United States
Environmental Protection
Agency
Office of Air Quality
Planning and Standards
Research Triangle Park, NC 27711
EPA-452/D35-004
May 1995
Air
EPA Economic Impact Analysis for the
Polymers and Resins I NESHAP
DRAFT
-------
This report has been reviewed by the Air Quality Strategies
and Standards Division, Office of Air Quality Planning and
Standards, U.S. Environmental Protection Agency, and approved for
publication. Mention of trade names or commercial products is
not intended to constitute endorsement or recommendation for use.
Copies of this report are available through the Library Services
Office (MD-35), U.S. Environmental Protection Agency, Research
Triangle Park, NC 27711, or from National Technical Information
Services, 5285 Port Royal Road, Springfield, VA 22161.
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CONTENTS
Page
TABLES v
FIGURES vii
ACRONYMS AND ABBREVIATIONS viii
EXECUTIVE SUMMARY ES-1
ES.l ECONOMIC IMPACT ANALYSIS OBJECTIVES ES-1
ES.2 INDUSTRY CHARACTERIZATION ES-2
ES.3 CONTROL COSTS AND COST-EFFECTIVENESS ES-3
ES.4 ECONOMIC METHODOLOGY OVERVIEW ES-4
ES.5 PRIMARY REGULATORY IMPACTS ES-6
ES.6 SECONDARY REGULATORY IMPACTS ES-9
ES.7 ECONOMIC COST ES-11
ES.8 POTENTIAL SMALL BUSINESS IMPACTS ES-11
1.0 INTRODUCTION AND SUMMARY OF CHOSEN REGULATORY
ALTERNATIVE 1
1.1 INTRODUCTION 1
1.2 SUMMARY OF CHOSEN REGULATORY ALTERNATIVE 2
2.0 INDUSTRY PROFILE 5
2.1 INTRODUCTION 5
2.2 IDENTIFICATION OF AFFECTED FIRMS AND FACILITIES 5
2.2.1 General Process Description 6
2.2.2 Product Description 6
2.2.3 Affected Elastomer Facilities, Employment, and Location 9
2.3 MARKET STRUCTURE 15
2.3,1 Market Concentration 20
2.3.2 Industry Integration and Diversification 21
2.3.3 Financial Profile 22
2.4 MARKET SUPPLY CHARACTERISTICS 24
2.4.1 Supply Trends 24
2.4.2 Supply Determinants 26
2.4.3 Exports of Group I Elastomers 30
2.5 MARKET DEMAND CHARACTERISTICS 31
2.5.1 End-Use Markets for Group I Elastomers 31
2.5.2 Demand Determinants 32
2.5.3 Past and Present Consumption 34
2.5.4 Imports of Group I Elastomers 34
2.6 MARKET OUTLOOK 37
3.0 ECONOMIC METHODOLOGY 41
3.1 INTRODUCTION 41
3.2 MARKET MODEL 41
in
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CONTENTS (continued)
Page
3.2.1 Partial Equilibrium Analysis 42
3.2.2 Market Demand and Supply 43
3.2.3 Market Supply Shift 44
3.2.4 Impact of Supply Shift on Market Price and Quantity 47
3.2.5 Trade Impacts 49
3.2.6 Plant Closures 50
3.2.7 Changes in Economic Welfare 50
3.2.8 Labor Input and Energy Input Impacts 53
3.2.9 Baseline Inputs 55
3.3 INDUSTRY SUPPLY AND DEMAND ELASTICITIES 58
3.3.1 Introduction 58
3.3.2 Price Elasticity of Demand 59
3.3.3 Price Elasticity of Supply 65
3.4 CAPITAL AVAILABILITY ANALYSIS 72
4.0 CONTROL COSTS, ENVIRONMENTAL IMPACTS, COST-EFFECTIVENESS ... 79
4.1 INTRODUCTION 79
4.2 CONTROL COST ESTIMATES 79
4.3 ESTIMATES OF ECONOMIC COSTS 82
4.4 ESTIMATED ENVIRONMENTAL IMPACTS 84
4.5 COST EFFECTIVENESS . , 84
5.0 PRIMARY ECONOMIC IMPACTS AND CAPITAL AVAILABILITY ANALYSIS . . 89
5.1 INTRODUCTION 89
5.2 ESTIMATES OF PRIMARY IMPACTS 89
5.3 CAPITAL AVAILABILITY ANALYSIS , 92
5.4 LIMITATIONS 96
5.5 SUMMARY 96
6.0 SECONDARY ECONOMIC IMPACTS 99
6.1 INTRODUCTION 99
6.2 LABOR MARKET IMPACTS . , 99
6.3 ENERGY INPUT MARKET 101
6.4 FOREIGN TRADE 101
6.5 REGIONAL IMPACTS , 103
6.6 LIMITATIONS . , 103
6.7 SUMMARY 103
7.0 POTENTIAL SMALL BUSINESS IMPACTS , 105
7.1 INTRODUCTION 105
7.2 METHODOLOGY , 106
7.3 SMALL BUSINESS CATEGORIZATION 106
7.4 SMALL BUSINESS IMPACTS , 106
APPENDIX A . A-l
IV
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TABLES
Page
ES-1. SUMMARY OF GROUP I NESHAP COSTS IN THE FIFTH YEAR BY
ELASTOMER INDUSTRY ES-5
ES-2. SUMMARY OF PRIMARY ECONOMIC IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP ES-8
ES-3. SUMMARY OF SECONDARY ECONOMIC IMPACTS OF THE
POLYMERS AND RESINS GROUP I NESHAP ES-10
ES-4. ANNUAL ECONOMIC COST ESTIMATES FOR THE POLYMERS AND
RESINS GROUP I REGULATION ES-12
2-1. STYRENE BUTADIENE RUBBER (SBR) AND LATEX (SBL)
MANUFACTURERS AND CAPACITY, 1992 10
2-2. POLYBUTADIENE RUBBER MANUFACTURERS AND CAPACITY, 1991 ... 11
2-3. ETHYLENE-PROPYLENE RUBBER MANUFACTURERS AND
CAPACITY 1991 13
2-4. NITRILE BUTADIENE RUBBER AND LATEX MANUFACTURERS AND
CAPACITY 1991 13
2-5. NEOPRENE MANUFACTURERS AND CAPACITY, 1991 14
2-6. 1991 EMPLOYMENT LEVELS OF POLYMERS AND RESINS GROUP I
FIRMS 16
2-7. GROUP 1 MANUFACTURERS BY RUBBER TYPE AND CAPACITY, 1991 . . 18
2-8. FINANCIAL STATISTICS FOR AFFECTED FIRMS 23
2-9. SYNTHETIC RUBBER DEMAND FORECASTS 38
3-1. PRODUCT-SPECIFIC BASELINE INPUTS 56
3-2. BASELINE INPUTS FOR THE POLYMERS AND RESINS GROUP I
INDUSTRIES 57
3-3. DATA INPUTS FOR THE ESTIMATION OF DEMAND EQUATIONS FOR
GROUP I INDUSTRIES 62
3-4. DERIVED DEMAND COEFFICIENTS 64
3-5. DATA INPUTS FOR THE ESTIMATION OF THE PRODUCTION
FUNCTION FOR GROUP I INDUSTRIES 69
3-6. ESTIMATED SUPPLY MODEL COEFFICIENTS FOR GROUP I
INDUSTRIES 71
4-1. SUMMARY OF GROUP I NESHAP COSTS IN THE FIFTH YEAR BY
ELASTOMER INDUSTRY 81
4-2. ANNUAL ECONOMIC COST ESTIMATES FOR THE POLYMERS AND
RESINS GROUP I REGULATION 85
4-3. ESTIMATED ANNUAL REDUCTIONS IN EMISSIONS AND COST-
EFFECTIVENESS ASSOCIATED WITH THE CHOSEN REGULATORY
ALTERNATIVE 86
5-1. SUMMARY OF PRIMARY ECONOMIC IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP 91
5-2. POST-NESHAP EFFECTS ON FIRMS' DEBT-EQUITY RATIOS 93
5-3. POST-NESHAP EFFECTS ON FIRMS' RETURN ON INVESTMENT
LEVELS 94
6-1. SUMMARY OF SECONDARY ECONOMIC IMPACTS OF POLYMERS
AND RESINS GROUP I NESHAP 100
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TABLES (continued)
Page
6-2. FOREIGN TRADE (NET EXPORTS) IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP 102
7-1. COMPLIANCE COSTS AS A PERCENTAGE OF SALES AT SMALL
GROUP I FIRMS 108
A-l. PRICE ELASTICITY OF DEMAND ESTIMATES A-l
A-2. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS: LOW-
END PRICE ELASTICITY OF DEMAND SCENARIO A-2
A-3. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
HIGH-END PRICE ELASTICITY OF DEMAND SCENARIO A-3
A-4. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS: LOW-
END PRICE ELASTICITY OF SUPPLY SCENARIO A-4
A-5. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
HIGH-END PRICE ELASTICITY OF SUPPLY SCENARIO A-5
VI
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FIGURES
Page
ES-1. MODEL DEVELOPMENT FOR ECONOMIC IMPACT ANALYSIS ES-7
2-1. DISTRIBUTION OF AFFECTED FACILITIES BY STATE AND EPA
REGION 17
2-2. PRODUCTION OF STYRENE-BUTADIENE RUBBER, POLYBUTADIENE
RUBBER AND BUTYL RUBBER 25
2-3. PRODUCTION OF NITRILE BUTADIENE RUBBER AND ETHYLENE-
PROPYLENE RUBBER 27
2-4. PRICE LEVELS BY RUBBER TYPE 33
2-5. TIRE AND AUTOMOBILE PRODUCTION 35
2-6. SALES OF SYNTHETIC RUBBER BY TYPE 36
3-1. MODEL DEVELOPMENT FOR ECONOMIC IMPACT ANALYSIS 48
Vll
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ACRONYMS AND ABBREVIATIONS
ASM Annual Survey of Manufactures
BCA Benefit Cost Analysis
BR polybutadiene rubber
CAA Clean Air Act
DOC U.S. Department of Commerce
EIA economic impact analysis
EPA U.S. Environmental Protection Agency
EPI epichlorohydrin elastomers
EPD ethylene-propylene copolymers
EPDM ethylene-propylene rubber
EPI epichlorohydrin elastomers
GDP gross domestic product
HAPs hazardous air pollutants
HNBR hydrogenated butyl rubber
HON Hazardous Organic NESHAP
IISRP International Institute of Synthetic Rubber Producers
ITC International Trade Commission
MACT maximum achievable control technology
MRR monitoring, recordkeeping, and reporting
NBL nitrile-butadiene latex
NBR nitrile-butadiene rubber
NESHAP national emission standard for hazardous air pollutants
RFA Regulatory Flexibility Act
SBA U.S. Small Business Administration
SBL styrene-butadiene latex
SBR styrene-butadiene rubber
SIC Standard Industrial Classification
TPEs thermoplastic elastomers
2SLS two-stage least squares
Vlll
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EXECUTIVE SUMMARY
ES.l ECONOMIC IMPACT ANALYSIS OBJECTIVES
The purpose of this economic impact analysis (EIA) is to evaluate the effect of the
control costs associated with the Polymers and Resins Group I National Emission
Standard for Hazardous Air Pollutants (NESHAP) on the behavior of the regulated
synthetic rubber (elastomer) facilities. The EIA was conducted based on the cost
estimates for one regulatory option chosen by the U.S. Environmental Protection Agency
(EPA) for the regulation of 35 affected facilities. This analysis compares the quantitative
economic impacts of regulation to baseline industry conditions which would occur in the
absence of regulation. The economic impacts of regulation are estimated for each of the
affected industries, using costs which were supplied on a facility level.
Section 112 of the Clean Air Act (CAA) contains a list of hazardous air pollutants
(HAPs) for which EPA has published a list of source categories that must be regulated.
To meet this requirement, EPA is evaluating NESHAP alternatives for the regulation of
industries classified within the Polymers and Resins Group I source category, based on
different control options for the emission points within elastomer facilities which emit
HAPs. This economic analysis analyzes the potential impacts of regulation on the
following eleven affected synthetic rubber industries:
• butyl rubber;
• ethylene - propylene rubber (EPDM);
• epichlorohydrin rubber (EPI);
• halobutyl rubber;
• Hypalon:
• nitrile-butadiene latex (NBL);
ES-1
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• nitrile-butadiene rubber (NBR);
• Neoprene;
• styrene butadiene latex (SBL);
• styrene butadiene rubber (SBR); and
• polybutadiene rubber (BR).
Throughout this report, the term, Group I industries, refers collectively to all of the
industries listed above. This report presents the results of the economic analysis
prepared to satisfy the requirements of Section 317 of the CAA which mandates that EPA
evaluate regulatory alternatives through an EIA.
The objective of this EIA is to quantify the impacts of NESHAP control costs on the
output, price, employment, and trade levels in the markets for each of the Group I
elastomers. The probability of synthetic rubber facility closure is also estimated, in
addition to potential effects on the financial conditions of affected firms. To comply with
the requirements of the Regulatory Flexibility Act (RFA), attention is focused on the
potential effects of control costs on the smaller affected firms relative to larger affected
firms.
ES.2 INDUSTRY CHARACTERIZATION
The firms affected by the Polymers and Resins Group I NESHAP operate facilities
that produce butyl rubber, EPDM, EPI, halobutyl rubber, Hypalon, NBL, NBR, Neoprene,
SBL, SBR, or BR. The production of these synthetic rubbers is categorized under
Standard Industrial Classification (SIC) code 2822. Synthetic rubbers are formed through
the vulcanization process, which converts a rubber hydrocarbon from a soft thermoplastic
into a strong thermoset with specific elasticity and yield properties.
The principle use of the synthetic rubbers in Group I is as an input to tire production,
which accounts for 60 percent of the use of domestically produced synthetic rubbers.
Butyl rubber, SBR, and BR are synthetic rubbers whose primary use is for tire
manufacture. These three elastomers are characterized by resistance to cracking and
abrasion, and stability over time. The remaining eight elastomers are used as inputs to
the production of many diverse types of products, including components for machinery
ES-2
-------
and equipment, wire covering, construction products, and consumer items. Group I
elastomers are frequently in competition with each other for end uses. EPDM is a low
cost elastomer with a wide range of applications, among which automotive and appliance
uses have been particularly significant. NBR is the preferred elastomer for gasoline
hoses, gaskets, and printing rolls. Neoprene differs from BR, SBR, butyl rubber and
EPDM because it is costlier and does not possess characteristics which make it favorable
for use in automobile tires. Its primary use is in hose applications. Hypalon is frequently
used as a substitute for most of the other standard elastomers, such as uses which
demand resistance to heat and oil. EPI is used primarily in the production of automotive
parts including hoses and gaskets.
The proposed regulation will affect 35 synthetic rubber facilities, which are owned
and operated by 18 firms. Synthetic rubber facilities are mainly owned by oil and
chemical companies, rubber product manufacturers, or independents. Butyl rubber,
Hypalon, and EPI are supplied by only one firm. The markets for the remaining
elastomers are fairly unconcentrated.
ES.3 CONTROL COSTS AND COST-EFFECTIVENESS
The Polymers and Resins Group I NESHAP would require sources to achieve
emission limits reflecting the application of the maximum achievable control technology
(MACT) to four affected emission points. This EIA analyzes one regulatory alternative
which was chosen by EPA. The chosen regulation is the same as the Hazardous Organic
NESHAP (HON) rule for all of the emission points within Group I elastomer facilities.
For existing sources, the MACT floor was based on the CAA stipulation that the minimum
standard represent the average emission limitation achieved by the best performing
12 percent of existing sources. No new source costs were included in this analysis given
that little new source construction is likely in this industry within the next five years.
Control costs were developed for the following major emission points within elastomer
facilities: equipment leaks, front- and back-end process vents, wastewater collection and
treatment systems, and storage tanks. Cost estimates were annualized for the fifth year
after promulgation of the Polymers and Resins Group I NESHAP and are expressed in
1989 dollars throughout this report. Economic impacts were estimated based on the
. ES-3
-------
facility-level costs for the proposed alternative, which represent the cost of the MACT
floor option for all four emission points. Table ES-1 presents the total investment capital
costs and national annualized cost estimates for controlling existing sources. These costs
were prepared by the engineering contractor for use in the EIA. Costs are provided by
industry for the MACT floor level of control. The total national annualized cost for
implementation of the regulatory alternative is approximately $21 million [including
monitoring, reporting, and recordkeeping (MRR) costs], and the total capital cost estimate
is approximately $26 million for the 11 affected industries five years subsequent to
promulgation of the regulation.
Table ES-1 also shows the HAP emission reductions associated with control at the
four emission points and the calculated cost-effectiveness of each control method. The
HAP emission reductions were calculated based on the application of sufficient controls to
each emission point to bring the point into compliance with the regulatory alternative.
The cost-effectiveness of the predicted HAP emission reduction ranges from $1,710 to
$9,205 per megagram, or an average of $3,311 per megagram of HAP reduced for the
proposed NESHAP.
