agents, and water-based mold release agents. A
summary of mold release agent model plant impacts is contained in Table A-4.
Table A-3
MOLDED FOAM MODEL PLANT IMPACTS FOR TECHNOLOGIES
TO REDUCE MIXHEAD FLUSHING HAP EMISSIONS
Technology
Non-HAP Flush
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
High-Pressure Mixhead
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Self-Cleaning Mixhead
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Solvent Recovery System
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
HP1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
LP1
0
(920)
5.14
a
658,125
163,815
5.14
31,871
225,688
34,938
5.14
6,797
47,250
23,412
3.86
6,073
LP2
0
(3,823)
19.69
a
658,125
146,107
19.69
7,420
225,688
17,231
19.69
875
47,250
10,131
14.77
686
LP3
0
(8,065)
21.31
a
658,125
112,535
21.31
5,281
225,688
(16,341)
21.31
a
47,250
(15,048)
15.98
a
$are 1994 dollars.
aCost effectiveness not calculated because net annualized cost is a negative quantity (cost savings).
Sources: EC/R Incorporated (1996a and 1996b).
For all regulatory alternatives, the level of control for repair adhesives is also the
prohibition of the use HAP-based adhesives, resulting in a 100 percent emission
reduction. Model plant impacts were developed for three technologies that can achieve
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-3
-------
this level: hot-melt adhesives, water-based adhesives, and hydrofuse adhesives. Table
A-5 provides a summary of repair adhesive model plant impacts.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-4
-------
Table A-4
MOLDED FOAM MODEL PLANT IMPACTS FOR TECHNOLOGIES
TO REDUCE MOLD RELEASE AGENT HAP EMISSIONS
Technology
Reduced-VOC Agent
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Naphtha-Based Agent
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Water-Based Agent
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
HP1
0
0
0
0
0
0
0
0
0
0
0
0
LP1
0
50
0.15
337
05
375
0.15
2,500
0
48
0.15
323
LP2
0
39
0.12
328
0
293
0.12
2,439
0
38
0.12
315
LP3
0
1,023
6.00
171
0
7,599
6.00
1,267
0
981
6.00
163
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
In calculating nationwide regulatory impacts, only major sources of HAP will be
subject to the Foam Production NESHAP. Since the high-pressure molded model plant
and the smallest low-pressure molded model plant have emissions below the major
source thresholds, it was assumed that the facilities represented by these model plants
would not be affected by the NESHAP. Therefore, nationwide regulatory alternative
impacts are based on the costs and emission reductions associated with the production
facilities represented by model plants LP2 and LP3.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-5
-------
Table A-5
MOLDED FOAM MODEL PLANT IMPACTS FOR TECHNOLOGIES
TO REDUCE HAP EMISSIONS FROM THE USE OF FOAM ADHESIVES
Technology
Hot-Melt Adhesive
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Hydrofuse Adhesive
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Water-Based Adhesive
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
HP1
6,804
6,377
2.09
3,047
5,670
738
2.09
353
0
(854)
2.09
a
LP1
0
0
0
0
0
0
0
0
0
0
0
0
LP2
0
0
0
0
0
0
0
0
0
0
0
0
LP3
6,804
1,869
1.35
1,384
5,670
1,001
1.35
5,281
0
(97)
1.35
a
$are 1994 dollars.
aCost effectiveness not calculated because net annualized cost is a negative quantity (cost savings).
Sources: EC/R Incorporated (1996a and 1996b).
For affected model plants, a compliance technology (corresponding to the above
tables) is assigned to each source type. Table A-6 gives the distribution of
technologies to model plants and source types used to estimate the molded foam
nationwide regulatory alternative costs. Since different technologies (with different
costs) can bring a source type into compliance, nationwide impacts are dependent upon
the compliance technology chosen by the plant.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-6
-------
Table A-6
DISTRIBUTION OF TECHNOLOGIES USED TO ESTIMATE
THE MOLDED FOAM NATIONWIDE REGULATORY
ALTERNATIVE COSTS BY MODEL PLANT
Emission Source/Technology
Mixhead Flush
Reg Alt 1
Solvent recovery
Reg Alt II
Non-HAP flush
HP mixheads
Mold Release Agents
All Regulatory Alternatives
Reduced VOC agents
Naphtha-based agents
Water- based agents
Repair Adhesives
All Regulatory Alternatives
Hot-melt adhesives
Water- based adhesives
Number of Facilities with the Assigned Technology
LP2
54
54
0
18
18
18
N/A
N/A
LP3
44
35
9
15
14
15
22
22
Sources: EC/R Incorporated (1996a and 1996b).
While Table A-6 shows the assumed distributions of control technologies adopted
by model plants for each emission source separately, it does not give the distribution for
combinations of control technologies. For example, under Alternative 2, 35 of 44 LP3
type model plants are assumed to adopt non-HAP flush to control mixhead flush and 15
to adopt reduced VOC agents to control mold release agents. However, Table A-6
does not show how many LP3 plants adopt non-HAP flush and reduced VOC agents.
For the economic impact analysis, we assume that model plants adopt combinations of
control technologies consistent with the proportions shown in Table A-6. For example,
we assume that 34 percent (15 of 44) of the 35 plants using non-HAP flush also use
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-7
-------
reduced VOC agents. We note, however, that the estimated impacts presented in this
report are not sensitive to assumptions about the distribution of combinations of control
technologies as long as some plants adopt the most costly combinations. The
economic impacts are driven by the level of control costs facing the highest cost
producers, and not the number of high cost producers.