ES.4 ECONOMIC METHODOLOGY OVERVIEW
In this study, data inputs are used to construct a separate, pre-control baseline
equilibrium market model of ten of the eleven affected industries. Hypalon was not
modeled due to the fact that emission control costs including MRR are estimated to be
zero for this industry. The baseline models of the markets for these ten synthetic rubbers
provide the basic framework necessary to analyze the impact of proposed control costs on
these industries. The Industry Profile [or the Polymers and Resins I NESHAP contained
industry data that are used as inputs to the baseline models and to the estimation of
price elasticities of demand and supply. The industry profile includes a characterization
of the market structure of each affected industry, provides necessary supply and demand
data, and identifies market trends. Engineering control cost studies provide the final
major data input required to quantify the potential impact of control measures on the
affected markets. These economic and engineering cost data inputs are evaluated within
the context of the market model to estimate the impacts of regulatory control measures on
ES-4
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each of the Group I industries and on society as a whole. The potential impacts include
the following:
• Changes in market price and output;
• Financial impacts on affected firms;
• Predicted closure of affected synthetic rubber facilities;
• Welfare analysis;
• Small business impacts;
• Labor market impacts;
• Energy use impacts;
• Foreign trade impacts; and
• Regional impacts.
The progression of steps in the EIA process is summarized in Figure ES-1.
ES.5 PRIMARY REGULATORY IMPACTS
Primary regulatory impacts include estimated increases in the market equilibrium
price of each Group I elastomer, decreases in the market equilibrium domestic output or
production of each elastomer, changes in the value of domestic shipments, and facility
closures. The analysis was conducted separately for each of the ten affected industries.
No impacts have been reported for the Hypalon industry since no emission control costs
are anticipated for this industry. The primary regulatory impacts are summarized in
Table ES-2.
As shown in Table ES-2, the estimated price increases for each of the Group I
industries range from a low of $0.002 per kilogram for halobutyl to a high of $0.022 per
kilogram for EPI, based upon 1989 price levels. These predicted price increases represent
percentage increases ranging from a low of 0.18 percent for NBL to a high of 2.5 percent
for butyl rubber. Domestic production will decrease for each of the Group I synthetic
rubbers in amounts ranging from 0.08 million kilograms for EPI to 24.53 million
kilograms for BR. This estimated percentage decrease in- annual production for each of
the elastomers varies from a low of 0.69 percent for NBL to a high of 4.95 percent for
butyl rubber.
ES-6
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ES-7
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TABLE ES-2. SUMMARY OF PRIMARY ECONOMIC IMPACTS OF
POLYMERS AND RESINS GROUP I NESHAP
Estimated Impacts4'5
Group I Industry
Butyl
Amount
Percentage
EPDM
Amount
Percentage
EPI
Amount
Percentage
Halobutyl
Amount
Percentage
NBL
Amount
Percentage
NBR
Amount
Percentage
Neoprene
Amount
Percentage
SBL
Amount
Percentage
SBR
Amount
Percentage
BR
Amount
Percentage
Price
Increases1
$0.009
2.50%
$0.019
0.87%
$0.022
0.82%
$0.002
0.68%
$0.004
0.18%
$0.007
0.31%
$0.008
1.12%
$0.009
0.64%
$0.005
0.40%
$0.020
1.91%
Production
Decreases2
(2.96)
(4.95%)
(3.25)
(1.21%)
(0.08)
(1.28)%
(1.18)
(1.37%)
(0.20)
(0.69%)
(0.74)
(1.17%)
(1.69)
(1.51%)
(2.91)
(0.80%)
(10.22)
(1.58%)
(24.53)
(4.52%)
Value of
Domestic
Shipments3
($0.55)
(2.58%)
($2.01)
(0.35%)
($0.08)
(0.47%)
($0.22)
(0.70%)
($0.34)
(0.51%)
($1.15)
(0.87%)
($0.34)
(0.41%)
($0.82)
(0.16%)
($8.88)
(1.18%)
($15.24)
(2.70%)
Facility
Closures
None
None
None
None
None
None
None
None
None
None
NOTES: 'Prices are shown in price per kilogram ($1969).
zAnnual production quantities are shown in millions of kilograms.
^Values of domestic shipments are shown in millions of 1989 dollars.
'Brackets indicate decreases or negative values.
5Hypalon is omitted from the analysis because compliance costs are estimated to be zero.
ES-8
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The predicted change in the dollar value of domestic shipments or revenue to
producers in the Group I source category is anticipated to decrease for the ten elastomer
industries. Annual revenue decreases range from $0.08 million annually for EPI to
$15.24 million annually for BR. Percentage decreases in revenues vary from 0.16 percent
for SBL to 2.70 percent for polybutadiene rubber. These revenue decrease estimates are
also based upon 1989 price levels.
No predicted facility closures are anticipated for the Polymers and Resins Group I
industries. The closure analysis was conducted based on the assumption that those
facilities with the highest control cost per unit are marginal in the post-control
marketplace. This is a worst-case assumption, and will, in general, tend to overestimate
the number of facility closures.
ES.6 SECONDARY REGULATORY IMPACTS
Secondary impacts of the Polymers and Resins Group I NESHAP include potential
effects of the regulation on the labor market, energy use, foreign trade, and regional
markets. The effects on the labor market, energy use, and balance of trade are
summarized in Table ES-3.
Labor market losses resulting from the NESHAP are estimated to be approximately
100 jobs for all of the Group I industries in total. This estimate reflects the reductions in
jobs predicted to result from the anticipated reduction in annual production of these
Group I elastomers. No effort has been made to estimate the number of jobs that may be
created as a result of the regulations, however, and, as a result, this estimate of job losses
is likely to be overstated. Additionally, the number of workers per industry was
unavailable, and estimates were generated based on the labor associated with SIC code
2822, Synthetic Rubbers.
Annual reductions in energy use as a result of the regulations are expected to amount
to a savings of $1.36 million (1989 dollars) annually. Net annual exports are predicted to
decrease by a total of 14 million kilograms annually. These decreases in net exports
represent a range of 0.68 percent for EPDM to a high of 58.3 percent for NBR.
ES-9
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TABLE ES-3. SUMMARY OF SECONDARY ECONOMIC IMPACTS OF THE
POLYMERS AND RESINS GROUP I NESHAP
Group I Industry
Butyl
Amount
Percentage
EPDM
Amount
Percentage
EPI
Amount
Percentage
Halobutyl
Amount
Percentage
NBL
Amount
Percentage
NBR
Amount
Percentage
Neoprene
Amount
Percentage
SBL
Amount
Percentage
SBR
Amount
Percentage
BR
Amount
Percentage
Estimated
Labor Input2
(2)
(4.95%)
(13)
(1.21%)
(0.40)
(1.28%)
(1)
(1.34%)
(1)
(0.69%)
(3)
(1.17%)
' (2)
(1.51%)
(8)
(0.80%)
(22)
(1.58%)
(48)
(4.23%)
Impacts1'5
Energy
Input3
($0.05)
(2.2%)
($0.31)
(0.68%)
($0.01)
(0.66%)
($0.02)
(0.61%)
($0.02)
(0.28%)
($0.07)
(0.48%)
($0.06)
(0.89%)
($0.18)
(0.35%)
($0.53)
(0.77%)
($0.11)
(2.12%)
Net
Exports4
(1.41)
(27.05%)
(1.19)
(1.59%)
(0.03)
(2.50%)
(0.56)
(7.43%)
(0.05)
(34.38%)
(0.20)
(58.34%)
(0.69)
(2.00%)
(0.79)
(2.79%)
(2.46)
(2.35%)
(6.80)
(9.23%)
NOTES: ' Brackets indicate decreases or negative values.
2 indicates estimated reduction in number of jobs.
3 Reduction in energy use in millions of 1989 dollars.
4 Reduction in net exports (exports less imports) are expressed in millions of kilograms.
5 Hypalon is omitted from the analysis.
ES-10
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Regional effects are expected to be minimal since the affected facilities are dispersed
throughout the United States. Given that the market impacts are predicted to be
minimal in most cases, it follows that no region of the country will be significantly
adversely affected by the regulation.
ES.7 ECONOMIC COST
Air quality regulations affect society's economic well-being by causing a reallocation of
productive resources in the economy. Resources are allocated away from the production of
goods and services (Group I elastomers) to the production of cleaner air. Economic costs
represent the total cost to society associated with this reallocation of resources.
The economic costs of regulation incorporate costs borne by all of society for pollution
abatement. The social, or economic, costs reflect the opportunity cost of resources used
for emission control. Consumers, producers, and all of society bear the costs of pollution
controls in the form of higher prices, lower quantities produced, and possible tax revenues
that may be gained or lost. Annual economic costs of $15 million ($1989) are anticipated
for the chosen alternative and are shown by industry in Table ES-4. Economic costs are a
more accurate estimate of the cost of the regulation to society than the cost of emission
controls to the directly affected industry.
ES.8 POTENTIAL SMALL BUSINESS IMPACTS
' The RFA requires that a determination be made as to whether or not the subject
regulation would have a significant economic impact on a substantial number of small
entities. The majority of affected Group I producers are large chemical companies, and,
consequently, significant small business impacts are not expected to result from
implementation of the Polymers and Resins Group I NESHAP. Based on available
employment data for each of the 18 affected firms, five firms classify as small businesses.
Of these, three are unaffiliated with a larger business firm. Costs expressed as a
percentage of sales for these three firms do not indicate that the NESHAP will result in
adverse economic impacts.
ES-11
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TABLE ES-4. ANNUAL ECONOMIC COST ESTIMATES FOR THE POLYMERS AND
RESINS GROUP I REGULATION1
(millions of 1989 dollars)2
Group I Industry
Butyl Rubber
EPDM
EPI
Halobutyl Rubber
NBL
NBR
Neoprene
SBL
SBR
BR
Total
Change in
Consumer
Surplus
($0.48)
($3.61)
($0.11)
($0.19)
($0.12)
($0.41)
($0.64)
($2.97)
($2.52)
($9.12)
($20.17)
Change in
Producer
Surplus
($0.59)
$0.27
($0.11)
($0.24)
($0.12)
($0.17)
($0.01)
$1.30
$0.57
$1.56
$2.46
Change in
Residual
Surplus
($0.29)
$0.46
($0.03)
($0.11)
($0.04)
($0.07)
$0.02
$0.78
$0.50
$1.38
$2.60
Total Loss
In Surplus
($1.36)
($2.88)
($0.25)
($0.54)
($0.28)
($0.65)
($0.63)
($0.89)
($1.45)
($6.18)
($15.11)
NOTES: 'Hypalon is omitted from the analysis.
2Brackets indicate economic costs.
ES-1?
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1.0 INTRODUCTION AND SUMMARY OF CHOSEN REGULATORY
ALTERNATIVE
1.1 INTRODUCTION
Section 112 of the CAA contains a list of HAPs for which EPA has published a list of
source categories that must be regulated. EPA is evaluating alternative NESHAPs for
controlling HAP emissions occurring as a result of the production of specific types of
synthetic rubbers (elastomers). These affected industries are categorized within the
Polymers and Resins Group I source category. This report evaluates the economic impact
of one proposed standard on the industries manufacturing the following synthetic rubbers:
• butyl rubber;
• ethylene - propylene rubber (EPDM);
• epichlorohydrin rubber (EPI);
• halobutyl rubber;
• Hypalon:
• nitrile-butadiene latex (NBL);
• nitrile-butadiene rubber (NBR);
• Neoprene;
• styrene butadiene latex (SBL);
• styrene butadiene rubber (SBR); and
• polybutadiene rubber (BR).
This analysis was conducted to satisfy the requirements of Section 317 of the CAA which
mandates that EPA evaluate regulatory alternatives through an EIA.
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This chapter presents a discussion of the NESHAP alternative under analysis in this
report. Chapter 2 of this report is a compilation of economic and financial data on the
eleven affected industries included in this analysis. Chapter 2 also presents an
identification of affected synthetic rubber facilities, a characterization of market structure,
separate discussions of the factors which affect supply and demand, a discussion of foreign
trade, a financial profile, and the quantitative data inputs for the EIA model. Chapter 3
outlines the economic methodology used in this analysis, the structure of the market
model, and the process used to estimate industry supply and demand elasticities.
Chapter 4 presents the control costs used in the model, the estimated emission
reductions expected as a result of regulation, and the cost-effectiveness of the regulatory
option. Also included is a quantitative estimate of economic costs and a qualitative
discussion of conceptual issues associated with the estimation of economic costs of
emission controls. Chapter 5 presents the estimates of the primary impacts determined
by the model, which include estimates of post-NESHAP price, output, and value of
domestic shipments in each of the affected industries. A capital availability analysis is
also included in this chapter as well as a discussion of the limitations of the model.
Chapter 6 presents the secondary economic impacts, which are the estimated quantitative
impacts on the industry's labor inputs, energy use, balance of trade, and regional
markets. Lastly, Chapter 7 specifically addresses the potential impacts of regulation on
affected firms which classify as small businesses based on the standards set by the U.S.
Small Business Administration (SBA). Appendix A presents the results of sensitivity
analyses conducted to quantify the extent to which the price elasticities of demand and
supply affect the results of the models.
1.2 SUMMARY OF CHOSEN REGULATORY ALTERNATIVE
The CAA stipulates that HAP emission standards for existing sources must at least
match the percentage reduction of HAPs achieved by either: (1) the best performing 12
percent of existing sources, or (2) the best 5 sources in a category or subcategory
consisting of fewer than 30 sources. For new sources, the CAA stipulates that, at a
minimum, the emission standard must be set at the highest level of control achieved by
any similar source. This minimum level of control for both existing and new sources is
referred to as the MACT floor.
-------
A source within a Group I synthetic rubber facility is defined as the collection of
emission points in HAP-emitting production processes within the source category. The
source comprises several emission points. An emission point is a piece of equipment or
component of production which produces HAPs. The NESHAP considered in this EIA
requires controls on the following emission points in synthetic rubber-producing facilities:
storage tanks, equipment leaks, front- and back-end process vents, and wastewater
collection and treatment systems. EPA chose one regulatory alternative for each of the
regulated industries. The results of a detailed economic impact analysis for each of them
are presented in this report.
EPA provided cost estimates for controls deemed appropriate as options for each
affected elastomer-producing process at existing facilities. EPA determined that no new
source costs will be included in this analysis, based on an industry source which reported
that no industry growth or capacity expansion is expected to occur in the United States
within the next 10 years1. Costs represent the impact of bringing each facility from
existing control levels to the control level defined by the regulatory alternative for each
emission point. The proposed Group I regulatory alternative chosen for this analysis
closely resembles the HON rule.2 The provisions of the single regulatory alternative
developed for storage tanks, wastewater streams, and equipment leaks are identical to
those required by Part 63 of the HON rule. The process vent provisions also resemble the
HON with the exception of provisions for some vents. For batch processes and back-end
process vents, the regulatory alternative is based on EPA's draft CTG for Batch
Processes.3 In either situation, the applicability of control requirements is based on vent
stream characteristics. For the regulatory a Iternative examined in this EIA, costs were
provided on a facility level.
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REFERENCES
1. Norwood, Phil. EC/R Incorporated. Telephone communication with Britt Theisman,
International Institute of Synthetic Rubber Producers (IISRP). Durham, NC.
July 14, 1994.
2. U.S. Environmental Protection Agency. "Hazardous Air Pollutant Emissions from
Process Units in the Synthetic Organic Manufacturing Industry - Background
Information for Proposed Standards. Volume IB: Control Technologies." Draft EIS.
EPA-453/D-92-0166. Research Triangle Park, NC. November 1992.
3. U.S. Environmental Protection Agency. "Control of Volatile Organic Compound
Emissions from Batch Processes." Draft Document. EPA-453/R-93-017. Research
Triangle Park, NC. November 1993.
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2.0 INDUSTRY PROFILE
2.1 INTRODUCTION
This chapter focuses on the markets for Group I elastomers. The economic and
financial information in this chapter characterizes the conditions in these industries
which are likely to determine the nature of economic impacts associated with the
implementation of the NESHAP. The quantitative data contained in this chapter
represent the inputs to the economic model (presented in Chapter 3) which were used to
conduct the EIA. The general outlook for the affected Group I industries is also discussed
in this chapter.
Section 2.2 describes the elastomer production process, and identifies the unique
market characteristics of each elastomer. Section 2,2 also identifies the affected
elastomer facilities by industry location and production capacity. Section 2.3
characterizes the structure of the affected industries in terms of market concentration and
firm integration. Also included in Section 2.3 is a financial profile of affected firms.
Section 2.4 characterizes the supply side of the market based on production trends, supply
determinants, and export levels. Section 2.5 presents demand-side characteristics,
including end-use markets, consumption trends, and import levels. Lastly, Section 2.6
presents a discussion of the outlook for Group I synthetic rubbers based on both a
literature search for published forecasts, and on anticipated future conditions in the
market as determined by the industry data contained in this chapter.
2.2 IDENTIFICATION OF AFFECTED FIRMS AND FACILITIES
This section reviews the products and processes of the affected synthetic rubber
industries. The affected firms are identified by capacity, employment, and location of
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facilities. An EIA requires that affected facilities in the industry be classified by some
production factor or other descriptive characteristic. Throughout this section, capacity
will be used as a measure of size, since it is the one characteristic that is consistently
available for each synthetic rubber producer. (In this report, the term firm refers to the
company or producer, while facility refers to the actual rubber production site or plant.)
2.2.1 General Process Description
Synthetic rubber production requires the synthesis of monomers (derived from
petrochemicals), followed by their polymerization. This process results in an aqueous
suspension of rubber particles, or the latex, which may then be processed into marketable,
dry, raw rubber. Synthetic rubbers are usually compounded with various additives and
then molded, extruded, or calendared into the desired solid form. A percentage of
elastomer production is also supplied in the form of water dispersions, called latexes
(primarily used in foam rubber). HAP emission sources in synthetic rubber facilities
include: equipment leaks, process vents, wastewater, and storage tanks.1 It is important
to note that elastomer production sites subject to this standard may be collocated with
other production facilities that are, or will be, subject to MACT standards other than the
Group I NESHAP. For example, a refining facility, chlorine plant, SOCMI facility, or
non-elastomer polymer facility could be located on the same site as Group I production
units.
2.2.2 Product Description
The affected Group I elastomers are classified as synthetic rubbers which have
specific elasticity and yield properties. Synthetic rubbers are either used as stand-alone
products, or are compounded with natural rubber, other thermoplastic materials, or
additives, depending on the desired end-use characteristics. This section describes the
properties of each elastomer individually and identifies its primary end uses.
2.2.2.1 Butyl Rubber. In addition to butyl rubber, this category includes chlorobutyl
rubber, bromobutyl rubber, and halobutyl rubber. Butyl rubbers are copolymers of
isobutylene isoprene, and are among the most widely used synthetic elastomers
worldwide. Characteristics of butyl rubber include low permeability to gases and high
-------
resistance to tear and aging. Eighty percent of butyl rubber produced is used as an input
to the production of tires, tubes, and tire products. Butyl rubber is also used in the
production of inner tubes because of its low air permeability. The remaining 20 percent of
butyl rubber is used in the production of automotive and mechanical goods, adhesives and
caulks, and also for various other uses, including pharmaceutical stoppers.
2.2.2.2 Styrene-Butadiene Rubbers and Latexes. SBR is produced in the largest
volume of all the synthetic rubbers. Its chemical properties include favorable performance
in extreme temperatures, resistance to cracking and abrasion, and stability over time.
The dominance of SBR among synthetic rubber types is attributable to the following two
market conditions: availability and processability. The availability of styrene and
butadiene in fossil hydrocarbons make these two inputs an abundant source of synthetic
rubber, and styrene and butadiene can be combined into rubber compounds which are
easily processed into tire molds. Types of SBR differ in the ratios of styrene to butadiene,
their content of additives, or the type of polymerization process used during the
manufacturing process. The substitutability of SBR with natural rubber is primarily
determined by the fluctuating prices of each, and by the properties required in the end
product.
As with butyl rubber, the primary use of SBR is in the production of tires, although
the percentage of SBR used for tires is lower than that of butyl rubber. Additional end
use categories for SBR include mechanical goods, automotive parts, floor tiles, and shoe
soles. Approximately 10 percent of SBR produced is in latex form (SBL), which is used for
carpet backing, nonwoven materials, and paper coatings. Latexes typically have a higher
percentage of styrene than SBR and are also used in the construction industry.
2.2.2.3 Polybutadiene Rubber. BR is formed from butadiene which undergoes
emulsion polymerization. After SBR, polybutadiene rubber is the synthetic rubber
produced in the second highest volume. The use of polybutadiene in tires is due to its
resistance to abrasion, high resiliency, favorable temperature flexibility, and resistance to
tread cracking. BR may also be blended with natural rubber to improve abrasion
resistance. Similar to butyl rubber and SBR, the primary use of BR is for tires and tire
products (68 percent). BR is also used as a styrene resin modifier, in the production of
ABS for example, as well as for an input to the manufacture belts and hoses.
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2.2.2.4 Ethylene-Propylene Rubber. The ethylene-propylene category includes both
ethylene-propylene copolymers (EPD), and ethylene-propylene terpolymers (EPDM).
EPDM is produced from the polymerization of ethylene and propylene. EPDM is
characterized by poor adhesion and slow curing, which makes blending with other rubbers
difficult. Advantages to using EPDM include low cost, resistance to cracking, and low
temperature flexibility. After SBR and BR, EPDM is third in terms of production volume
of all the synthetic rubbers. EPDM compounds have been developed for a great variety of
applications, among which automotive and appliance uses have been particularly
significant. End uses include roofing membranes, impact modifiers, oil additives,
automobile parts, gaskets and seals, and hoses and belts. The wide range of uses of this
elastomer is attributable to its multifunctional nature.
2.2.2.5 Nitrile Butadiene Rubber. NBR is a copolymer of acrylonitrile and butadiene.
Its most significant characteristic is its resistance to oil. NBR is the preferred product for
gasoline hoses, gaskets, and printing rolls. Many of the properties of nitrile rubber are
directly related to the proportion of acrylonitrile in the rubber. NBR is used in many hose
applications where oil, fuel, chemicals, and solutions are transported. In powder form,
NBR is used in cements, adhesives, and brake linings, and in plastics modification. NBR
is also used in belting and cable, in addition to its uses in O-rings and seals, adhesives
and sealants, sponges, and footwear.
2.2.2.6 Neoprene. Polychloroprene, also known as Neoprene, is produced from
chloroprene through an emulsion process. Neoprene differs from BR, SBR, butyl rubber,
and EPDM because it is costlier and does not possess characteristics which make it
favorable for use in automobile tires. Its flexibility, high resistance to oils, strength, and
resistance to abrasion, however, make it suitable for other diverse uses. Neoprene is
similar to NBR in end uses, given that the primary use is for hoses and belts, with the
remainder allocated among mechanical, adhesive, and wire and cable end uses.
Manufacturers of shoes, aircraft, automobiles, furniture, building products, and industrial
components rate Neoprene adhesives as a versatile material for adhesive purposes. The
oldest use of Neoprene is as a jacket for electrical conductors in such products as
appliances and telephone wires. In latex form, Neoprene is used to manufacture
household and industrial gloves.
8
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2.2.2.7 Hypalon. Chlorosulfonated polyethylene, also known by the trade name
Hypalon, is formed solely from polyethylene through a chlorination and chlorosulfonation
process. Although a breakdown of Hypalon among end uses was not available, it is used
as a substitute for most of the other standard elastomers, including uses which demand
resistance to heat and oil. Uses of Hypalon include coatings for roofs and tarpaulins, hose
construction, wire coverings, industrial rolls, and sporting goods.
2.2.2.8 Epichlorohydrin Elastomers. The production of EPI uses epichlorohydrin,
ethylene oxide, and allyl glycetal ether, which are combined in a polymerization process.
Information on epichlorohydrin elastomers was limited. Its primary use is as an
automotive rubber, for applications including gaskets and hoses.
2.2.3 Affected Elastomer Facilities, Employment, and Location
The proposed NESHAP will affect 35 facilities, which are owned and operated by 18
firms. SBR production as a whole (SBR and SBL) includes the highest number of
producers of any of the other rubber types in Group I. Table 2-1 shows the distribution of
production capacity among the producers of SBR and SBL. The top four firms share 70
percent of the total industry SBR capacity. Uniroyal Goodrich Tire Company and The
Goodyear Tire & Rubber Company own 32 percent and 37 percent of SBR capacity,
respectively. The remaining 5 SBR manufacturers operate between 3 percent and 11
percent of industry capacity. The SBL market is less concentrated than that of SBR.
Reichhold Chemical is the dominant firm, with 29 percent of industry capacity; Dow
Chemical owns the next highest percentage at only 23 percent of capacity.
The production capacity for BR manufacturers is listed by firm and facility location in
Table 2-2. The capacity for producing polybutadiene rubber is shared by four firms. The
market concentration in this industry subcategory is more concentrated than in the SBR
industry. The Goodyear Tire & Rubber Company owns the highest degree of production
capacity, with 50 percent of the total. The second largest producer is Bridgestone/
Firestone Inc., with 26 percent of industry capacity. The top two firms in the
polybutadiene rubber industry share 76 percent of capacity, indicating a high level of
market concentration.
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TABLE 2-1. STYRENE BUTADIENE RUBBER (SBR) AND LATEX (SBL)
MANUFACTURERS AND CAPACITY, 1992 12 3
Capacity (Million kilograms)
Company SBR
American Synthetic Rubber Co. 41
BASF Corp.
Bridgestone/Firestone Inc. 120
Copolymer Rubber & Chemical Corp. 45
Dow Chemical 33
Gencorp
General Tire 117
The Goodyear Tire & Rubber Company 428
Hampshire Chemical
Reichhold Chemicals
Rhone-Poulenc, Inc.
Rohm & Haas
Uniroyal Goodrich Tire Co. (Ameripol Synpol) 362
Total 1,146
Percentage
of Total
3.6%
10.5%
3.9%
2.9%
10.2%
37.3%
31.6%
100.0%
Percentage
SBL of Total
88
154
62
52
2
193
36
70
656
13.4%
23.4%
9.4%
7.9%
0.3%
29.4%
5.5%
10.7%
100.0%
10
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TABLE 2-2. POLYBUTADIENE RUBBER MANUFACTURERS AND CAPACITY, 1991
1 2 3
Capacity
(Million Percentage
Company Facility Location kilograms) of Total (%)
American Synthetic Rubber Corp. Louisville, KY 119 13.3%
Bridgestone/Firestone Inc. Lake Charles, LA 122
Orange, TX 111
BRIDGESTONE TOTAL 233 25.9%
The Goodyear Tire & Rubber Company Beaumont, TX 449 50.0%
Miles Inc. (Polysar Rubber Division) Orange, TX 97 10.8%
Total 897 100.0%
11
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Table 2-3 presents a similar industry breakdown for ethylene-propylene rubber
manufacturers. This industry subsegment is the least concentrated subsegment of those
in Group I. Copolymer Rubber & Chemical Corporation and Uniroyal Chemical Company
are the top two firms by production capacity ownership, with 30 percent and 22 percent of
industry capacity, respectively. Exxon Corporation owns the third highest percentage of
capacity with 21 percent. The remaining 27 percent of capacity is shared by the other two
producers.
Table 2-4 shows the relative size of the five nitrile butadiene rubber manufacturers
and the two NBL manufacturers. Copolymer Rubber Corporation and Goodyear Tire &
Rubber are the two main competitors in the NBR market, sharing 63 percent of total
industry capacity. Zeon is the other major player, with 21 percent of capacity. Reichhold
Chemical owns 95 percent of the total national NBL production, with the remaining 5
percent owned by Hampshire Chemical.
The producers of Neoprene are shown by facility in Table 2-5. DuPont is the primary
producer with 81 percent of industry capacity at 2 facilities. Miles Inc. is the other
producer with the remaining 19 percent of industry capacity. Each of the remaining
rubbers (butyl rubber, EPI, halobutyl rubber, and Hypalon) are produced by only one
firm.
On a firm level, employment data were available for each of the 18 affected firms.
Firm-level employment data will satisfy the requirements of the RFA by identifying the
percentage of affected firms that classify as small businesses. Specifically, the RFA
requires the examination of the economic impacts of regulations on "small businesses." A
regulatory flexibility analysis must be prepared if a proposed regulation will have a
significant economic impact on a substantial number of small entities. The first step in
the determination of the effect of the Group I NESHAP on small firms is to assign the
appropriate definition of a small entity in the Polymers and Resins Group I industry. The
U.S. Small Business Administration (SBA) defines small businesses in SIC code 2822 as
employing a work force of 750 employees or less.4
12
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TABLE 2-3. ETHYLENE-PROPYLENE RUBBER MANUFACTURERS AND
CAPACITY, 1991123
Company
Copolymer Rubber & Chemical Corp.
E.I. Du Pont de Nemours, Inc
Exxon Corporation
Miles Inc. (Polysar Rubber Division)
Uniroyal Chemical Company, Inc.
Total
Facility Location
Addis, LA
Beaumont, TX
Baton Rouge, LA
Orange, TX
Geismar, LA
Capacity
(Million
kilograms)
121
73
85
32
88
399
Percentage of
Total (%)
30.4%
18.2%
21.2%
8.1%
22.1%
100.0%
TABLE 2-4. NITRILE BUTADIENE RUBBER AND LATEX MANUFACTURERS
AND CAPACITY, 1991123
Capacity (Million kilograms)
Company
NBR
Percentage
of Total
NBL
Percentage
of Total
Copolymer Rubber & Chemical Corp. 36
The Goodyear Tire & Rubber Company 51
Hampshire Chemical
Miles Inc. (Polysar Rubber Division) 2
Reichhold Chemicals
Uniroyal Chemical Company, Inc. 20
Zeon 29
Total 141
26.1%
37.0%
1.4%
14.5%
21.0%
100.0%
103
5.0%
95.0%
108
100.0%
13
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TABLE 2-5. NEOPRENE MANUFACTURERS AND CAPACITY, 19911 2 3
Capacity Percentage of
Company Facility Location (Million Kilograms) Total (%)
DuPont La Place, LA 39
Louisville, KY 75
DUPONT TOTAL 114 81%
Miles Inc. Houston, TX 27 19%
Total 141 100%
14
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Table 2-6 lists 1991 employment levels for each of the affected firms. Of these firms,
only five employ a workforce of less than 1,000. Of these five, Ameripol Synpol and
American Synthetic Rubber Corporation are affiliated with large business entities.
Because only three firms qualify as small businesses, an RFA may be unnecessary. EPA
may adopt an alternative definition of a small business if an alternative size cutoff can be
justified. If EPA exercised this option, the determination of whether an RFA is necessary
would need to be reconsidered. The results of examining the effects of the Group I
NESHAP on these five small firms is presented in Chapter 7.0.
The distribution of affected facilities is shown on a regional and State basis in
Figure 2-1. Certain industry characteristics are evident from the regional categorization
in this figure. Of the 35 affected facility locations, 50 percent are located in the South
Central United States. The geographical distribution of the affected facilities will be
critical to the determination of the regional impacts of the NESHAP. The leading States
by number of facilities are Texas, Louisiana, and Kentucky. Table 2-7 provides a
summary of the national production capacity by firm, location, and synthetic rubber type.
Each firm in the table is identified by facility location and corresponding 1991 production
capacity, where available. Only domestic facilities are included in the table, since only
firms located in the United States will be forced to incur the costs of pollution control
equipment after promulgation of the NESHAP. The majority of facilities in the Polymers
and Resins I source category produce styrene-butadiene latex. In terms of capacity,
styrene-butadiene rubber is the synthetic rubber with the second highest production
capacity.
2.3 MARKET STRUCTURE
The purpose of this section is to characterize the market structures in the Group I
industries. Market structure has important implications for the resultant price increases
that occur as a result of controls. For example, in a perfectly competitive market, the
imposition of control costs will shift the industry supply curve by an amount equal to the
per-unit control costs, and the price increase will equal the cost increase. An indication of
the market structure of the affected Group I industries is provided by an assessment of
the number of firms operating resin facilities, vertical integration, and diversification.
15
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TABLE 2-6. 1991 EMPLOYMENT LEVELS OF POLYMERS AND RESINS
GROUP I FIRMS5 6
Firm Name Number of Employees
American Synthetic Rubber Corp. 340
Ameripol Synpol 850
BASF Corp. 133,759
Bridgestone/Firestone Inc. 53,500
Copolymer (DSM) 732*
Dow Chemical 62,100
E.I. Du Pont de Nemours, Inc. 124,916
Exxon Corp. 104,000
Gencorp 13,900
General Tire Inc./Dynagen 9,600
The Goodyear Tire & Rubber Company 107,671
Hampshire Chemical 750*
Miles Inc. (Polysar Rubber Division) 1,200
Reichhold Chemicals, Inc. 9,500
Rhone-Poulenc, Inc. 9,300
Rohm & Haas 12,872
Uniroyal Chemical Company, Inc. 3,000
Zeon 400*
NOTES: *Those firms with asterisks are defined as small businesses for SIC code 2822.
16
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2.3.1 Market Concentration
Market concentration in an industry is an indication of the control that firms have
over their pricing, policies. Market concentration is typically expressed as the percentage
of industry output controlled by the largest firms; however, for Polymers and Resins
Group I, the necessary production data on a firm level by rubber type were not accessible.
For this analysis, therefore, market concentration in each of the Group I industries was
assessed in terms of production capacity rather than by a specific measure of elastomer
output. Because butyl rubber, halobutyl rubber, Hypalon, and EPI are each produced by
only one firm, market concentration will not be considered for these four industries.
Uniroyal Goodrich and Goodyear Tire & Rubber dominate the market for SBR, with
the remainder of production capacity allocated among 5 producing firms. Market
concentration among SBL producers is more highly concentrated in the hands of fewer
producers. Reichhold Chemical is the primary producer of SBL, operating 29 percent of
total national SBL capacity. The remaining SBL capacity is owned and operated by 7
other firms. The majority of the national polybutadiene production capacity is owned by
the Goodyear Tire & Rubber Company with 50 percent of the total, with the second
largest producer being Bridgestone/Firestone Inc. with 26 percent of industry capacity.
The remaining 24 percent of BR capacity is shared by 4 other firms.
The EPDM industry is the least concentrated industry in the Group I source category.
Capacity is shared by 5 producers, with no one firm dominating the market. The market
for NBR is dominated two firms which collectively operate 63 percent of total industry
capacity. The Goodyear Tire & Rubber owns 37 percent of national capacity, followed by
Copolymer Rubber & Chemical Corporation which operates 26 percent of total capacity.
Zeon Chemicals is the other major producer with 21 percent of total national capacity.
The major player in the NBL market is Miles Chemical with 95 percent of industry
capacity. Lastly, of the two firms in the Neoprene industry, DuPont controls 81 percent of
total industry capacity.