Table A-7
SLABSTOCK FOAM MODEL PLANT COSTS
FOR STORAGE/UNLOADING
Regulatory Alternative 1 and
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 2
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
MP1
8,220
1,673
0.083
20,218
4,110
873
0.000095
9,186,710
MP2
12,330
1,756
0.247
9,700
8,220
1,740
0.000475
3,673,295
MP3
4,110
438
0.494
887
N/A
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
SLABSTOCK FOAM MODEL PLANTS
There are five basic model plants for slabstock foam, each representing a range
of production. Each basic model plant is separated into facilities that use MeCI2 as an
equipment cleaner, and facilities that do not (e.g. MP1a uses MeCb as an equipment
cleaner and MP1 b does not). Model plant impacts and compliance control costs were
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-8
-------
developed for a number of technologies to bring the following source types into
compliance:
• storage/unloading,
• equipment cleaning,
• equipment leaks,
• HAP auxiliary blowing agent (ABA) emissions.
The MACT floor level of control for storage and unloading of both TDI and HAP
ABA is an equipment standard that requires either a vapor balance system to return the
displaced HAP vapors to the tank truck or rail car, or a carbon canister through which
emissions must be routed prior to being emitted to the atmosphere. The subsequent
regulatory alternatives do not contain more stringent requirements. The model plant
impacts are based on the installation of vapor balance. The slabstock foam production
model plant costs for storage/unloading emission control are provided in Table A-7.
There are no costs for model plants 4 and 5 because all TDI and MeCb storage tanks at
these model plants are assumed to be controlled at baseline.
The MACT floor level of control for equipment cleaning is the complete
elimination of HAP emissions. The subsequent regulatory alternatives do not contain
more stringent requirements. Model plant costs were developed for the use of
non-HAP equipment cleaners. These costs are shown in Table A-8. The amount of
MeCb used to clean the equipment is consistent for all model plants. Therefore, the
impacts shown in Table A-8 are applicable for all model plants.
The MACT floor level of control for equipment leaks was determined to be
sealless pumps for TDI transfer pumps. The first regulatory alternative adds a unique
LDAR program for HAP ABA components. Since Regulatory Alternative 2 does not
allow the emission of any HAP ABA (which, in effect, prohibits the use of MeCb or any
other HAP as an ABA), this alternative only contains the MACT floor requirement for
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-9
-------
TDI pumps. Table A-9 shows model plant MACT floor level impacts. Table A-10
shows model plant Regulatory Alternative 1 impacts.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-10
-------
Table A-8
SLABSTOCK FOAM MODEL PLANT COSTS FOR EQUIPMENT CLEANING
EQUIPMENT CLEANING IMPACTS FOR
ALL REGULATORY SCENARIOS FOR ALL MODEL PLANTS
Capital Cost
Annual Cost
Emission Reduction
Cost Effectiveness
$0
($275)
5.0 tons/yr
N/A
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
Table A-9
MACT FLOOR SLABSTOCK FOAM MODEL PLANT EQUIPMENT LEAK IMPACTS
Model
Plant
1
2,3,4,5
Capital
Cost
($1994)
5,000
N.A.
Annual
Cost
($/yr)
932
N.A.
Emission
Reduction
(ton/yr)
0.33
N.A.
Cost Effectiveness
($/ton)
2,800
N.A.
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
Table A-10
ALTERNATIVE 1 SLABSTOCK FOAM MODEL PLANT EQUIPMENT LEAK IMPACTS
Model
Plant
1
2
3
4
5
Capital
Cost
($1994)
12,544
7,544
7,544
7,544
7,431
Annual
Cost
($/yr)
7,245
5,980
5,980
5,980
5,810
Emission
Reduction
(ton/yr)
1.2
1.0
1.0
1.0
0.8
Cost Effectiveness
($/ton)
6,038
5,980
5,980
5,980
7,263
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-11
-------
Source: EC/R Incorporated (1996c).
There are three levels of control for HAP ABA emissions. The MACT Floor and
Regulatory Alternative 1 have emission limits based on formulation limitations.
Applying the two sets of formulation limitations to the product mix of the model plants
results in the emission reductions shown in Table A-11. The second regulatory
alternative requires the complete elimination of HAP ABA emissions.
Table A-11
MODEL PLANT HAP ABA
REGULATORY ALTERNATIVE EMISSION REDUCTIONS
Model
Plant
Baseline HAP ABA
Emissions (tons/yr)
1
2
3
4
5
55.0
165.0
330.0
335.0
380.0
HAP ABA Emission Reduction
(tons/yr)
MACT Floor
31.3
93.8
184.0
195.9
220.4
Reg Alt 1
35.9
111.7
220.7
235.7
266.0
Reg Alt 2
55.0
165.0
330.0
335.0
380.0
Sources: EC/R Incorporated (1996a, 1996b, and 1996d).
For each level of control, model plant impacts were developed for several
technologies. While there are numerous technologies available to reduce HAP ABA
emissions, the effectiveness of individual technologies is widely disputed within the
foam industry. Therefore, the engineering contractor made assumptions, based on
their knowledge of the industry, regarding the technologies that could be used to meet
each of the three HAP ABA levels of control. Table A-12 shows the technologies
assumed for each regulatory alternative level.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-12
-------
TableA-12
TECHNOLOGIES CAPABLE OF ACHIEVING HAP ABA
REGULATORY ALTERNATIVE LEVELS
Regulatory Alternative
MACT Floor Level
Regulatory Alternative 1
Regulatory Alternative 2
Technology
Chemical alternatives
Carbon dioxide as an ABA
Acetone as an ABA
Variable pressure foaming
Forced cooling
Carbon dioxide as an ABA
Acetone as an ABA
Variable pressure foaming
Forced cooling
Carbon dioxide plus chemical
alternatives
Acetone as an ABA
Variable pressure foaming
Forced cooling plus chemical
alternatives
Source: EC/R Incorporated (1996a).