20
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2.3.2 Industry Integration and Diversification
Synthetic rubber facilities are mainly owned by oil and chemical companies, rubber-
product manufacturers (tires, for example), or independents. The majority of affected
Group I firms are large firms that are vertically integrated to the extent that the same
firm supplies input for several stages of the production and marketing process. The
majority of firms in this industry own segments that are responsible for the production of
the chemical inputs which are manufactured for captive use in rubber production. Other
firms produce the rubbers being profiled in this report for captive use as an input into
rubber products, such as automobile tires. For example, as was shown in Table 2-1, the
largest SBR producers are Uniroyal Goodrich Tire Company and The Goodyear Tire &
Rubber Company. Each of these firms is a significant player in the global tire market.
The world tire industry is currently characterized by overcapacity, lower profits than the
historical average, and increased competition for market share.7 As of December 1990, six
producers controlled 80 percent of global tire production, a fact which reflects the high
levels of consolidation in the past decade. In the past 2 years, further consolidation has
taken place. Goodyear, which is one of only two remaining domestic tire producers,
controls 28 percent of worldwide tire production. Goodyear also operates 52 percent of
domestic polybutadiene rubber capacity. (The majority of SBR and polybutadiene
produced is used in tire manufacturing.) This indicates that any potential effect of the
Group I NESHAP on the polymers and resins industry would also have a related and
potentially significant effect on the global tire industry. Firms that are vertically
integrated could therefore be indirectly affected by the NESHAP in the factor and product
markets for various rubbers, particularly if demand for synthetic rubber decreases and
production in the tire market, for example, suffers as a result. Domestic tire producers,
in particular, could be adversely affected.
For the larger firms in this industry, horizontal integration exists to the extent that
these firms operate several plants which manufacture one or more Group I elastomers.
Table 2-7 provided an indication of the horizontal integration of the industry, as
represented by the number of companies that either operate several SBR facilities, for
example, or supply more than one Group I elastomer. Of the 18 firms in the industry, 12
operate more than one plant. The major firms operate several plants, and the largest,
Dow, operates plants in five States. Of those firms producing more than one synthetic
21
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rubber type, the Goodyear Tire & Rubber Company and Miles Inc. each manufacture four
of the synthetic rubbers in the Group I source category.
Diversification indicates the extent to which a firm has developed other revenue-
producing operations, in this case, in addition to synthetic rubber production. Many of
the firms in the synthetic rubber industry comprise larger corporations with a variety of
product areas. Several are large players in the oil industry, including Exxon and Unocal.
E.I. Du Pont is a major firm in the chemical industry. Other synthetic rubber producers
are part of several other industries, such as Dow Chemical. Given that many of the major
firms in this industry are in divisions of large, diversified corporations, the financial
resources for capital investment in control equipment may be more accessible than for an
industry characterized by a large number of smaller firms.
2.3.3 Financial Profile
This subsection examines the financial performance of a sample of affected Group I
firms. The financial data presented here were obtained by request from Dun and
Bradstreet's Supplier Evaluation Reports.8 Although Dun and Bradstreet provided
financial data for all 18 affected firms, the data reported for two firms were either too
sparse for inclusion in the sample, or the categories reported were inconsistent with the
data provided for the other firms. To supplement the Dun and Bradstreet data,
information was obtained from a sample of the firms' annual reports.
Because the EIA is conducted on a firm level, it is useful to examine overall corporate
profitability as a preliminary indicator of the baseline conditions of affected firms in the
industry. Corporate-level data are also useful as an indication of the financial resources
available to affected firms and the ability of this capital to cover increased compliance
costs after promulgation of the NESHAP.
Table 2-8 presents net income to assets ratios which were averaged from 1987 to 1991
for each firm. Also presented are long-term debt to long-term debt plus equity ratios for
the most current year for which data were available. Net income to assets ratios are
provided for 16 of the 18 affected firms, and range from minus 6 percent for
22
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TABLE 2-8. FINANCIAL STATISTICS FOR AFFECTED FIRMS8
Company
American Synthetic Rubber Company
BASF Corporation
Bridgestone/Firestone Inc.
Copolymer (DSM)
Dow Chemical
E.I. DuPont de Nemours, Inc.
Exxon Corporation
Gencorp
General Tire Inc./Dynagen
Goodyear Tire & Rubber Company
Miles Inc.
Reichhold Chemicals, Inc.
Rhone-Poulenc, Inc.
Rohm & Haas
Uniroyal Chemical Company
W. R. Grace (Hampshire Chemical)
Net Income to Assets
1987 to 1991 Average
(%)
3.7%
18.4%
(6.4%)
2.1%
8.7%
2.7%
5.9%
3.5%
3.4%
4.2%
2.2%
1.3%
11.5%
9.8%
10.4%;
3.5%
Long Term Debt to
LT Debt and Equity
(%)
66.3%
N/A
68.1%
N/A
62.7%
60.7%
20.4%
61.8%
N/A
46.6%
53.1%
N/A
32.2%
35.1%
N/A
46.77o
NOTE: N/A = not available.
-------
Bridgestone/Firestone to 12 percent for Rhone-Poulenc. Long-term debt to equity ratios
are provided for 11 of the 18 firms, and range from 20 percent for Exxon Corporation to
68 percent for Bridgestone/Firestone. A financial impact analysis and capital availability
analysis was completed based on the results of the partial equilibrium analysis to
determine the effect of NESHAP control costs on the financial conditions of affected firms.
The results of the capital availability analysis are presented in Section 5.3 of this report.
2.4 MARKET SUPPLY CHARACTERISTICS
This section analyzes the supply side of the Group I industries. Historical production
data are presented, and the factors that affect production are identified. The role of
foreign competition in this industry is also assessed. The focus of this section is on
overall industry supply and the existing conditions in the marketplace.
2.4.1 Supply Trends
In recent years, overall domestic production of synthetic rubbers has remained below
the peak levels it reached in 1988. Synthetic rubber production fell in 1991 for the third
consecutive year. These low production levels have been attributed to a decrease in
domestic automobile production, low levels of economic activity, and higher import levels
of automobile parts and other rubber products. Figure 2-2 shows the production levels
from 1985 to 1991 for the three major synthetic rubber types classified in the Group I
source category. The overall growth rate for SBR during this time period was 18 percent.
Because SBR relies mainly on the tire industry for profits, producers have been harder hit
by lower automotive production than the other, more diversified Group I rubbers.
The growth rate for BR between 1985 and 1991 was 28 percent. Butyl rubber
production data were reported in a category which encompasses butyl rubber, Neoprene,
Hypalon, polyisoprene, silicon, and other synthetic elastomers. The production levels of
this elastomer category have fluctuated during this 7-year period, and are currently at
1988 levels. Butyl rubber production, in particular, has declined due to a decrease in
demand from the inner tube market.
24
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Figure 2-3 shows similar production data for NBR and EPDM. The production of
EPDM increased fairly consistently during the 1980s, which was due to its increased use
in wire and cable insulation, roofing membranes, viscosity additives, automobile parts,
and impact modifiers for thermoplastics.10 Overall, NBR has shown very little growth
during this time period.
2.4.2 Supply Determinants
Synthetic rubber production decisions are primarily a function of input prices,
production costs, elastomer prices, existing capacity levels, and international trade trends.
Decisions made by producers include determining which processors and markets to
continue to serve and which facilities to continue operating. Variations of synthetic
rubbers are constantly being developed to satisfy the changing needs of the rubber
industry and its customers, and to provide greater raw material stability and upgraded
performance properties to meet new demands in end products. Profits depend on the
productivity of the elastomer production site. In the short run, a producer will
manufacture a particular synthetic rubber depending on the capacity of the facility and
the cost of production. The marginal costs of production of each elastomer will determine
any future changes in production.
Generally speaking, synthetic rubber production is capital intensive, requiring
relatively complex production equipment and technology. The input cost that has the
greatest impact on the production decisions of producers in the rubber industry is that of
crude oil, since synthetic rubbers are derived from petroleum feedstock. Butadiene is a
primary feedstock to the production of five of the major Group I rubbers: SBR, SBL,
NBL, BR, and NBR. Historically, the price of butadiene has been affected by the price of
crude oil. In recent years, synthetic rubber producers have been simultaneously faced
with rising feedstock costs and an inability to increase synthetic rubber prices accordingly
because of the high levels of price competition.11
Existing Federal, State, and local regulations can also have an impact on the quantity
of elastomers supplied by domestic facilities. Facilities that are already regulated may
have previously altered their production, and may therefore have already altered the
industry supply schedule. The industry supply curve used in the EIA for each Group I
26
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industry incorporates any changes in production that have occurred as a result of other
regulations to the extent that the supply curve accounts for the level of existing controls
at companies in each affected industry.
Although it is beyond the scope of this profile to review all State and local
regulations, some Federal regulations are important to note here. The NESHAP for
benzene will impact styrene producers, for example, to the extent that benzene prices will
have a direct effect on the production costs of styrene producers. Styrene is a primary
input to SBR and SBL production and any styrene price increases would therefore
increase production costs of both of these elastomers. In addition, the petroleum refining
NESHAP will affect firms in Group T industries which are also producers of petroleum
products, including, for example, Exxon Corporation. Because synthetic rubbers are
produced from petrochemical feedstocks, any impact on petroleum product prices will
influence the affected Group I facilities. Similarly, the NESHAPs for other groups in the
Polymers and Resins categories are also likely to affect many firms in Group I, which are
diversified and produce several types of polymers and resins.
Competition takes place in the synthetic rubber market on two levels: among
producers of the same elastomer type, and among various synthetic rubbers with similar
characteristics. In choosing the appropriate rubber for a given application, end users
consider performance and elastomer price. In addition to competing with each other,
Group I elastomers also compete with natural rubber in certain end uses. Although
natural rubber is unable to compete with specialty elastomers designed for a particular
use, its ease of processability and relatively low cost make it a substitute for several of
the synthetic rubbers in Group I. As stated earlier in this chapter, the largest volume of
rubber is used for tire manufacturing. The polymers used in tires include: natural
rubber, SBR, polybutadiene, butyl, and some EPDM. For use in a tire, the demands
placed on the rubber type include resistance to cracks and abrasion, flexibility, and
stability over time. SBR, polybutadiene, and natural rubber each meet these
requirements after the vulcanization process.
The tradeoff between SBR and natural rubber for use in tire manufacturing has
typically been one of economics. SBR has more favorable abrasion resistance than
natural rubber, but is poorer in heat buildup. In certain instances, for example, in heavv-
28
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duty truck and bus tires, natural rubber is preferred over SBR because of such properties
as crack resistance. Because of a market switch to radial tires, the percentage share of
natural rubber relative to the percentage share of elastomers in the rubber market has
increased. Generally speaking, the advantage of synthetic rubber over natural rubber is
the existence of ample production capacity, widespread uses, and processing advantages.
Both Neoprene and natural rubber are options in end uses which demand flexibility
and resilience. Natural rubber competes with Neoprene for use in bridge bearings. For
products with lower quality including footwear, garden hoses, and mats, SBR and natural
rubber are competitors, and both can be mixed with high levels of reclaimed rubber to
decrease production costs. In these applications where SBR and natural rubber are more
interchangeable, pricing plays a more significant role.
EPDM, butyl, Neoprene, EPI, and Hypalon are each resistant to ozone effects. SBR,
BR, NBR, and natural rubber are non-ozone resistant, but can be blended with other
materials to achieve this property. SBR and natural rubber are not suitable for uses
which demand oil resistance, such as special grades of hose, for example. Neoprene, NBR,
and EPI are suitable in these uses. In cases where extreme heat resistance is required,
EPDM, butyl, Hypalon, Neoprene, and NBR are suitable. For uses which require low
temperature flexibility, EPDM, polybutadiene, natural rubber, and SBR are best.
The compounding process allows for any of the eleven synthetic rubbers in this report
to be modified to achieve a suitable property. Changes in demand specifications can
significantly affect the synthetic rubber market, which is characterized by similar
products with diverse chemical properties. NBR and Neoprene have both been negatively
affected by weak automobile sales, while increased demand for EPDM has been triggered
by a necessity for high-performance, cost-effective rubber components. EPDM has a more
favorable cost performance ratio than NBR or Neoprene and, as a result, market growth
is predicted for EPDM in developing countries which are in a period-of industrialization.11
(EPDM prices hover around 45 cents per kilogram, while competing elastomers are
typically higher.)
29
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In addition to competing with each other, the commodity rubbers in Group I also
compete with specialty rubbers, which include thermoplastic elastomers (TPEs), silicones,
and fluorocarbons. In 1991, specialty rubbers supplied about 8 percent of domestic rubber
demand, an increase of 5 percent from 1990.12 Benefits of TPEs include easier
processability and recyclability. The costs of manufacturing TPEs are also lower than for
vulcanizing the thermoset rubbers. In addition to the economic advantages of TPEs,
another favorable characteristic is that these elastomers can be designed to meet specific
user criteria. TPEs are not well-suited for use in tires, since they do not possess the wide
temperature performance range of most Group I rubbers, nor are the TPEs able to resist
deformation at high temperatures. As a result, the share of the tire market held by
Group I elastomers is sheltered from competition from TPEs. In 1991, the allocation of
North American rubber use among the three rubber categories was as follows: synthetic
rubber, 68 percent; natural rubber, 24 percent, and TPEs, 8 percent.13 The International
Institute of Synthetic Rubber Producers (IISRP) projects that SBR, BR, NBR, Neoprene,
and natural rubber will each lose market share as thermoplastics use increases. EPDM is
the only Group I rubber whose market share is expected to grow.14 The end-use markets
in which TPEs compete with natural and synthetic rubbers are shoe soles, polymer
modifiers, adhesives, and automotive parts.
Several Group I producers, however, also operate TPE capacity. Du Pont, for
example, is the sole supplier of Neoprene but also produces EPDM, several TPEs, and
inputs to TPEs. Although thermoset plastics are less expensive per kilogram than TPEs,
the production process for TPEs is less complex and has lower overall process costs. As
Group I firms expand into the TPE market, one possibility is that capacity for synthetic
rubbers will be idled as TPE production becomes more profitable. In general, TPEs are
most likely to replace Group I elastomers in applications where the same performance
properties are either not necessary, or can be sacrificed in order to cut costs.
2.4.3 Exports of Group I Elastomers
Some measure of the extent of foreign competition can be obtained by comparing
exports with domestic production. The Foreign Trade Division of the United States
Bureau of the Census collects trade by polymer type according to a commodity coding
system. In 1991, exports of all synthetic rubbers accounted for 22 percent of domestic
30
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production. In 1991, exports of butyl rubber were 1.4 million kilograms, or 20 percent of
domestic production, while exports of NBR comprised 24 percent of domestic production.
Exports of polybutadiene rubber totalled 101 million kilograms in 1991 which represented
27 percent of domestic production, and exports of EPDM comprised 29 percent of domestic
production. SBR exports were 152 million kilograms in 1991, or 23 percent of production,
and SBL exports were 22 percent of domestic production. (Neoprene, Hypalon, and EPI
are not published as line items by the Bureau of the Census.)15
2.5 MARKET DEMAND CHARACTERISTICS
The purpose of this section of the chapter is to characterize the demand side of the
Group I industries. The following sections present an examination of the factors that
determine demand levels, including the identification of the end-use markets, an
evaluation of historical consumption patterns, and an assessment of the role that imports
play in satisfying domestic demand.
2.5.1 End-Use Markets for Group I Elastomers
In general, the primary use of Group I elastomers is as an input into the production
of tires. Globally, tires accounted for 60 percent of synthetic rubber use in 1991. The
categorization of the remaining 40 percent of synthetic rubber production into distinct end
uses is complex. The Group I elastomers are used as input for many diverse types of
products, including components for machinery and equipment (for example, belting and
hoses), wire covering, construction (including roofing materials), and consumer items.
Synthetic rubbers are also used for waterproofing, sealing, and electrical and thermal
insulation.
In addition to the automotive market, other major end-use markets for synthetic
rubbers include construction products, industrial use, and miscellaneous applications,
such as footwear, adhesives, sealants, and electrical products. Market conditions affecting
demand have developed in the non-tire markets as well. Environmental concerns, and
particularly new technology, have generated the need for more resilient end-use products,
causing one elastomer to gain market share at the expense of another. In the
manufacture of automobile and electrical parts in 1986, for example, SBR began to lose
31
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sales to thermoplastic blends and EPDM, which possessed better heat resistance
properties.
2.5.2 Demand Determinants
The bulk of synthetic rubber produced is sold by the producer to another
manufacturer for use in a manufacturing process (or construction) or for incorporation
into some other product. Consequently, demand levels are mainly determined by the
overall conditions in the industries which use Group I rubbers as inputs. The demand
for Group I synthetic rubbers is primarily determined by price level, the price of available
substitutes, general economic conditions, and end-use market conditions. The degree to
which price level influences the quantity of elastomers demand is referred to as the price
elasticity of demand, which is explored later in this report. Due to the inherent
substitutability among the synthetic rubber types in Group I, price is often a significant
demand determinant. Historical price trends from 1987 to 1991 are shown in constant
dollars in Figure 2-4. Increased competition from TPEs in recent years has contributed to
downward pressure on prices. Polybutadiene and NBR prices have declined since 1987,
and price levels for the other Group I elastomers have experienced yearly fluctuations
over this time period.