As can be seen in Table A-12, some technologies can be used to meet more
than one level of control. In these cases, it was assumed that the technologies would
only be used to the degree necessary to meet the level of the regulatory alternative. In
other words, although variable pressure foaming can be used to totally eliminate the use
of HAP ABA, it was assumed that at the MACT floor level, the amount of MeCb allowed
would still be used and emitted. Tables A-13 through A-17 provide model plant costs
associated with the compliance technologies found in Table A-12.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-13
-------
TableA-13
SLABSTOCK FOAM MODEL PLANT COSTS FOR
CHEMICAL ALTERNATIVES HAP ABA EMISSION REDUCTION
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction (tons/yr)
Cost Effectiveness ($/ton)
Model Plant Costs
MP1
31,725
54,523
31.3
1,742
MP2
31,725
151,713
93.8
1,617
MP3
31,725
274,276
184.0
1,491
MP4
31,725
335,202
195.9
1,711
MP5
31,725
378,997
220.4
1,720
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
TableA-14
SLABSTOCK FOAM MODEL PLANT COSTS FOR
CARDIO HAP ABA EMISSION REDUCTION
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 2 -
CarDio plus Chemical
Alternatives
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Model Plant Costs
MP1
31,725
54,523
31.3
1,742
429,300
66,354
37.9
1,751
461,025
84,163
55
1,530
MP2
31,725
151,713
93.8
1,617
429,300
23,254
113.7
204
461,025
27,660
165
168
MP3
31,725
274,276
184.0
1,491
429,300
(42,403)
222.7
a
461,025
(29,666)
330
a
MP4
31,725
335,202
195.9
1,711
429,300
(38,631)
237.7
a
461,025
17,561
335
52
MP5
31,725
378,997
220.4
1,720
429,300
(43,559)
268.0
a
461,025
16,227
380
43
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-14
-------
$are 1994 dollars.
a. Cost effectiveness not calculated because net annualized cost is a negative quantity (cost savings).
Sources: EC/R Incorporated (1996a and 1996b).
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-15
-------
TableA-15
SLABSTOCK FOAM MODEL PLANT COSTS FOR
ACETONE ABA EMISSION REDUCTION
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 2
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Model Plant Costs
MP1
194,000
35,121
31.3
1,122
194,000
32,455
37.9
856
194,000
25,306
55
460
MP2
31,725
151,713
93.8
1,617
429,300
23,254
113.7
204
194,000
(22,633)
165
a
MP3
31,725
274,276
184.0
1,491
429,300
(42,403)
222.7
a
194,000
(99,520)
330
a
MP4
31,725
335,202
195.9
1,711
429,300
(38,631)
237.7
a
194,000
(101,750)
335
a
MP5
31,725
378,997
220.4
1,720
429,300
(43,559)
268.0
a
194,000
(121,840)
380
a
$are 1994 dollars.
a. Cost effectiveness not calculated because net annualized cost is a negative quantity (cost savings).
Sources: EC/R Incorporated (1996a and 1996b).
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-16
-------
TableA-16
SLABSTOCK FOAM MODEL PLANT COSTS FOR
VARIABLE PRESSURE FOAMING HAP ABA EMISSION REDUCTION
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 2
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Model Plant Costs
MP1
4,500,000
774,400
31.3
24,741
4,500,000
769,120
37.9
20,293
4,500,000
755,440
55
13,735
MP2
4,500,000
724,400
93.8
7,723
4,500,000
708,480
113.7
6,231
4,500,000
667,486
165
4,047
MP3
4,500,000
652,240
184.0
3,545
4,500,000
621,280
222.7
2,790
4,500,000
535,531
330
1,623
MP4
4,500,000
642,720
195.9
3,281
4,500,000
609,280
237.7
2,563
4,500,000
531,546
335
1,587
MP5
4,500,000
623,120
220.4
2,827
4,500,000
585,040
268.0
2,183
4,500,000
495,679
380
1,305
$are 1994 dollars.
Sources: EC/R Incorporated (1996a and 1996b).
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-17
-------
TableA-17
SLABSTOCK FOAM MODEL PLANT COSTS FOR
FORCED COOLING HAP ABA EMISSION REDUCTION
MACT Floor
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 1
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Regulatory Alternative 2
Forced Cooling plus
Chemical Alternatives
Capital Investment ($)
Annual Cost ($/yr)
Emission Reduction
(tons/yr)
Cost Effectiveness ($/ton)
Model Plant Costs
MP1
1,000,000
162,500
31.3
5,192
1,000,000
157,220
37.9
4,148
1,031,725
167,441
55
3,044
MP2
2,000,000
305,180
93.8
3,254
2,000,000
289,260
113.7
2,544
2,031,725
308,350
165
1,869
MP3
2,000,000
243,300
184.0
1,322
2,000,000
212,340
222.7
953
2,031,725
227,636
330
690
MP4
2,000,000
243,418
195.9
1,243
2,000,000
209,978
237.7
883
2,031,725
217,033
335
648
MP5
2,000,000
237,310
220.4
1,076
2,000,000
199,230
268.0
743
2,031,725
207,189
380
545
$are 1994 dollars.
Sources: EC/R Incorporated (1996a, 1996b and 1996c).
Table A-18 shows the distribution of ABA emission reduction technologies used
to estimate slabstock foam nationwide regulatory alternative costs by model plant.
Note, Appendix D contains sensitivity analyses of regulatory impacts when technology
combination assumptions are modified.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-18
-------
TableA-18
DISTRIBUTION OF ABA EMISSION REDUCTION TECHNOLOGIES
USED TO ESTIMATE THE SLABSTOCK FOAM NATIONWIDE
REGULATORY ALTERNATIVE COSTS BY MODEL PLANT
Technology
MACT Floor
CarDio
Acetone
VPF
Forced Cooling
Chem Alts
Reg Alt I
CarDio
Acetone
VPF
Forced Cooling
Reg Alt II
CarDio + Chem Alts
Acetone
VPF
Forced Cooling + Chem
Alts
Number of Facilities Using the Technology
MP1
4
1
0
2
12
13
3
0
3
10
3
0
6
MP2
9
1
0
4
14
18
4
0
6
15
3
1
9
MP3
4
1
0
3
6
6
3
0
5
5
2
1
6
MP4
4
1
0
3
3
5
2
0
4
3
2
2
4
MP5
1
0
2
2
1
1
1
2
2
1
1
2
2
Sources: EC/R Incorporated (1996a and 1996b).
MONITORING COSTS
In addition to the emission control costs described earlier in this appendix the
estimated economic impacts presented in this report include the effects of monitoring,
inspection, recordkeeping and reporting costs (MIRR) at affected plants. Total annual
MIRR costs are estimated for each industry segment as 10 percent of nationwide
annual emission control costs. Annual MIRR costs per plant are estimated as
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS
A-19
-------
nationwide MIRR costs for the industry segment divided by the number of affected
plants in the industry segment.52
REFERENCES
EC/R Incorporated (1996a). Technical memorandum from Phil Norwood and Amanda
Williams to David Svendsgaard (EPA/OAPQS), January 26.
EC/R Incorporated (1996b). Technical memorandum from Phil Norwood to Jeffrey
Sassin (Mathtech), February 18.
EC/R Incorporated (1996c). Technical memorandum from Phil Norwood to David
Svensgaard and Lisa Conner (EPA/OAQPS), March 26.
EC/R Incorporated (1996d). Technical memorandum from Phil Norwood to Jeffrey
Sassin (Mathtech), June 6.
52
EC/R Incorporated (1996d).
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-20
-------
APPENDIX B
TECHNICAL DESCRIPTION OF ANALYTICAL METHODS
This technical appendix provides detailed descriptions of the analytical methods
employed to conduct the following analyses:
• Partial equilibrium analysis (i.e., computing post-control price, output and
trade impacts).
• Estimating changes in economic surplus.
• Labor and energy impacts.
• Capital availability.
We also present the baseline values used in the partial equilibrium analysis.
PARTIAL EQUILIBRIUM ANALYSIS
The partial equilibrium analysis requires the completion of four tasks. These
tasks are:
• Specify market demand and supply.
• Estimate the post-control shift in market supply.
• Compute the impact on market quantity.
• Compute the impact on market price.
• Predict plant closures.
APPENDIX A: AFFECTED PLANTS AND EMISSION CONTROL COSTS A-21
-------
The following description of the partial equilibrium model is fully general in that it
includes a foreign sector. Recall, however, that trade in flexible foam is negligible.
Accordingly, we set foreign supply (net imports) at zero for this study.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS 6-2
-------
Market Demand and Supply
Baseline or pre-control equilibrium in a market is given by:
Qd = aPE (B.1)
Qd = pPy (B.2)
Q* = pPy (B.3)
Qd = Qd + Q* = Q (B.4)
where, Q = output;
P = price;
e = demand elasticity;
y = supply elasticity;
a, p and p are constants;
Subscripts d and s reference demand and supply, respectively; and,
Superscripts d and f reference domestic and foreign supply, respectively.
The constants a, p and p are computed such that the baseline equilibrium price is
normalized to one. Note that the market specification above assumes that domestic
and foreign supply elasticities are the same.
Market Supply Shifts
Supply price for a model plant will increase by an amount just sufficient to equate
the net present value of the investment and operation of the control equipment to zero.
Specifically,
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS 6-3
-------
[ (OQ) - (V+D) ] (l-t)+D _
o O — .K
where C is the change in the supply price;
Q is output;
V is a measure of annual operating and maintenance control costs.
t is the marginal corporate income tax rate;
S is the capital recovery factor;
D is annual depreciation (we assume straight-line depreciation);
k is the investment cost of emissions controls.
kS-D V+D
C = Q(l-t) + Q
Solving for C yields the following expression:
Estimates of k and V were obtained from EPA (1991). The variables, D, I, and S
are computed as follows:
D = k/T (B.7)
and
S = r(1+r)T/((1+r)T-1) (B.8)
where r is the discount rate or cost of capital faced by producers;
T is the life of emission control equipment.
Solving for P in Equation (B.2) yields the following expression for the baseline
inverse market supply function for domestic producers.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-4
-------
P = (Qd/p)1/y (B.9)
Emission control costs will raise the supply price of the ith model plant by C\ (as
computed in Equation (B.6)). The aggregate domestic market supply curve, however,
does not identify the supply price for individual plants. Accordingly, we adopt the
worst-case assumption that model plants with the highest after-tax per unit control costs
are marginal in the post-control market. Specifically, we write the post-control supply
function as
P = (Qd/p)1/Y+C(Ci,qi) (B.10)
where q\ is the total output of all model plants of type i.