In addition to price, the consumption of Group IV resins is determined by general
economic conditions and the health of end use markets. Overall, the depressed conditions
of both the global and domestic economies have had negative effects on synthetic rubber
markets. The rate of growth in real GDP from 1981 to 1992 was 28.4 percent overall, an
average annual growth rate of 2,4 percent for this 12-year period, while the growth rate
from year to year has ranged from a decrease of 1.2 percent to an increase of 6.2 percent
during this period. Since synthetic rubbers are tied directly to manufacturing industries,
slow GDP growth generally results in low growth levels for the synthetic rubber market.
The demand levels for synthetic rubber have historically followed a cyclical pattern
which reflects overall economic conditions and mirrors the fluctuations in demand for
domestically produced tires, automobiles, and other automotive products. Tires and tire
products, for example, have historically accounted for roughly half of the synthetic
rubbers
32
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consumed in the United States, but changes in tire technology, such as smaller tires and
improved tire life, have in turn reduced the demand for butadiene-based elastomers. Two
factors negatively influencing demand are the growth in popularity of imported cars
(which come equipped with foreign-made tires) and the significant upturn in sales of
imported replacement tires, whose low cost adversely affects sales of retreaded tires.
Figure 2-5 presents the 10-year trends for the two major end uses of Group I rubbers:
tires and automotive components. Tire production has been relatively stable after
increasing during the early 1980s. In contrast, automobile production has experienced
more volatile production levels, and has been declining since 1988. The recent declines in
both end-use industries can be attributed to the trend of consumers using their
automobiles over a longer time period, and purchasing replacement tires for existing
vehicles.
2.5.3 Past and Present Consumption
Overall, sales levels for Group I elastomers have been in a slow growth period since
1987, with the exception of SBR, which has shown more significant growth. Figure 2-6
presents historical sales trends for the years 1987 through 1991 for the four main rubber
types, as well as a category encompassing all other elastomers. Each of the rubber types
has maintained relatively stable sales levels over this period, with the exception of SBR,
.vhose sales have increased 33 percent.
2.5.4 Imports of Group I Elastomers
Imports as a percentage of domestic consumption range from 2 to 31 percent for
Group I elastomers. Trade data for EPI, Hypalon, and Neoprene were not available from
the U.S. Bureau of the Census. In 1991, imports of butyl rubber were only 1.3 million
kilograms, 2 percent of domestic consumption. As a percentage of domestic consumption,
NBR imports were 17.4 million kilograms, or 23 percent of domestic NBR sales in 1991.
In 1991, imports of polybutadiene were 71 million kilograms and accounted for 31 percent
of domestic polybutadiene sales. EPDM imports were 13 million kilograms in 1991,
which accounted for 7 percent of consumption, SBL imports were 25.5 million kilograms
34
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in 1991, or 11 percent of domestic SBL consumption. Imports of SBR were 55.6 million
kilograms, which represented 9 percent of domestic consumption in 1991.20
2.6 MARKET OUTLOOK
This section presents quantitative capacity growth forecasts available from the
literature for each affected Group I industry. Forecasts are important to the EIA since
future market conditions contribute to the potential impacts of the NEStiAP which are
assessed for the fifth year after regulation.
As discussed in Section 2.4, the domestic supply of these synthetic rubbers will be
influenced by technology, production costs, and price. One of the underlying conditions
that will ultimately affect the supply outlook for synthetic rubber, given increased
regulations, is the industry's projected production capacity. Given that current capacity
utilization is only at 69 percent of total capacity because of low production and high
prices, little expansion is planned in the next five years.21
Due to low levels of automobile production, synthetic rubber output has been falling
for the past three years. Overall, synthetic rubber producers are faced with weak demand
in end-use markets, increasing feedstock costs, and environmental regulation.
Performance requirements from the automotive industry are also changing in response to
new fuel efficiency and emission standards.
The IISRP has projected positive, but low, levels of demand growth for each of the
Group I elastomers through 1997.22 These demand projections are shown in Table 2-9.
With the exception of EPDM, which has an annual growth projection of 4 percent,
demand for each of the Group I rubbers is projected to grow between 0.5 percent and 2
percent per year. In contrast, the demand for TPEs is projected to grow 7 percent
annually between 1992 and 1997.
37
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TABLE 2-9, SYNTHETIC RUBBER DEMAND FORECASTS
(MILLION KILOGRAMS)22
SBR
SBL
Polybutadiene
EPDM
Neoprene
NBR
Other Synthetics
1992
806.0
60.5
473.0
207.5
75.5
112.4
384.8
1993
833.0
61.5
484.0
221.0
76.5
113.7
396.1
Average Annual
Growth: 1992-1997
1.6%
1.8%
2.0%
4.0%'
0.5%
0.8%
2.2%
These low demand forecasts for Group I rubbers are based on slow growth in the tire
and automotive markets. Demand growth for polybutadiene, whose end uses are heavily
reliant on the health of the automotive market, is at a low 2 percent. Its use as an
impact modifier and a polymer additive will result in a modest increase in sales.23 The
future growth predicted for EPDM demand is based on its increased use in roofing
membranes. Although the current lag in housing construction in the United States has
negatively affected EPDM demand, its use outside of North America is expected to
increase.
38
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REFERENCES
1. U.S. Environmental Protection Agency. Office of Air Quality Planning and Standards.
Polymers and Resins I Process Reference. Research Triangle Park, NC. EPA 90-26.
May 1992.
2. Radian Corporation. Draft of Industry Profile on Synthetic Rubber Industry.
Received from L. Sorrels. U.S. Environmental Protection Agency. May 1993.
3. SRI International, Inc. 1992 Directory of Chemical Producers. Menlo Park, CA.
1992.
4. U.S. Small Business Administration. "Small Business Size Standards; Final and
Interim Final Rules." 13 CFR 121. Federal Register. December 21, 1989.
5. Dun & Bradstreet. Supplier Evaluation Reports for Group I Affected Firms. August
1993.
6. Standard & Poor's. Register of Corporations, Directors, and Executives. Volume 1.
McGraw-Hill, Inc. New York. 1993.
7. Schiller. Why Tiremakers Are Still Spinning Their Wheels. Business Week.
February 26, 1990.
8. Reference 5.
9. U.S. Department of Commerce, International Trade Commission. Synthetic Organic
Chemicals: United States Production and Sales, 1970 through 1991. Time Series
Data Request. June 1993.
10. Standard & Poor's, Inc. Industry Surveys: Chemicals. Vol. 160, No. 45. Sec. 1.
November 5, 1992.
11. Chemical Marketing Reporter. Elastomers '92. November 2, 1992.
12. Reference 10.
13. Chemical & Engineering News. Product Report: Thermoplastic Elastomers. May 4,
1992.
14. International Institute of Synthetic Rubber Producers. Worldwide Rubber Statistics.
Houston, TX. 1991
15. U.S. Department of Commerce, Bureau of the Census, Trade Data Inquiries and
Control Section. Information Request. June 1993.
16. Reference 9.
17. Motor Vehicle Manufacturers Association. Facts & Figures 1992. Detroit, MI. 1992.
39
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REFERENCES (continued)
18. Rubber Manufacturers Association. Monthly Tire Report. Washington, DC. 1991.
19. Reference 9.
20. Reference 15.
21. Chemical & Engineering News. World Chemical Outlook. December 14, 1992.
22. Chemical Week. U.S. Rubber Markets Recover. February 3, 1993.
23. Chemical Marketing Reporter. Slow Growth Mode. November 2, 1992.
40
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3.0 ECONOMIC METHODOLOGY
3.1 INTRODUCTION
The purpose of this chapter is to outline economic methodology used in this analysis.
Baseline values used in the partial equilibrium analysis are presented, and the analytical
methods used to conduct the following analyses are described individually in this chapter:
• Partial equilibrium model used to compute post-control price, output, and trade
impacts;
• Economic surplus changes;
• Labor and energy impacts; and
• Capital availability.
3.2 MARKET MODEL
The framework for the analysis of economic impacts on each of the eleven affected
Group I industries is a partial equilibrium model. A partial equilibrium analysis is an
analytical tool often used by economists to analyze the single market model. This method
assumes that some variables are exogenously fixed at predetermined levels. The goal of
the partial equilibrium model is to specify market supply and demand, estimate the post-
control shift in market supply, estimate the change in market equilibrium (price and
quantity), and predict plant closures. This section presents the framework of the partial
equilibrium model, baseline equilibrium conditions, the calculation of the supply curve
shift, and the methodology used to calculate impacts on trade, closure, and labor and
energy inputs. The baseline inputs for each of the eleven affected industries are also
presented.
41
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3.2.1 Partial Equilibrium Analysis
A partial equilibrium analysis was used to estimate the economic impacts of the
regulatory options for each Group I industry. For modeling purposes, it was assumed
that each of the industries is operating in a perfectly competitive market. Perfectly
competitive industries are characterized by the following conditions: many sellers;
production of a homogeneous product; a small market share owned by each firm in the
industry; freely available information regarding prices, technology, and profit
opportunities; freedom of entry and exit by firms in the industry; and competing sellers
which are not considered as a threat to market share.1 The implication of an assumption
of perfect competition to this analysis is that perfect competition constrains firms in the
industry to be price takers due to the absence of the market power necessary to affect
market price. Firms which operate in a perfectly competitive industry are also assumed
to minimize costs.
The Group I industries do not meet the strict definition of perfect competition
particularly when evaluated on the basis of the most widely applied of these criterion -
the number of firms in the market. The number of firms in each of the Group I industries
range from one to eight. Ignoring other factors, these firms are likely to be characterized
as pure monopolists or oligopolists. However, the products produced by these firms have
close substitutability with other products produced in the marketplace. Thus, the affected
firms producing Group I elastomers face competition not only from other firms producing
the same rubbers, and also from firms producing other products which are technically
produced by another industry, but are nonetheless considered to be a reasonable
substitute by the consumer (i.e., business firm) using the elastomer as an input to
production.
In some end uses, Group I elastomers compete with each other. Butyl rubber,
Hypalon, and EPI, for example, which are each produced by one firm, are substitutes for
most of the other standard Group I elastomers, particularly in uses which demand
resistance to heat and oil. The presence of close substitutes in the marketplace yields the
option of modeling industries with one producer as pure monopolist unsatisfactory.
Further adequate modeling of oligopoly markets requires more in-depth economic
behavior information than is currently available, or within the scope of this analysis. It is
42
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reasonable to conclude that the affected Group I firms will exhibit greater market power
(control over the market price) than is postulated in the perfectly competitive model used
in the analysis. However, if one assumes the most extreme case - that each of these firms
is a pure monopolist, the primary market impacts are likely to be less severe than those
estimated in this analysis under the assumption of pure competition.
The pure monopolist maximizes profits by producing a level of production that
equates the firm's marginal revenue (increase in revenue associated with producing one
more unit of a product) with the firm's marginal cost of output (increase in cost resulting
from production of one more unit of a product). SJncreases in fixed costs, such as emission
control capital costs, will not alter the profit maximizing monopolist production quantity
choice unless these costs force the firm to incur economic losses and shut downy Since a
significant portion of the emission control cost estimates considered in this analysis are
due to the necessary capital investment required by firms, it is likely that the estimated
market impacts under the assumption of a competitive marketplace ( i.e. increases in
market price and decreases in market output) would exceed those estimated assuming a
monopoly market. From this standpoint, the assumption of perfect competition may be
interpreted as an upper bound on the estimated market impacts resulting from the
proposed NESHAP.
3.2.2 Market Demand and Supply
The baseline, or pre-control levels for the Group I markets are each defined with a
domestic market demand equation, a domestic market supply equation, a foreign supply
equation (imports), and a foreign demand equation (exports). It is assumed that these
markets will clear, or achieve an equilibrium. Since engineering control costs were
estimated to be zero for the single firm producing Hypalon, this industry will be omitted
from the analysis. The following equations identify the market demand, supply, and
equilibrium conditions for each affected industry:
Q a = ctP£
43
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QS" =
Os' =
O = Q D" + Q °' =Q° + Q'
where:
QDd = the quantity of the Group I elastomer demanded by domestic
consumers annually,
Qaf - the quantity of the Group I elastomer demanded by foreign
consumers and produced by domestic producers annually (or
exports),
Qsd = the quantity of the Group I elastomer produced by domestic
supplier(s) annually,
Qsr = the quantity of the Group I elastomer produced by foreign
suppliers and sold in the United States annually (or imports),
P = the price of the Group I elastomer,
e = the price elasticity of demand for the Group I elastomer, and
y = the price elasticity of supply for the Group I elastomer.
The constants, a, 6, P, and p, are parameters estimated by the model, which are
computed such that the baseline equilibrium price is normalized to one. The market
specification assumes that domestic and foreign supply elasticities are the same, and that
domestic and foreign demand elasticities are identical. These assumptions are necessary,
since data were not readily available to estimate the price elasticity of supply for foreign
suppliers and the price elasticity of demand for foreign consumers.
3.2.3 Market Supply Shift
The domestic supply equation shown above may be solved for the price, P, of each of
the Group I elastomers, respectively, to -lerive an inverse supply function that serves as
the baseline supply function for each industry. The inverse domestic supply equation for
each industry is as follows:
44
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P =(O
A rational profit maximizing business firm will seek to increase the price of the
product it sells by an amount that recovers the capital and operation costs of the
regulatory control requirements over the useful life of the emission control equipment.
This relationship is identified in the following equation:
[(C- Q) -(V + D)] (1 -Q +D _k
S
where:
C = the increase in the supply price,
Q = output,
V = a measure of annual operating and maintenance control costs,
t = the marginal corporate income tax rate,
S = a capital recovery factor,
D = annual depreciation (straight line depreciation is assumed), and
k = the investment cost of emission controls.
Thus, the model assumes that individual elastomer facilities will seek to increase the
product supply price by an amount, C, that equates the investment costs in control
equipment, k, to the present value of the net revenue stream (revenues less expenditures)
related to the equipment. Solving the equation for the supply price increase, C , yields
the following equation:
C kS ~D + V + D
Q(1 - 0 Q
Estimates of the annual operation and maintenance control costs and of the
investment cost of emission controls, V and k, respectively, were obtained from
engineering studies conducted by an engineering contractor for EPA, and are based on
1989 price levels. Production levels reflect calendar year 1991 values. The variables, D
45
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and S, which represent depreciation and the capital recovery factor, respectively, are
computed as follows:
s=_41
[(1 + /T-1]
where:
r = the discount rate faced by producers, which is assumed to be 10 percent, and
T = the life of the emission control equipment, which is 10 years for most of the
proposed emission control equipment.
Emission control costs will increase the supply price for each Group I elastomer by an
amount equivalent to the per unit cost of the annual recovery of investment costs plus the
annual operating costs of emission control equipment, or Ct (i denotes the number of
affected facilities in each of the ten Group I industries). The baseline product cost curves
for each Group I industry are unknown because production costs for the individual
facilities are unknown. Therefore, an assumption is made that the affected facilities in
each industry with the highest after-tax per unit control costs are marginal in the post-
control market. In other words, those firms with the highest after-tax, per unit control
costs also have the highest per unit pre-control production costs. This is a worst-case
scenario model assumption that may not be the case in reality. This assumption,
however, results in the upper bound of possible market impacts occurring as the result of
regulation. Based upon this assumption, the post-control supply function can be
expressed as follows:
__
P =(QSVP)T + C(C, , q)
where:
C (C,, q,) = a function that shifts the r-upply function to reflect the incurrence of
control costs,
46
-------
C, = the vertical shift that occurs in the supply curve for the ith facility
to reflect the increased cost of production in the post-control
market, and
qt = the quantity produced by the ith facility producing each Group I
elastomer, respectively.
This shift in the supply curve is illustrated in Figure 3-1.
3.2.4 Impact of Supply Shift on Market Price and Quantity
The impact of the proposed control standards on market equilibrium price and output
are derived by solving for the post-control market equilibrium and comparing the new
equilibrium price and quantity to the baseline equilibrium conditions. Since post-control
domestic supply is assumed to be segmented, or a step function, a special algorithm was
developed to solve for the 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 the sum of domestic demand and foreign
demand of domestic production equals post-control domestic supply plus foreign supply,
the algorithm simultaneously solves for the following post-control variables:
• Equilibrium market price;
• Equilibrium market quantity;
• Change in the value of domestic production or revenues to producers;
• Quantity supplied by domestic producers;
• Quantity supplied by foreign producers (imports);
• Quantity demanded (domestic production) by foreign consumers (exports); and
• Quantity demanded by domestic consumers.
The changes in these equilibrium variables are estimated by comparing baseline
equilibrium values to post-control equilibrium values.
47
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3.2.5 Trade Impacts
Trade impacts are reported as the change in both the volume and dollar value of
exports, imports, and net exports (exports minus imports). The price elasticity of demand
for each of the products has been assumed to be identical for foreign and domestic
consumers, and the price elasticity of supply is assumed to be the same for foreign and
domestic producers. As the volume of imports rises and the volume of exports falls, the
volume of net exports will decline. Since each of the Group I elastomers being analyzed
has elastic demand (with the exception of SBL that has demand elasticity of -0.99), it is
possible to predict the directional change anticipated in the dollar value of net exports.
As a result of the emission controls, the quantity of exports will decline, while the market
price of each Group I elastomer, respectively, will increase. Price increases for products
with elastic demand result in revenue decreases for the producer. Consequently, the
dollar value of exports is anticipated to decrease as a result of the emission controls.