The function C(Ci,qi) shifts segments of the pre-control domestic supply curve
vertically by Cj. The width or horizontal distance of each segment is qj. The resulting
segmented post-control domestic supply curve is illustrated in Figure B-1 as 82,
compared with pre-control supply Si.53
53 The supply curves in Figure B-1 are drawn as linear functions for ease of exposition. Because the
supply curves are specified as Cobb-Douglas, they are log-linear.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS 6-5
-------
Impact on Market Price and Quantity
The impacts of the alternative standards on market output are estimated by
solving for post-control market equilibrium and then comparing that output level, Q2, to
the pre-control output level, Qi. Because post-control domestic supply is segmented, a
special iterative algorithm was developed to solve for post-control market equilibrium.
The algorithm first searches for the segment in the post-control supply function at which
equilibrium occurs and then solves for the post-control market price that clears the
market.
Since the market clearing price occurs where demand equals post-control
domestic supply plus foreign supply, the algorithm simultaneously solves for the
following post-control variables.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS
6-6
-------
• Equilibrium market price.
• Equilibrium market quantity.
We assess the market impacts of control costs by comparing baseline values to
post-control values for each of the variables listed above.
We also report the change in the dollar value of shipments by domestic
producers. This value, AVS, is given by
AVS = P2«Qs - P Q*
^ r-J -L H
where PI and P2 are, respectively, pre- and post-control market equilibrium prices.
Plant Closures
We predict that any plant will close if its post-control supply price is higher than
the post-control equilibrium price. Post-control supply prices are computed by Equation
(B.10). We round fractions of plant closures to the nearest integer.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS 6-7
-------
CHANGES IN ECONOMIC SURPLUS
The shift in market equilibrium will have impacts on the economic welfare of three
groups:
• Consumers.
• Producers.
• Society at large.
The procedure for estimating the welfare change for each group is presented below.
The total change in economic surplus, which is taken as an approximation to economic
costs, is computed as the sum of the surplus changes for the three groups.
Change in Consumer Surplus
Consumers will bear a dead weight loss associated with the reduction in output.
This loss represents the amount over the pre-control price that consumers would have
been willing to pay for the eliminated output. This surplus change is given by:
i
x (Q/a)1/E dQ - P± • (Q±-Q2
In addition, consumers will have to pay a higher price for post-control output.
This surplus change is given by:
(P2-Pi)-Q2
The total impact on consumer surplus, ACS, is given by (B.12) plus (B.13).
Specifically,
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS 6-8
-------
ACS = Jx (Q/a)1/E dQ - P. Q. + P9Q9
Q
This change, ACS, includes losses of surplus incurred by foreign consumers. In
this report we are only concerned with domestic surplus changes. We have no method
for identifying the marginal consumer as foreign or domestic.
To estimate the change in domestic consumer surplus we assume that total
consumer surplus is split between foreign and domestic consumers in the same
proportion that sales are split between foreign and domestic consumers in the
pre-control market. That is, the change in domestic consumer surplus, ACSd, is:
ACS
While ACS is a measure of the consumer surplus change from the perspective of
the world economy, ACSd represents the consumer surplus change from the
perspective of the domestic economy.
Change in Producer Surplus
To examine the effect on producers, output can be divided into two components:
• Output eliminated as a result of controls.
• Remaining output of controlled plants.
The total change in producer surplus is given by the sum of the two components.
Note that post-tax measures of surplus changes are required to estimate the
impacts of controls on producers' welfare. The post-tax surplus change is computed by
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-9
-------
multiplying the pre-tax surplus change by a factor of (1-t) where t is the marginal tax
rate. As a result, every one dollar of post-tax loss in producer surplus will be
associated with a complimentary loss of t/(1-t) dollars in tax revenues.
Output eliminated as a result of control costs causes producers to suffer a
dead-weight loss in surplus analogous to the dead-weight loss in consumer surplus.
The post-tax dead-weight loss is given by:
-J
1^ dQ
'1-t'
L -L. "— J
Plants remaining in operation after controls realize a welfare gain of P2 - PI on
each unit of output, but incur a per unit welfare loss of Cj. Thus, the post-tax loss in
producer surplus for m model plant types remaining in the market is
(P1-P2)QS
I
(1-t)
The total post-tax change in producer surplus, APS, is given by the sum of (B.16)
and (B. 17). Specifically,
APS =
dQ +
(1-t)
Recall that we are interested only in domestic surplus changes. For this reason
we do not include the welfare gain experienced by foreign producers due to higher
prices. This procedure treats higher prices paid for imports as a dead-weight loss in
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS
B-10
-------
consumer surplus. Higher prices paid to foreign producers represent a transfer from
the perspective of the world economy, but a welfare loss from the perspective of the
domestic economy.
Residual Effect on Society
The changes in economic surplus, as measured above, must be adjusted to
account for two effects which cannot be attributed specifically to consumers and
producers. These two effects are caused by tax impacts and differences between
private and social discounts rates.
Two adjustments for tax impacts are required. First, per unit control costs C\,
which are required to predict post-control market equilibrium, reflect after-tax control
costs. The true resource costs of emissions controls, however, must be measured on
a pre-tax basis. For example, if after-tax control costs exceed pre-tax control costs, C\
overstates the true resource costs of controlling emissions.
A second tax-related adjustment is required because changes in producer
surplus have been reduced by a factor of (1-t) to reflect the after-tax welfare impacts of
emissions control costs on affected plants. As was noted earlier, a one dollar loss in
pre-tax producer surplus imposes an after-tax burden on the affected plant of (1-t)
dollars. In turn, a one dollar loss in after-tax producer surplus causes a complimentary
loss of t/(1-t) dollars in tax revenues.
A second adjustment is required because of the difference between private and
social discount rates. The rate used to shift the supply curve reflects the private
discount rate (or the marginal cost of capital to affected firms). This rate must be used
to predict the market impacts associated with emission controls. The economic costs
of the NESHAP, however, must be computed at a rate reflecting the social cost of
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-11
-------
capital. This rate is intended to reflect the social opportunity cost of resources
displaced by investments in emission controls.54
The adjustment for the two tax effects and the social cost of capital, which we
refer to as the residual change in surplus, ARS, is given by:
m
ARS = -I (Ci-pci)qi + APS«[t/(l-t)]
where pq = per unit cost of controls for model plant type i, computed as in (B.5)
with t=0 and r=social cost of capital.
The first term on the right-hand-side of (B.20) adjusts for the difference between
pre- and post-tax differences in emission control costs and for the difference between
private and social discount rates. Note that these adjustments are required only on
post-control output. The second term on the right-hand-side of (B.19) is the
complimentary transfer of the sum of all post-tax producer surplus.
Total Economic Costs
The total economic costs, EC, is given by the sum of changes in consumer and
producer surplus plus the change in residual surplus. Specifically,
EC = ACSd + APS + ARS (B.20)
LABOR AND ENERGY IMPACTS
54 See Section 7 for a more detailed discussion of this issue.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-12
-------
Our estimates of the labor and energy impacts associated with the alternative
standards are based on input-output ratios and estimated changes in domestic
production.
Labor Impacts
Labor impacts, measured as the number of jobs lost due to domestic output
reductions, are computed as:
AL =
2000
where AL is the change in employment, U is the production worker hours per dollar of
output, and all else is as previously defined. The number 2000 is used to translate
production worker hours into jobs (i.e., we assume a 2000 hour work year).
Energy Impacts
We measure the energy impacts associated with the alternative standards as the
reduction in expenditures on energy inputs due to output reductions. The method we
employ is similar to the procedure described above for computing labor impacts.
Specifically,
AE = EP Q -<
II
where AE is the change in expenditures on energy inputs, E! is the baseline
expenditure on energy input per dollar output and all else is as previously defined.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-13
-------
BASELINE INPUTS
The partial equilibrium model described above requires, as inputs, data on the
characteristics of affected plants and baseline values for variables and parameters that
characterize each market. The characteristics of affected plants have been described
earlier in Appendix A. These include the number of plants by model type and a
measure of output for each model plant. Appendix A also reports estimates of capital
and annual emission control costs.
Table B-1 reports the baseline values of variables and parameters for each market
segment. The baseline prices of slabstock foam are taken from Table 3-5, converted to
a weight measure using the average of the densities in the table, and adjusted to 1994
dollars using the GDP implicit deflator. The molded foam price is given at $2.35 per
pound in current dollars and adjusted to 1994 dollars using the GDP implicit deflator.
Baseline domestic output in each market is computed as the sum of production at all
domestic plants (see Appendix A for production rates at slabstock and molded foam
plants).
The demand and supply elasticities in Table B-1 are assumed values used in the
base case analysis reported in the text of this report. We assess the sensitivity of the
estimated impacts to demand elasticity by reporting in Appendix D results based on "low"
and "high" estimates.
We use a marginal tax rate of 25 percent to assess the impacts of emission
controls. We adopt a 10 percent private discount rate (real marginal cost of capital) and
a 7.0 percent social discount rate. The expected life of emission control equipment is 10
years.
Finally, the values for labor hours per unit of output (l_i) and energy use per unit of
output (Ei) are computed from the data reported in Tables 3-14, 3-15 and 3-16 and
adjusted to 1994 dollars using the GDP implicit deflator. Recall that these data are avail-
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-14
-------
able at the 4-digit SIC code level. Both slabstock and molded foam products are
included in SIC code 3086. For this reason, U and EI are the same in both market
segments.
CAPITAL AVAILABILITY ANALYSIS
Pre- and post-control values of the following financial measures are compared in
the capital availability analyses:
• Net income/assets.
• Long-term debt/long-term debt plus equity.
Pre-Control Financial Measures
Pre-control measures of net income and net income/assets are computed by
averaging data for the period 1991 through 1993 where these data are available. The
long-term debt ratio is computed from 1993 data, or the most recent year available.
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-15
-------
Table B-1
BASELINE INPUTS
Variable/Parameter
Price (P0a
d .
Domestic Output (Qs )
Supply Elasticity (e)
Demand Elasticity (y)
Tax Rate (t)
Private Discount Rate (r)
Social Discount Rate
Equipment Life (T)c
Labor (L0d
Energy (E^6
MARKET
Slabstock
$2,812
611,250
10.0
-0.5
0.25
0.1
0.07
10
.01025
0.022
Molded
$4,700
228,995
10.0
-0.5
0.25
0.1
0.07
10
.01025
0.022
Notes: a Dollars (1992) per kilogram (wet weight).
b Tons per year.
c Years.
d Production worker hours per dollar of output.
e Energy expenditure per dollar of output.
Then, pre-control values are estimated by:
i) n =
1993
Z ni/4
1=1991
(B.23)
ii) r
iii) I
where n
1=1991
Il993/(ll993 + 61993)
average net income
(B.24)
(B.25)
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS
B-16
-------
rij = net income in year i
r = average return on assets
a\ = assets in year i
I = long-term debt ratio
I1993 = long-term debt in 1993
61993 = equity in 1993
Post-Control Values
To determine the impact of controls, an estimate of the cost of controls is made.