Since the price paid for imports and the quantity of imports increase, the dollar value of
imports will increase. Since the dollar value of imports rise and the dollar value of
exports fall, the resulting dollar value of net exports will decline in the post-control
market. The price elasticity of demand for SBL is very close to being unitary elastic.
The volume and dollar value of imports is expected to rise for SBL while the dollar value
of exports should change insignificantly. Thus it is likely that the dollar value of net
exports will decline for SBL also.
The following algorithms are used to compute the trade impacts of the proposed
regulatory alternative:
s, /-\s' /"»s'
' = Q, - Q0
= (P, • Q*') - (P0 • Q/')
r\
AC?
49
-------
* QI ) - (P0 *
°l - .ns,
= *VX -
where:
AQs/r = the change in the volume of imports,
= the change in the dollar value of imports,
~ the change in the volume of exports,
= the change in the dollar value of exports,
= the change in the dollar value of net exports, and
= the volume change in net exports.
The subscripts 1 and 0 refer to the post- and pre-control equilibrium values, respectively.
and all other variables have been previously identified.
3.2.6 Plant Closures
It is assumed that a Group I facility will close if its post-control supply price exceeds
the post-control market equilibrium price. Since most of the affected firms produce
diversified products, closure of a facility in the analysis simply means that the firm is
likely to cease production of a particular Group I elastomer, or to eliminate one line of
production. SThe closure analysis does not provide an indication that the firm itself will
shut down, or that an individual facility would necessarily shut down.,)
3.2.7 Changes in Economic Welfare
Regulatory control requirements will result in changes in the market equilibrium
price and quantity of synthetic rubbers produced and sold. These changes in the market
equilibrium price and quantity will affect the welfare of consumers of products
50
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manufactured with Group I elastomers, producers of these products, and society as a
whole. The methods used to measure these changes in welfare are described below.
3.2.7.1 Changes in Consumer Surplus. Consumers will bear a loss in consumer
surplus, or a dead-weight loss, associated with the reduction in the amount of Group I
elastomers sold due to higher prices charged for these synthetic rubbers. This loss in
consumer surplus represents the amount consumers would have been willing to pay over
the pre-control price for production eliminated. Additionally, consumers will have to pay
a higher price for post-control output. This consumer surplus change for domestic
consumers, ACSd, is given by:
Q°a
=|
(QD'/a)e dQ°a + P,Q°a- P0QQ
The change in consumer surplus is an estimate of the losses of surplus incurred by
domestic consumers only. Although both domestic and foreign consumers may suffer a
loss in surplus as a result of emission controls, this study focuses on the change in
domestic consumer surplus only. The variable, &.CSd, represents the change in domestic
consumer surplus that results from the change in market equilibrium price and quantity
occurring after the incurrence of regulatory control costs. While the total change in
consumer surplus is pertinent from the perspective of the world economy, *CSd , the
change in consumer surplus, is relevant to the domestic economy, since it is the welfare
impacts to the domestic economy that are most relevant to this analysis.
3.2.7.2 Change in Producer Surplus. The change in producer surplus is composed of
two elements. The first element relates to output eliminated as the result of emission
controls. The second element is associated with the change in price and cost of production
for the new market equilibrium quantity. The total change in producer surplus is the
sum of these two elements. After-tax measures of surplus changes are required to
estimate the impact of air quality controls on producers' welfare. The after-tax surplus
change is corrtputed by multiplying the pre-tax surplus change by a factor of 1 minus the
tax rate, or (1-t), where t is the marginal tax rate. Every dollar of after-tax surplus loss
represents a corresponding loss in tax revenues of an amount equal to t/(l-t) dollars.
51
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The lower output levels as a result of control costs cause producers to suffer a welfare
loss in producer surplus. Affected Group I facilities which continue producing after the
incurrence of emission control costs realize a welfare gain on each unit produced as a
result of the incremental increase in the market price. Producers will also experience a
decrease in welfare per unit of production relating to the increased capital costs and
operating cost of emission controls. The total change in producer surplus is specified by
the following equation:
s s V - M
APS = [P, Q, " - P0O0 * - j (O/p)y dQ - £ C, qj * (1 -t)
o,"
Since domestic surplus changes are the object of interest, the welfare gain
experienced by foreign producers due to higher prices is not considered. This procedure
treats higher prices paid for imports as a dead-weight loss in consumer surplus. Higher
prices paid to foreign producers represent simply a transfer of surplus from the United
States to other countries from a world economy perspective, but a welfare loss from the
perspective of the domestic economy.
3.2.7.3 Residual Effect on Society. The changes in economic surplus, as measured by
the change in consumer surplus and producer surplus, must be adjusted to reflect the
true change in social welfare resulting from the regulations. The additional adjustments
relate to differences in tax effects and to the difference between the private discount rate
and the social discount rate
Two refinements are necessary to adjust the estimated changes in economic surplus
for tax effects. The first relates to the per unit control cost, C, that reflects after-tax
control costs and is used to predict the post-control market equilibrium. The true cost of
emission controls must be measured on a pre tax basis.
A second tax-related adjustment is required because changes reflect the after-tax
welfare impacts of emission control costs on affected facilities. As noted previously, a one
dollar loss in pre-tax surplus imposes an after-tax burden on the affected plant of an
amount equal to (1-t) dollars. Alternatively, a one dollar loss in after-tax producer
surplus causes a complimentary loss of an amount equal to t/(l-t) dollars in tax revenue.
52
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Economic surplus must also be adjusted because the private and social discount rates
differ. The private discount rate is used to shift the supply curve of firms in each affected
Group I industry since this rate reflects the marginal cost of capital to affected firms. The
economic costs of regulation must reflect the social cost of capital. The social discount
rate reflects the social opportunity cost of resources displaced by investments in emission
controls.
The total adjustment for the two tax effects and the social cost of capital is referred to
as the residual change in economic surplus, or A/2S. This adjustment is specified by the
following equation:
M
AP.S = £ (C. - pc)qt + APS • [tf(1 -I)}
/-i
where:
pc, = the per unit cost of controls for each Group I facility, assuming a tax rate of
zero, and a discount rate of 7 percent.
All other variables have been previously defined.
3.2.7.4 Total Economic Costs. The total economic costs of the proposed regulation are
the sum of the changes in consumer surplus, producer surplus, and the residual surplus.
This relationship is defined in the following equations:
EC = ACSd + APS + AflS
where:
EC = the economic cost of the proposed controls.
All other variables have been previously defined.
3.2.8 Labor Input and Energy Input Impacts
The estimates of the labor market and energy market impacts associated with the
alternative standards are based on the baseline input-output ratios and the estimated
changes in domestic production.
53
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3.2.8.1 Labor Input Impacts. The labor market impacts are measured as the number
of jobs lost due to domestic output reductions. The estimated number of job losses are a
function of the change in the level of production that is anticipated to occur as a result, of
the proposed emission controls. Employment information is not available on a synthetic
rubber-specific basis. For this reason, total production wages paid and hours worked are
based upon the levels reported for SIC code 2822, Synthetic Rubbers (Vulcanizable
Elastomers). The ratio of production wages to total revenues for SIC code 2822 is
calculated. This ratio is then multiplied by the decrease in value of domestic production
for each industry to establish the wage decrease that is likely to occur as a result of the
NESHAP. This decrease in production wages is divided by the average 1989 hourly wage
and by 2,000 hours (average number of hours worked annually per employee) to estimate
the transitional employee layoffs that are likely to result from the regulation. The loss in
employment expressed in terms of number of workers is specified as follows:
A/. = (LCQ * (P0 * (0^ - G0S<)] / WQ I 2000
where:
A!/ = the change in the employment level expressed in terms of number of
workers,
LC0 = the total production wages based on 1989 price levels and 1991
production levels, and
W0 ~ the hourly wage for production workers in SIC code 2822 based on 1989
price levels.
In the above equation, the number 2,000 represents the number of hours worked
annually by an employee, subscripts 0 and 1 represent pre-control and post-control
values, respectively, and all other variables have been previously defined.
3.2.8.2 Energy Input Impacts. The reduction in energy inputs occurring as a result of
the proposed NESHAP is calculated based on the expected reduction in expenditures for
energy inputs attributable to post-NESHAP production decreases. The expected change
in use of energy inputs is calculated us follows:
54
-------
A£ =
where:
tJE = the change in expenditures on energy inputs, and
E0 = the baseline expenditure on energy input per dollar value of output reported
for SIC code 2822.
All other variables are as previously defined.
3.2.9 Baseline Inputs
The partial equilibrium model used in this analysis requires, as data inputs, baseline
values for variables and parameters that have been previously described to characterize
each of the Group I elastomer markets. (Hypalon is omitted from the analysis based upon
emission control cost estimates of zero for the one producer in this industry.) These data
inputs include the number of domestic facilities currently in operation, the annual
capacity per facility, and the relevant control costs per facility. Table 3-1 lists the
variable and parameter inputs to the model that vary for each Group I industry. Some of
the data inputs were unavailable for the individual synthetic rubber types, or do not differ
across Group I elastomer types. Table 3-2 lists variables and parameters that are
assumed to be the same for each of the affected Group I industries.
Tables 3-1 and 3-2 list the baseline parameters and variables used to characterize
baseline market conditions. The baseline market prices and quantities for each Group I
synthetic rubber were obtained from the U.S. Department of Commerce's International
Trade Commission (ITC).2 Imports and exports of each Group I elastomer were obtained
from the U.S. Department of Commerce's Bureau of the Census.3 The prices are stated in
cents per kilogram excluding taxes, and industry output is stated in millions of kilograms
produced annually. The price elasticities of supply and demand were estimated
econometrically and are discussed in Section 3.3, Industry Supply and Demand
Elasticities.
The marginal tax rate of 35 percent, private discount rate of 10 percent, and social
discount rate of 7 percent are rates that have been assumed for the analysis as surrogates
55
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TABLE 3-2. BASELINE INPUTS FOR THE POLYMERS AND RESINS
GROUP I INDUSTRIES
Variable Value
Supply Elasticity (y) 1.49
Tax rate (t) 35%
Private Discount rate (r) 10%
Social Discount rate 7%
Equipment life (T) 10 years
Labor Cost Ratio (LCo)1 10.98%
Energy Cost Ratio (E0)2 4.46%
Wage (W)3 $29.38
NOTES: ' Production wages per dollar value of shipments (1989$).
2 Energy expenditures per dollar value of shipments (1989$).
3 Per hour production wage for SIC code 2822 (1989$).
57
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for the actual rates in the economy. The marginal tax rate of 35 percent reflects the 1993
marginal corporate rate for the highest income bracket. Since the affected firms are
primarily large multi-product firms, this tax rate seems the most appropriate for this
analysis. No attempt has been made to incorporate State or local taxes into this estimate.
Additionally, the rates vary from 34 percent to 39 percent for taxable income levels above
$100,000 per year. It is reasonable to assume all of the firms subject to the regulation
have taxable income exceeding $100,000 per year. The 7 percent social discount rate is
consistent with the most current United States Office of Management and Budget (OMB)
guidance.4 The equipment life of 10 years was obtained from the engineering study of
emission control costs conducted by an engineering contractor for EPA. This equipment
life is applicable for most of the pollution control equipment considered in the analysis.
The production wages per dollar value of shipments (LC), hours worked, wages, and the
energy expenditure per value of shipments (E) were calculated from data obtained from
the Annual Survey of Manufactures (ASM), for calendar years 1989 and 1991.5 Data from
the ASM, which were used to derive these estimates include: the 1989 and 1991 annual
values for production hours worked and production wages, 1989 and 1991 dollar value of
domestic shipments, 1989 and 1991 price indices for value of domestic shipments, and
the 1989 and 1991 total expenditures on energy. All of the data acquired from the ASM
reflect those values reported for SIC code 2822, Synthetic Rubbers (Vulcanizable
Elastomers).
3.3 INDUSTRY SUPPLY AND DEMAND ELASTICITIES
3.3.1 Introduction
Demand and supply elasticities are crucial components of the partial equilibrium
model used to quantify the economic impact of regulatory control cost measures on the
affected Group I industries. The price elasticities of demand and supply for each
elastomer were unavailable from published sources. It was therefore determined that the
price elasticities of demand and supply should be estimated econometrically for this
analysis. The following sections present the analytical approach and the data employed to
estimate the price elasticities of demand and supply used in the partial equilibrium
analysis. The techniques utilized to estimate the price elasticities of demand and supply
are consistent with economic theory and, at the same time, utilize the available data.
-------
3.3.2 Price Elasticity of Demand
The price elasticity of demand, or own-price elasticity of demand, is a measure of the
sensitivity of buyers of a product to a change in price of the product. The price elasticity
of demand represents the percentage change in the quantity demanded resulting from
each 1 percent change in the price of the product.
3.3.2.1 Approach. Group I synthetic rubbers are used as intermediate products to
produce final goods. The demand for these products is therefore derived from the demand
for these final products. Information concerning the end uses by rubber type is provided
in the Industry Profile for the Polymer and Resins I NESHAP.6 According to the
information contained in this profile report, these Group I elastomers are used primarily
as inputs to the production of tires, automotive hoses and other automotive parts, building
and construction products, and miscellaneous plastic products. Butyl rubber, BR, and
SBR are used primarily as an input into tire production, while EPDM is used primarily
for building and construction materials. EPI, halobutyl rubber, Neoprene, and SBL have
end uses primarily as inputs for miscellaneous rubber products. Finally, NBL and NBR
are used to manufacture components for automobiles. In particular, NBR is used to
produce hoses that are components of automobiles and other transportation vehicles. The
methodology used to estimate the price elasticity of demand for each elastomer will
consider the relevant end use market for each rubber type.
The assumption was made that firms using Group I rubbers as inputs into their
productive processes seek to maximize profits. The profit function for these firms may be
written as follows:
Max 7i = PFP * f(Q, I) - (P * O) - (POI * /)
O, /
where:
7i = profit,
PFP = the price of the final product or end-use product,
f(Q, I) = the production function of the firm producing the final product,
P = the price of the Group I elastomer,
Q = the quantity input use of the Group I elastomer,
59
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POI = a vector of prices of other inputs used to produce the final product, and
I = a vector of other inputs used to produce the final product.
All other variables have been previously defined.
The solution to the profit function maximization results in a system of derived
demand equations for each Group I synthetic rubber. The derived demand equations are
of the following form:
O - 9(P, PFP, POI)
where:
P = the price of the Group I elastomer,
PFP = the price of the final product and
POI = the price of other inputs.
A multiplicative functional form of the derived demand equation is assumed because of
the useful properties associated with this functional form. The functional form of the
derived demand function is expressed in the following formula:
0 =
FP
where:
P - the price elasticity of demand for the Group I elastomer, and
PFP = the final product price elasticity with respect to the use of the Group I
elastomer.
All other variables have been previously defined. P, pFP, and A are parameters to be
estimated by the model. P represents the own price elasticity of demand. The prices of
other inputs (represented by POI) have been omitted from the estimated model because
data relevant to these inputs were unavailable. The implication of this omission is that
the use of Group I elastomers is fixed by technology.
The market price and quantity sold of each Group I synthetic rubber are
simultaneously determined by the demand and supply equations. For this reason, it is
60
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advantageous to apply a systems estimator to obtain unbiased and consistent estimates of
the coefficients for the demand equations.7 Two-stage least squares (2SLS) is the
estimation procedure used in this analysis to estimate the demand equations for the
Group I elastomers. Two-stage least squares uses the information available from the
specification of an equation system to obtain a unique estimate for each structural
parameter. The predetermined, or exogenous, variables in the demand and supply
equations are used as instruments. The supply-side variables used to estimate the
demand functions include: the real capital stock variable for SIC code 2822 adjusted for
capacity utilization (K), a technology time trend (t), and the weighted-average price index
for the cost of labor and materials for SIC code 2822 (P^L).
3.3.2.2 Data. Data relevant to the econometric modeling of the price elasticity of
demand for each Group I synthetic rubber, including the variable symbol, units of
measure, and variable descriptions are listed in Table 3-3. These data were available
from the ITC. The data from ITC contain insufficient consistent time series data to
estimate the price elasticity of demand for butyl, EPI, halobutyl, NBL, and Neoprene.
ITC reports production of these synthetic rubbers in a classification that will be referred
to as Other Elastomers. Demand elasticities were estimated econometrically for EPDM,
NBR, SBL, SBR, BR,and Other Elastomers using time series price and domestic demand
quantity data. A time series of domestic price and sales quantities were obtained for
these six synthetic rubber categories from the ITC for the analysis for the years 1970
through 1991.8
The final products produced with each Group I elastomer differ, as previously
discussed. A series of prices for these final products was sought. Since some of the
products are inputs in the production of miscellaneous rubber products, the price index for
value of shipments for SIC code 3069, Fabricated Rubber Products, Not Elsewhere
Classified is relevant to the demand determination, and was obtained from the U.S.
Department of Commerce. A subcategory of Group I elastomers are used to produce
tires and components for automobiles, so the price index for SIC code 3011, Tires and
Inner Tubes and SIC code 3052, Rubber and Plastic Hose and Belting were also obtained.