In order to get an idea of the steady-state cost, an annualized cost is used. The
annualized cost, AC, for a plant is:
AC = V + kS (B.26)
where the variables are as defined previously.
However, affected firms will realize an increase in revenue, AR, because of higher
post-control prices. We compute this value as
AR = (P2-Pi)-q (B.27)
where P2 - PI is the price change and q is the firm's output.
Annualized costs and capital costs are estimated for each model plant type. For
each establishment, post-control measures are given by:
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-17
-------
1993 ni+AR-AC
pn = Z ——7
1=1991
1993 (n.-AR-AC)/(a.+k)
1 1
z
1=1991
_
P "
Il993+ei993+k
where pn = post-control average net income
AC = annualized cost for the company
pr = post-control return on assets
k = capital cost for the company
pi = post-control long-term debt ratio
APPENDIX B: TECHNICAL DESCRIPTION OF ANALYTICAL METHODS B-18
-------
APPENDIX C
SENSITIVITY ANALYSES:
DEMAND AND SUPPLY ELASTICITIES
INTRODUCTION
This appendix presents the results of sensitivity analyses that explore the degree
to which the results presented earlier in this report are sensitive to estimates of demand
and supply elasticities.
SUPPLY AND DEMAND ELASTICITY
The "base case" results presented earlier in this report are based on a demand
elasticity of -0.5 and a supply elasticity of 10.0 for both molded and slabstock foam.
Below, we report results for "low" and "high" elasticity cases. These alternative cases
use the following elasticities values:
•Low demand elasticity: -0.25 for molded and slabstock foam.
•Low supply elasticity: 5.00 for molded and slabstock foam.
•High demand elasticity: -1.00 for molded and slabstock foam.
•High supply elasticity: 50.00 for molded and slabstock foam.
The greater the elasticity of demand and supply (in absolute value), the greater the
change in market clearing quantity in response to a given change in price. Therefore,
we expect that when we use higher demand and supply elasticities in the partial e-
quilibrium analysis, the reduction in market output will be greater than in the base case.
APPENDIX C: SENSITIVITY ANALYSES: DEMAND AND SUPPLY ELASTICITIES C-1
-------
Similarly, when we use lower elasticities, we expect the change in market quantity to be
smaller, relative to the base case.
Tables C-1 through C-4 present estimates of the primary economic impacts
associated with the alternative forms of the NESHAP for the molded and slabstock
industry segments in the case of low and high elasticities. Tables C-1 and C-2 report
results based on low elasticities and Tables C-3 and C-4 report results based on high
elasticities. Note that these results do not take into consideration the sensitivity analysis
conducted in Appendix D for the slabstock segment of the industry. These results
assume the distribution of higher-cost control technology.
For the molded foam segment, plant closures and market output impacts are
unchanged or less severe under all regulatory alternatives for the low elasticity case.
The three predicted closures under Regulatory Alternative I mid-elasticity assumptions
are reduced to two closures when a low elasticity is assumed. For the slabstock
segment, plant closures and market impacts are also less severe or unchanged under
the assumptions of low elasticities. The four predicted closures under Regulatory
Alternative 2 mid-elasticity assumptions are reduced to one closure under low elasticity
assumptions.
For the molded and slabstock markets, impacts on domestic output, value of
domestic shipments, and energy and employment are all more severe under the
assumptions of "high" elasticities. Predicted plant closures increase from three under
the base case to six for the molded sector under Regulatory Alternative 1. Under the
MACT Floor, slabstock closures increase from two under the base case to four under the
high elasticity case. Slabstock plant closures under the high elasticity case also
increase for Regulatory Alternatives 1 and 2.
APPENDIX C: SENSITIVITY ANALYSES: DEMAND AND SUPPLY ELASTICITIES C-2
-------
Table C-1
SENSITIVITY ANALYSIS: ESTIMATED PRIMARY IMPACTS ON THE
SLABSTOCK FOAM MARKET WITH LOW ELASTICITIES
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Price
(%)
2.66
3.68
4.02
Market
Output
(%)
-0.65
-0.90
-0.98
Value of Domestic Shipments
(%) ($MMa)
1.99
2.75
3.00
34.19
47.23
51.63
Plant Closures
2
3
1
a1994$
Note: Results based on demand elasticity of-0.25 and supply elasticity of 5.0 and a distribution of
higher-cost control technologies.
Table C-2
SENSITIVITY ANALYSIS: ESTIMATED PRIMARY IMPACTS ON THE
MOLDED FOAM MARKET WITH LOW ELASTICITIES
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Price
(%)
0.07
0.84
1.14
Market
Output
(%)
-0.02
-0.21
-0.28
Value of Domestic Shipments
(%) ($MMa)
0.06
0.63
0.85
0.60
6.75
9.17
Plant Closures
0
2
0
a1994$
Note: Results based on demand elasticity of -0.25 and supply elasticity of 5.0.
APPENDIX C: SENSITIVITY ANALYSES: DEMAND AND SUPPLY ELASTICITIES
C-3
-------
Table C-3
SENSITIVITY ANALYSIS: ESTIMATED PRIMARY IMPACTS ON THE
SLABSTOCK FOAM MARKET WITH HIGH ELASTICITIES
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Price
(%)
2.35
2.27
3.03
Market
Output
(%)
-2.30
-2.22
-2.94
Value of Domestic Shipments
(%) ($MMa)
0.00
0.00
0.00
0.00
0.00
0.00
Plant Closures
4
4
7
a1994$
Note: Results based on demand elasticity of -1.0 and supply elasticity of 50.0 and a distribution of
higher-cost control technologies.