Time series price indices data were available from the ASM for these variables for the
period 1970 through 1991.9 Three alternative specifications of the Other Elastomers
category were attempted using the price indices for SIC code 3011, SIC code 3069, and
61
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TABLE 3-3. DATA INPUTS FOR THE ESTIMATION OF DEMAND
EQUATIONS FOR GROUP I INDUSTRIES
Variable Unit of Measure Description
1. Time Trend - t
2. Price (Synthetic rubber type) - P1 price per kilogram Annual Average Price
3. Sales Volume of Synthetic rubber millions of kilograms Quantity sold of
type - Q1 Synthetic rubber type
4. Price Final Goods - PFP
a. Fabricated Rubber Products2 index SIC code 3069
b. Tires and Inner Tubes2 index SIC code 3011
c. Rubber and Plastic Hose, Belting2 index SIC code 3052
5. Cost of material inputs2 millions of dollars SIC code 2822
6. Price index for material inputs2 index SIC code 2822
7. Production Worker Wages2 millions of dollars SIC code 2822
8. Production Worker Hours2 millions of hours SIC code 2822
9. Real Capital Stock2 millions of 1987$ SIC code 2822
10. Capacity Utilization Factor3 percentage SIC code 28
11. Implicit Price Deflator4 index Base year is 1987
NOTES: 1. International Trade Commission.
2. Annual Survey of Manufactures.
3. Federal Reserve Board.
4. Business Statistics 1961-1991.
62
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SIC code 3052, respectively. Only the empirical results for the Other Elastomers
classification using the price index for tires (SIC code 3011) as an end-product was
successful. These results are reported, and have been used in this analysis. Since the
Other Elastomer category is a composite of a number of elastomers, and since the primary
use for all elastomers is for tire production, it is reasonable that the tire end-use
predominates this category.
All price data were deflated to reflect real values using the Implicit Gross Domestic
Price Deflator obtained from Business Statistics for 1970 through 1991.10 CThe real capital
stock variable was adjusted to reflect varying annual capacity utilization using the annual
capacity utilization rate for SIC code 28 obtained from the Federal Reserve Board for the
years 1970 through 1991."/
3.3.2.3 Statistical Results. Two-stage least square econometric models were estimated
for EPDM, NBR, SBL, SBR, BR, and Other Elastomers, respectively, using the previously
discussed data and techniques. The model results for the coefficients of the demand
models for these six Group I industry categories are reported in Table 3-4. Standard
errors are shown in parentheses. The Other Elastomers category is applicable to butyl,
EPI, halobutyl, and Neoprene. Each of the coefficients reported have the anticipated sign
and are statistically significant with the exception of the end-use product coefficient for
NBL/NBR that is not statistically significant but does have the anticipated sign. Each of
the models were adjusted to correct for first-order serial correlation using the Prais-
Winsten algorithm. The NBR, NBL, SBR, and Other Elastomers models were also
corrected for heteroscedasticity. v
The own-price elasticity estimates for each of the Group I elastomers reflect that the
demand for each synthetic rubber type is elastic with the exception of SBL which
approaches unitary elasticity. Regulatory control costs are more likely to be paid by
consumers of products with inelastic demand when compared to products with elastic
demand, all other things held constant. Price increases for products with elastic price
elasticity of demand lead to revenue decreases for producers of the product. Thus, one
can predict that price increases resulting from implementation of regulatory control costs
s-
will lead to a decrease in revenues for firms in the affected Group I industries^ The
change in revenue for SBL should approach zero>
63
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TABLE 3-4. DERIVED DEMAND COEFFICIENTS
Product Own Price p1 End-Use
EPDM
NBR/NBL
SBL
SBR
BR
Other Elastomers2
-1.23
(0.670)
-2.78
(0.908)
-0.99
(0.181)
-3.58
(0,863)
-2.04
(0.326)
-1.17
(0.550)
3.13
(1.90)
2.76
(2.96)
2.13
(1-11)
5.82
(0.255)
3.08
(0.450)
2.11
(0.995)
NOTES: ' Standard errors are shown in parentheses.
2 Applicable to butyl rubber, EPI, halobutyl, and Neoprene.
64
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A degree of uncertainty is associated with this method of demand estimation. The
estimation is not robust since the model results vary depending upon the instruments
used in the estimation process, and as a result of the correction methods for serial
correlation. For these reasons, a sensitivity analysis of the price elasticity of demand
estimates is presented using a range of elasticities that differ by a plus one and minus
one standard deviation from those utilized in the analysis. A lower and upper bound
estimate for EPDM of-0.56 and -1.9, for NBR/NBL of-1.87 and -3.69, for SBL of-0.81 and
-1.17, for SBR of-2.72 and -4.44, for BR of-1.71 and -2.37, and for Other Elastomers of
-0.62 and -1.72 is assumed in this sensitivity analysis. The results of the sensitivity
analysis are reported in Appendix A.
3.3.3 Price Elasticity of Supply
The price elasticity of supply, or own-price elasticity of supply, is a measure of the
responsiveness of producers to changes in the price of a product. The price elasticity of
supply indicates the percentage change in the quantity supplied of a product resulting
from each 1 percent change in the price of the product.
3.3.3.1 Model Approach. Published sources of the price elasticity of supply using
current data were not readily available. For this reason, an econometric analysis of the
price elasticity of supply for the Polymers and Resins Group I industries was conducted.
The approach used to estimate the price elasticity of supply makes use of the production
function. The theoretical methodology of.deriving a supply elasticity from an estimated
production function will be briefly discussed, with the industry production function
defined as follows:
0s =f(L,K,M,f)
where:
0s = the quantity of each Group I elastomer produced by domestic facilities,
L = the labor input, or number of labor hours,
K - real capital stock,
M = the material inputs, and
t = a time variable to reflect technology changes.
65
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In a competitive market, market forces constrain firms to produce at the cost
minimizing output level. Cost minimization allows for the duality mapping of a firm's
technology (summarized by the firm's production function) to the firm's economic behavior
(summarized by the firm's cost function). The total cost function for a Group I facility is
defined as follows:
TC ^
where:
TC = the total cost of production, and
C = the cost of production (including cost of materials and labor).
All other variables have been previously defined.
This methodology assumes that capital stock is fixed, or a sunk cost of production.
This assumption is consistent with the objective of modeling the adjustment of supply to
price changes after implementation of controls. Firms will make economic decisions that
consider those costs of production that are discretionary or avoidable. These avoidable
costs include production costs, such as labor and materials, and emission control costs. In
contrast, costs associated with existing capital are not avoidable or discretionary.
Differentiating the total cost function with respect to Q8 derives the following marginal
cost function:
MC = h'(C,K,t,Qs]
where MC is the marginal cost of production and all other variables have been previously
defined.
Profit maximizing competitive firms will choose to produce the quantity of output that
equates market price, P, to the marginal cost of production. Setting the price equal to the
preceding marginal cost function and solving for 0s yields the following implied supply
function:
0s • (P,PLJJM,K,t)
-------
where:
P = the price of the Group I elastomer,
PL = the price of labor, and
PM = the price of materials.
All other variables have been previously defined.
An explicit functional form of the production function may be assumed to facilitate
estimation of the model. For this analysis, the Cobb-Douglas, or multiplicative form, of
the production function is postulated. The Cobb-Douglas production function has the
convenient property of yielding constant elasticity measures. The functional form of the
production function becomes:
0, = A <« fx L?L M?"
where:
Qt = the sum of the industry output of Group I synthetic rubbers
produced in year t,
Kf = the real capital stock in year t,
Lt = the quantity of labor hours used to produce Group I synthetic
rubbers in year t,
Mt = the material inputs in year t, and
A, OK, aL, aM, X = parameters to be estimated by the model.
This equation can be written in linear form by taking the natural logarithms of both
sides of the equation. Linear regression techniques may then be applied. Using the
approach described, the implied supply function may be derived as:
In = P0 + y In P + p2 In K *$3 In PL + p4 In PM + p5 In t
where:
PL = the factor price of the labor input,
PM = the factor price of the material input, and
K = fixed real capital.
67
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The P; and y coefficients are functions of the o^, the coefficients of the production function.
The supply elasticity, y, is equal to the following:
1 - OCL - a
M
It is necessary to place some restrictions on the estimated coefficients of the
production function in order to have well-defined supply function coefficients. The sum of
the coefficients for labor and materials should be less than one. Coefficient values for aL
and au that equal to one result in a price elasticity of supply that is undefined, and
values greater than one result in negative supply elasticity measures. For these reasons,
production function is estimated with the restriction that the sum of the coefficients for
the inputs equal one. This is analogous to assuming that the synthetic rubber industry
exhibits constant returns to scale, or is a long-run constant cost industry. This
assumption seems reasonable on an a priori basis, and is not inconsistent with the
available data.
3.3.3.3 Estimated Model. The estimated model reflects the industry production
function for the Group I synthetic rubber industries, using annual time series data for the
years from 1959 through 1991. The following model was estimated econometrically:
In Q, = In A + aK In K + 'k In t *- at In L + aM In M
where each of the variables and coefficients have been previously defined.
3.3.3.4 Data. The data used to estimate the model are enumerated in Table 3-5.
This table contains a list of the variables included in the model, the units of measure, and
a brief description of the data. The data for the price elasticity of supply estimation
model includes: the value of domestic shipments in millions of dollars; the price index for
value of domestic shipments (value of domestic shipments deflated by the price index-
represent the quantity variable, Q< or the dependent variable in the analysis); a
68
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TABLE 3-5. DATA INPUTS FOR THE ESTIMATION OF THE PRODUCTION
FUNCTION FOR GROUP I INDUSTRIES
Variable
Unit of Measure
Description
Q<
Lt
Mt
Millions of dollars
Years
Millions of 1987
dollars
The value of shipments for SIC code
2822 deflated by the price index for
value of shipments1
Technology time trend
Real capital stock for SIC code 2822
adjusted for capacity utilization1'2
Thousand of labor man hours Production worker hours
for SIC code 28221
Millions of dollars
Dollar value of material input for
SIC code 2822 deflated to real
values using the materials price
index1
NOTES: 'Annual Survey of Manufactures.
2Federal Reserve Board.
69
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technology time variable, t, real net capital stock adjusted for capacity utilization, K^ in
millions of dollars; the number of production labor manhours, Lt; the material inputs in
millions of dollars, Mt; and the price index for value of materials. Data to estimate the
production function on a rubber-specific basis were unavailable; therefore, data for SIC
code 2822 is utilized for each of the variables previously enumerated, with the exception
of the time variable and the capacity utilization factor, which is on a 2-digit SIC code
level. The capital stock variable represents real net capital stock for SIC code 2822
adjusted for capacity utilization using the capacity utilization factor.
The capital stock variable represents the most difficult variable to quantify for use in
the econometric model. Ideally, this variable should represent the economic value of the
capital stock actually used by each facility to produce synthetic rubbers for each year of
the study. The most reasonable data for this variable would be the number of machine
hours actually used to produce the synthetic rubbers each year. These data are
unavailable. In lieu of machine hours data, the dollar value of net capital stock in
constant 1987 prices, or real net capital stock, is used as a proxy for this variable.
However, these data are flawed in two ways. First, the data represent accounting
valuations of capital stock rather than economic valuations. This aberration is not easily
remedied, but is generally considered unavoidable in most studies of this kind. The
second flaw involves capital investment that is idle and is not actually used in production
in a particular year.
-------
TABLE 3-6. ESTIMATED SUPPLY MODEL COEFFICIENTS FOR
GROUP I INDUSTRIES
Variable Estimated Coefficients1
t time -0.022
(0.033)
jK< Capital Stock .401
(0.087)
Lt Labor 0.149
(0.101)
Mt Materials 0.450
(0.065)
NOTES: 'Standard errors are shown in parentheses.
71
-------
but only the capital stock and materials coefficient are significantly different from zero
with a high degree of confidence.
Using the estimated coefficients in Table 3-6 and the formula for supply elasticity
shown in Section 3.3.3.1, Model Approach, the price elasticity of supply for the Group ]
industries is derived to be 1.49. The calculation of statistical significance for this
elasticity measure is not a straightforward calculation since the estimated function is non-
linear. No attempt has been made to assess the statistical significance of the estimated
elasticity. The corrections for serial correlation and the restricted model results yield the
standard measures of goodness of fit (R2) inaccurate. However, the ordinary least squares
estimated model that is unrestricted and unadjusted for serial correlation has an R2 of
0.96.
3.3.3.6 Limitations of the Supply Elasticity Estimates. The estimated price elasticity
of supply for the affected Group I industries reflects that the synthetic rubber
manufacturing industry in the United States will increase production of these products by
1.49 percent for every 1 percent increase in the price of these products. The preceding
methodology does not directly estimate the supply elasticities for the individual
elastomers due to a lack of necessary data. The assumption implicit in the use of this
supply elasticity estimate is that the elasticities of the individual products will not differ
significantly from the price elasticity of supply for all products categorized under SIC code
2822. This assumption does not seem unreasonable since similar factor inputs are used to
produce each of these synthetic rubbers.
The uncertainty of the supply elasticity estimate is acknowledged. To take this
uncertainty into account, a sensitivity analysis of the price elasticity supply was
conducted. The results of a sensitivity analysis of the price elasticity of supply are
presented in Appendix A for a high-end and low end estimate of the price elasticity of
supply of 2.49 and 0.49, respectively.
3.4 CAPITAL AVAILABILITY ANALYSIS
The capital availability analysis outlined in this section is designed to evaluate the
impact of the proposed emission controls on the affected firms' financial performance and
72
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their ability to finance the additional capital investment in emission control equipment.
Sufficient financial data were available to conduct this analysis on a firm level.
One measure of financial performance frequently used to assess the profitability of a
firm is net income before interest expense expressed as a percentage of firm assets, or
rate of return on investment. The pre-control rate of return on investment (roi) is
calculated as follows:
roi =
1991
£
/ - 1987
a,
15 • 100
where n, is income before interest payments and a, is total assets. A five year average is
used to avoid annual fluctuations that may occur in income data. The proposed
regulations could potentially have an effect on income before taxes, nlt for firms in the
industry and on the level of assets for firms in the industry, a,. The baseline average
rate of return on investment for firms in the sample range from minus 6 percent for
Bridgestone/Firestone to 18 percent for BASF. The post-control return on investment
(proi) is calculated for each firm as follows:
proi =
1991
£",
y-1987 ;
/ 5 + A n
1991
£«.
V-1987 )
I 5 + A
•100
where:
proi
A n
Ak
post-control return on investment,
change in income before interest and after taxes resulting from
implementation of emission controls for each firm in the sample, and
change in investment or assets for each firm in the sample.
73
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The change in a firm's net income, A n,, is calculated using the results of the partial
equilibrium model. A firm's post-control net income has the following two components!:
(1) the change in revenue attributable to the change in price, and (2) the change in cost
attributable to the firm's incurrence of compliance costs. The net effect of these two
components determines the impact of the proposed NESHAP on firms' net income levels.
The change in net income, or A n, for each firm is calculated as follows:
A nn = (A P • qn) - (A cn • qn)
where:
A P •= the change in market price, or Pl - P0,
qn •= the level of output for firm n, and
A cn = total annualized per unit cost of compliance (including taxes) for firm n.
An adjustment needs to be made for the marginal firm which will experience post-control
changes in production. For each marginal Group I firm, the change in net income is
calculated as follows:
A n = (A P • q, ~ P0 • A q) - (A cn • qj
where:
ql = firm's post control production, or q() - (Q^'1 - Q0sd),
P0 = baseline market price, and
A q = decrease in domestic production, or QjSd - Q0sd.
The change in net income is adjusted to appropriately consider tax effects of changes in
income. For affected firms which operate more than one affected facility, the effects of
compliance costs on net income and assets were aggregated to a firm level.
The ability of affected firms to finance the capital equipment associated with emission
control is also relevant to the analysis. Numerous financial ratios can be examined to
analyze the ability of a firm to finance capital expenditures. One alternative is a measure
74
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of historical profitability, such as rate of return on investment. The approach used to
analyze this measure has been previously described. The bond rating of a firm is another
indication of the credit worthiness of a firm, or the ability of a firm to finance capital
expenditures with debt capital. Such data are unavailable for many of the firms subject
to the regulation, and consequently, these measures are not analyzed. Ability to pay
interest payments and coverage ratios are two other criteria sometimes used to assess the
capability of a firm to finance capital expenditures. The data available to conduct the
capital availability analysis based on these two criteria were also unavailable.
Finally, the degree of debt leverage or debt-equity ratio of a firm is considered in
assessing the ability of a firm to finance capital expenditures. The pre-control debt-equity
ratio is the following:
die = dl991
"1991 + 61991
where:
die = the debt equity ratio,
d = debt capital, and
e = equity capital.
Since capital information is less volatile than earnings information, it is appropriate
to use the latest available information for this calculation. The baseline debt equity ratios
for Group I firms range from 20 percent for Exxon Corporation to 68 percent for
Bridgestone/Firestone. If one assumes that the capital costs of control equipment are
financed solely by debt, the debt-equity ratio becomes:
pd/e = d™ + A k
"1990 +
where:
pd/e = the post-control debt-equity ratio assuming that the control equipment
costs are financed solely with debt.
75
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Obviously, firms may choose to issue capital stock to finance the capital expenditure
or to finance the investment through internally generated funds. Assuming that the
capital costs are financed solely by debt may be viewed as a worse case scenario.