Table C-4
SENSITIVITY ANALYSIS: ESTIMATED PRIMARY IMPACTS ON THE
MOLDED FOAM MARKET WITH HIGH ELASTICITIES
Regulatory
Alternative
MACT Floor
Alternative 1
Alternative 2
Price
(%)
0.08
0.86
1.17
Market
Output
(%)
-0.08
-0.85
-1.16
Value of Domestic Shipments
(%) ($MMa)
0.00
0.00
0.00
0.00
0.00
0.00
Plant Closures
0
6
1
a1994$
Note: Results based on demand elasticity of -1.0 and supply elasticity of 50.0.
APPENDIX C: SENSITIVITY ANALYSES: DEMAND AND SUPPLY ELASTICITIES
C-4
-------
APPENDIX D
SENSITIVITY ANALYSIS OF EMISSION CONTROL TECHNOLOGIES
This appendix presents the results of sensitivity analyses that explore
the degree to which predicted plant closures in the slabstock sector are sensitive to the
assignment of control technologies. As has been previously discussed, there are
several different technologies which can satisfy the requirements of the regulatory
alternatives. When calculating nationwide regulatory costs, assumptions have been
made as to the specific technology, or combination of technologies, that model plants
would adopt (and thus the costs that would be incurred). Different assumptions about
which control technology combinations plants will adopt affect the costs and impacts of
the alternatives.
Predicted closures for the slabstock segment are sensitive to control
technology assignments. Tables A-15 and A-17 (see Appendix A), show that Acetone
and Forced Cooling provide the same level of emission reductions at very different costs.
General economic principle dictates that given the comparable performance of the
control technologies, facilities would choose the lowest-cost option. However, because
there are facilities in the industry using the higher-cost technology in favor of the
lower-cost options, the EPA includes the higher-cost technology in the distribution of
technologies to model plants. As Table D-1 indicates, switching compliance
technologies chosen by model plants MP2 and MP3 (from forced cooling to acetone) will
decrease predicted plant closures from two to one under the MACT Floor, from three to
one under Regulatory Alternative 1, and from four to one under Regulatory Alternative 2.
APPENDIX C: SENSITIVITY ANALYSES: DEMAND AND SUPPLY ELASTICITIES C-5
-------
Table D-1
PREDICTED PLANT CLOSURES WITH REASSIGNMENT OF
SLABSTOCK ABA EMISSION REDUCTION TECHNOLOGIES
Technology
MACT Floor
Cardi
0
Aceto
ne
VPF
Force
d
Coolin
g
Chem
Alts
Reg Alt I
Cardi
0
Aceto
ne
VPF
Force
d
Coolin
g
Reg Alt II
Cardi
0 +
Chem
Alts
Aceto
ne
VPF
Force
d
Coolin
g+Ch
em
Alts
Number of Facilities
Using the Technology
(Original)
MP1
4
1
0
2
12
13
3
0
3
10
3
0
6
MP2
9
1
0
4
14
18
4
0
6
15
3
1
9
Number of Facilities
Using the Technology
(Revised)
MP1
4
3
0
0
12
13
6
0
0
10
9
0
0
MP2
9
5
0
0
14
18
10
0
0
15
3
1
9
Predicted Closures
Original
2
3
4
Revised
1
1
1
APPENDIX D: SENSITIVITY ANALYSIS OF EMISSION CONTROL TECHNOLOGIES
D-2
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO.
EPA-452/R-96-012
3. RECIPIENT'S
ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Impact Analysis of the Proposed
NESHAP for Flexible Polyurethane Foam
5. REPORT DATE
September
1996
6. PERFORMING
ORGANIZATION CODE
7. AUTHOR(S)
U.S. EPA
Office of Air Quality Planning and
Standards
Innovative Strategies and Economics
Group
8. PERFORMING
ORGANIZATION REPORT
NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
U.S. Environmental Protection Agency
Office of Air Quality Planning and
Standards
Air Quality Strategies and Standards
Division (MD-15)
Research Triangle Park, NC 27711
10. PROGRAM ELEMENT
NO.
11. CONTRACT/GRANT
NO.
12. SPONSORING AGENCY NAME AND ADDRESS
John Seitz, Director
Office of Air Quality Planning and
Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
13. TYPE OF REPORT
AND PERIOD COVERED
14. SPONSORING
AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
APPENDIX D: SENSITIVITY ANALYSIS OF EMISSION CONTROL TECHNOLOGIES
D-3
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EPA Form 2220-1 (Rev. 4-77)
The report evaluates the distribution of economic impacts
among various members of society (producers and consumers)
from the regulatory alternatives considered for the Flexible
Polyurethane Foam NESHAP.
17.KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS
Economic Impact Analysis
National Emission
Standard for Hazardous
Air Pollutants
(NESHAP)
Cost Impacts
Regulatory Flexibility
Analysis
18. DISTRIBUTION STATEMENT
Release Unlimited
b. IDENTIFIERS/OPEN
ENDED TERMS
Air Pollution
control
Economics
19. SECURITY CLASS
(Report)
Unclassified
20. SECURITY CLASS
(Page)
Unclassified
c. COSATI Field/Group
21. NO. OF PAGES
22. PRICE
PREVIOUS EDITION IS OBSOLETE
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