The methods used to perform this capital availability analysis do have some
limitations. The approach matches 1991 debt and equity values with estimated capital
expenditures for control equipment. Average 1987 through 1991 income and asset
measures are matched with changes in income and capital expenditures associated with
the control measures. The control cost changes and income changes reflect 1989 price
levels. The financial data used in the analysis represent the most recent data available.
is inappropriate to simply index the income, asset, debt, and equity values to 1992 price
levels for the following reasons. Assets, debt, and equity represent embedded values that
are not subject to price level changes except for new additions such as capital
expenditures. Income is volatile and varies from period to period. For this reason,
average income measures are used in the study.
The methodology used in this analysis reflects a conservative approach to analyzing
the changes likely in financial ratios for the affected Group I firms. The potential for
decreases in the cost of production to occur for some firms after implementation of
emission controls has not been considered. Production costs which may decrease under
post-control conditions include labor input and energy input cost decreases. Annualized
compliance costs are overstated from a financial income perspective, since these costs
include a component for earnings, or return on investment. In general, the approach
followed tends to overstate the negative impact of the proposed emission controls on the
financial operations of the affected Group I industries.
76
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REFERENCES
1. Hyman, David N. Economics. Irwin Publishing. Homewood, IL. 1989. pp. 213-214.
2. U.S. Department of Commerce, International Trade Commission. Synthetic Organic
Chemicals: U.S. Production and Sales. Time Series Data Request. Washington, DC.
March 17, 1993.
3. U.S. Department of Commerce, Bureau of the Census, Trade Data Inquiries and
Control Section. Data Request. Washington, DC. March 11, 1993.
4. U.S. Office of Management and Budget. Guidelines and Discount Rates for Benefit-
Cost Analysis of Federal Programs. Circular Number A-94. Washington, D.C.
October 29, 1992.
5. U. S. Department of Commerce, Bureau of the Census. Annual Survey of
Manufactures. Washington; DC. 1959-1991.
6. U.S. Environmental Protection Agency. Industry Profile for the Polymers and Resins
Group I NESHAP - Revised Draft. Research Triangle Park, NC. September 14, 1993.
7. Pindyck, Robert S. and Daniel L. Rubinfeld. Econometric Models and Economic
Forecasts, 2nd Edition. McGraw Hill Publishing. 1981. pp. 174-201.
8. Reference 2.
9. Reference 5.
10. U.S. Department of Commerce, Bureau of Economic Analysis. Business Statistics
1963-1991. 27th Edition. Washington, DC. June 1992.
11. Board of Governors of the Federal Reserve System, Division of Research and
Statistics. Industrial Production and Capacity Utilization Data Request.
Washington, DC. August 18, 1994.
77
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4.0 CONTROL COSTS, ENVIRONMENTAL IMPACTS,
COST-EFFECTIVENESS
4.1 INTRODUCTION
Inputs to the model outlined in the previous chapter include the quantitative data
summarized in Chapter 2.0 and control cost estimates provided by EPA. This chapter
summarizes the cost inputs used in this EIA which were provided on a facility level for
each of the affected Group I industries.
A formal Benefit Cost Analysis (BCA) requires estimates of economic costs associated
with regulation, which do not correspond to emission control costs. This chapter presents
the progression of steps which were taken to arrive at estimates of economic costs based
on the emission control cost estimates. The environmental impacts associated with the
chosen regulatory option in this analysis are summarized and the cost-effectiveness of the
regulatory option is presented.
4.2 CONTROL COST ESTIMATES
Control cost estimates and emission reductions were provided by EPA's engineering
contractor on a facility level. The cost estimates provided by EPA represent the impact of
bringing each facility from existing control levels to the control level defined by each
regulatory alternative. The emission points for which costs were provided include:
storage tanks, equipment leaks, wastewater streams, and front- and back-end process
vents. The control costs estimated for each elastomer facility can be divided into fixed
and variable components. Fixed costs are constant over all levels of output of a process,
and usually entail plant and equipment. Variable costs will vary as the rate of output
79
-------
changes. Annual and variable cost estimates include costs for monitoring, recordkeeping,
and reporting (MRR) requirements. The costs were calculated for existing emission
sources only given that little new source construction is likely in these industries within
the next five years.
Table 4-1 presents the national annualized cost estimates for controlling existing
sources for each of the regulated industries in the fifth year after promulgation of the
NESHAP.1 Emission control costs are the annualized capital and annual operating and
maintenance costs of controls based on the assumption that all affected synthetic rubber
facilities install controls. The engineering contractor established a baseline level of
control for each facility, determined which facilities would be required to install controls
to meet the provisions of the regulatory alternative, and estimated the cost of the
anticipated controls. The single facility in the Hypalon subcategory would not require any
additional control to meet the proposed level of control. For this reason, Hypalon is not
included in the EIA results presented later in this report. The controls associated with
each of the emission points in the remaining Group I industries are discussed separately
below.
The methodologies used to estimate the costs for the expected regulatory alternative
are the same as the methodologies used to estimate the costs of the HON rule.2 For
storage tanks, required control measures range from floating roofs to closed vent systems
routed to a control device. For equipment leaks, facilities have several compliance
options. Facilities are required to develop and implement leak detection and repair
programs or to install certain types of emission-reducing, or emission-eliminating,
equipment. The affected facilities that produce styrene-butadiene rubber by emulsion and
Hypalon are in compliance with HON equipment leak provisions. Therefore, no emission
reductions are achieved, or equipment leak control costs incurred, at facilities producing
these two types of elastomers. Emission reductions and compliance costs for which
additional control is necessary were calculated as the incremental emission reductions
and costs between the existing control program and the HON level. Costs for equipment
leak provisions were based on the calculation used in the HON. For process vents, the
proposed provisions also resemble the HON. Control may be in the form of a 98 percent
reduction in emissions using add-on control, or a process change that alters the vent
stream characteristics. For three subcategories (styrene-butadiene rubber by emulsion,
80
-------
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styrene-butadiene and polybutadiene rubber by solution, and ethylene-propylene rubber),
the regulatory alternative for back-end process vents is an emission limit based on
production levels. The regulatory alternative for back-end process vents at all other
subcategories is not expected to require additional control beyond the baseline.3 For
wastewater, the NESHAP provisions require that wastewater be kept in tanks,
impoundments, containers, drain systems, and other vessels that do not allow exposure to
the atmosphere until it is recycled or treated to reduce HAP concentration. Costs for
wastewater provisions were also developed using HON methodologies.
As shown in Table 4-1, the total nationwide annualized cost for implementation of the
proposed regulatory alternative is $21 million for the 10 affected synthetic rubber
industries, excluding Hypalon (and including MRR costs). The majority of these costs are
estimated for controlling HAP emissions occurring as the result of the production of
EPDM, or the production of BR/SBR by a solution process. Table 4-1 also presents the
HAP emission reductions associated with control at the four emission points and the
calculated cost-effectiveness for each industry. The cost effectiveness of this regulation
ranges from $1,710 per megagram to $9,205 per megagram, or an average of $3,311 per
megagram of HAP reduced. Table 4-1 also shows the total investment capital costs by
Group I industry. Total capital investment costs are estimated to be $26 million for
existing sources five years subsequent to promulgation of the NESHAP.
4,3 ESTIMATES OF ECONOMIC COSTS
Air quality regulations affect society's economic well-being by causing a reallocation of
productive resources within the economy. Resources are allocated away from the
production of goods and services (Group I elastomers) to the production of cleaner air.
Estimates of the economic costs of cleaner air require an assessment of costs to be
incurred by society as a result of emission control measures. By definition, the economic
costs of pollution control are the opportunity costs incurred by society for productive
resources reallocated in the economy to pollution abatement. The economic costs of the
regulation can be measured as the value that society places on goods and services not
produced as a result of resources being diverted to the production of improved air quality.
The conceptually correct valuation of these costs requires the identification of society's
willingness to be compensated for the foregone consumption opportunities resulting from
82
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the regulation. In contrast to the economic cost of regulation, emission compliance costs
consider only the direct cost of emission controls to the industry affected by the
regulation. Economic costs are a more accurate measure of the costs of the regulation to
society than an engineering estimate of compliance costs. However, compliance cost
estimates provide an essential element in the economic analysis.
Economic costs are incurred by consumers, producers, and society at large as a result
of pollution control regulations. These costs are measured as changes in consumer
surplus, producer surplus, and residual surplus to society. Consumer surplus is a measure
of well-being, or of the welfare of consumers of a good, and is defined as the difference
between the total benefits of consuming a good and the market price paid for the good.
Pollution control measures will result in a loss in consumer surplus due to higher prices
paid for Group I elastomers and to the deadweight loss in surplus caused by reduced
output of these elastomers in the post-control market.
Producer surplus is a measure of producers' welfare that reflects the difference
between the market price charged for a product and the marginal cost of production.
Pollution controls will result in a change in producer surplus that consists of three
components. These components include: surplus gains relating to increased revenues
experienced by firms in the Group I industries attributable to higher post-control prices,
surplus losses associated with increased costs of production for annualized emission
control costs, and surplus losses due to reductions in post-control output. The net change
in producer surplus is the sum of these surplus gains and losses.
Additional adjustments, or changes in the residual surplus to society, are necessary to
reflect the economic costs to society of pollution controls, and these adjustments are
referred to as the change in residual surplus to society. Specifically, adjustments are
necessary to consider tax gains or losses associated with the regulation and to adjust for
differences between the social discount rate and the private discount rate. Since control
measures involve the purchase of long-lived assets, it is necessary to annualize the cost of
emission controls. Annualization of costs require the use of a discount rate, or the cost of
capital. The private cost of capital (assumed to be 10 percent) is the relevant discount rate
to use in estimating annualized compliance costs and market changes resulting from the
regulation. Firms in the Group I industries will make supply decisions in the post-control
83
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market based upon increases in the costs of production. The private cost of capital more
accurately reflects the capital cost to firms associated with the pollution controls.
Alternatively, the social costs of capital (assumed to be 7 percent) is the relevant discount
rate to consider in estimating the economic costs of the regulation. The economic cost of
the regulation represents the cost of the regulation to society, or the opportunity costs of
resources displaced by emission controls. A risk-free discount rate, or the social discount
rate, better reflects the capital cost of the regulation to society.
The sum of the change in consumer surplus, producer surplus, and residual surplus to
society constitutes the economic costs of the regulation. Table 4-2 summarizes the
economic costs associated with the regulatory alternative. The total economic cost for all
of the affected industries combined is $15 million (1989 $).
4,4 ESTIMATED ENVIRONMENTAL IMPACTS
The primary purpose of the proposed NESHAP is to reduce HAP emissions from
Group I facilities. Table 4-3 reports estimates of annual emission reductions associated
with the chosen alternative. The HAP emission reductions were calculated based on the
application of sufficient controls to each emission point to bring each point into
compliance with the regulatory alternative. The estimate of total HAP emission
reductions is 6,341 Mg per year. This represents a nearly 50 percent reduction from the
industry baseline.
4.5 COST EFFECTIVENESS
Economic cost effectiveness is computed by dividing the annualized economic costs by
the estimated emission reductions. The proposed NESHAP has a calculated total cost
effectiveness of $2,384 per megagram of HAP reduced.
Generally, a dominant alternative results in the same or higher emission reduction at
a lower cost than all other alternatives. Because this analysis evaluated only one
alternative, however, there is no basis for comparison.
84
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TABLE 4-2. ANNUAL ECONOMIC COST ESTIMATES FOR THE POLYMERS AND
RESINS GROUP I REGULATION
(millions of 1989 dollars)
Group I Industry
Butyl Rubber
EPDM
EPI
Halobutyl Rubber
NBL
NBR
Neoprene
SBL
SBR
BR
Total
Change in
Consumer
Surplus*
($0.48)
($3.61)
($0.11)
($0.19)
($0.12)
($0.41)
($0.64)
($2.97)
($2.52)
($9.12)
($20.17)
Change in
Producer
Surplus*
($0.59)
$0.27
($0.11)
($0.24)
($0.12)
($0.17)
($0.01)
$1.30
$0.57
$1.56
$2.46
Change in
Residual
Surplus*
($0.29)
$0.45
($0.03)
($0.11)
($0.04)
($0.07)
$0.02
$0.78
$0.50
$1.38
$2.59
Total Loss
In Surplus*
($1.36)
($2.89)
($0.25)
($0.54)
($0.28)
($0.65)
($0.63)
($0.89)
($1.45)
($6.18)
($15.12)
NOTE. 'Brackets indicate economic costs.
85
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TABLE 4-3. ESTIMATED ANNUAL REDUCTIONS IN EMISSIONS AND COST-
EFFECTIVENESS ASSOCIATED WITH THE CHOSEN REGULATORY ALTERNATIVE
Group I Industry
Butyl Rubber
EPDM
EPI
Halobutyl Rubber
NBL
NBR
Neoprene
SBL
SBR
BR
Total
HAP Emission Reduction
(Megagrams/Yr)
596
2,087
124
335
140
365
354
583
238
1,519
6,341
HAP Cost Effectiveness*
($/Year)
$2,282
$1,385
$2,016
$1,612
$2,000
$1,781
$1,780
$1,527
$6,092
$4,068
$2,384
NOTES: "Cost-effectiveness is computed as estimated annualized economic costs divided by estimated emissions reduced.
Comparisons are made between the regulatory alternative and baseline conditions.
86
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REFERENCES
1. Phil Norwood, EC/R Incorporated. Letter to Larry Sorrels, EPA/OAQPS/CEIS.
Polymers and Resins I: Facility-Specific Summary of Costs. Durham, NC.
September 14, 1994.
2. U.S. Environmental Protection Agency. "Hazardous Air Pollutant Emissions from
Process Units in the Synthetic Organic Manufacturing Industry - Background
Information for Proposed Standards. Volume IB: Control Technologies." Draft EIS.
EPA-453/D-92-016b. Research Triangle Park, NC. November 1992.
3. Phil Norwood, EC/R Incorporated. Letter to Leslie Evans, EPA/OAQPS/ESD/CPB.
Preliminary Impacts Analysis: Polymers and Resins I. Durham, NC. July 8, 1994.
4. King, Bennett. Pacific Environmental Services. Letter to Larry Sorrels. U.S.
Environmental Protection Agency. Revised Draft Costs Impacts for Court-Order
Group I Resins. Research Triangle Park, NC. September 12, 1994.
87
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5.0 PRIMARY ECONOMIC IMPACTS AND CAPITAL
AVAILABILITY ANALYSIS
5.1 INTRODUCTION
Estimates of the primary economic impacts resulting from implementation of the
NESHAP and the results of the capital availability analysis are presented in this chapter.
Primary impacts include changes in the market equilibrium price and output levels,
changes in the value of shipments or revenues to domestic producers, and plant closures.
The capital availability analysis assesses the ability of affected firms to raise capital and
the impacts of control costs on firm profitability.
5.2 ESTIMATES OF PRIMARY IMPACTS
The partial equilibrium model is used to analyze the market outcome of the proposed
regulation. As outlined in Chapter 3 of this report, the purchase of emission control
equipment will result in an upward vertical shift in the domestic supply curve for each
affected Group I market. The height of the shift is determined by the after-tax cash flow
required to offset the per unit increase in production costs. Since the control costs vary
for each of the affected Group I facilities, the post-control supply curve is segmented, or a
step function. Underlying production costs for each facility are unknown; therefore, a
worst case assumption was necessary. The facilities with the highest control costs per
unit of production were assumed to also have the highest pre-control per unit cost of
production. Thus, firms with the highest per unit cost of emission control are assumed to
be marginal in the post-control market.
Foreign demand and supply are assumed to have the same price elasticities as
domestic demand and supply, respectively. The United States had a positive trade
89
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balance for each of the Group I synthetic rubbers in 1991. Net exports are therefore
positive for each Group I industry in the baseline market models. Foreign and domestic
post-control supply are added together to form the total post-control market supply. The
intersection of this post-control supply with market demand will determine the new
market equilibrium price and quantity in each Group I industry.
Table 5-1 presents the primary impacts predicted by the partial equilibrium model.
The range of anticipated price increases vary from a low of $0.002 for halobutyl to a high
of $0.022 for EPI per kilogram produced. The percentage price increases for each Group I
elastomer range from a high of 2.5 percent for butyl to a low of 0.31 percent for NBR.
Production is expected to decrease by 47.76 million kilograms for all Group I elastomers
collectively, decreases in domestic production ranging from 0.69 percent for NBL to 4.95
percent for butyl rubber.
The value of domestic shipments, or revenues, for domestic producers is expected to
decrease for each affected Group I industry by a total of $29.6 million for all Group I
industries combined. The predicted decreases in annual revenues for individual products
range from a low of $0.08 million for EPI to a high of $15.24 for BR (1989 dollars). The
percent changes range from a low of 0.35 percent for EPDM to a high of 2.7 percent for
BR. Economic theory predicts that revenue decreases are expected to occur when prices
are increased for products which have an elastic price elasticity of demand, holding all
other factors constant. A revenue decrease results because the percentage increase in
price is less than the percentage decrease in quantity for goods with elastic demand. The
estimated revenue decreases in each of the Group I industries follows this trend. It is
anticipated that none of the affected facilities will close or shut down as a result of the
proposed NESHAP.
The estimated primary impacts reported for the Group I elastomers depend on the set
of parameters used in the partial equilibrium model. Two of the parameters, the price
elasticity of demand and the price elasticity of supply, have some degree of estimation
uncertainty. For this reason, a sensitivity analysis was conducted. The results of these
90
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TABLE 5-1. SUMMARY OF PRIMARY ECONOMIC IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP
Estimated Impacts4'5
Group I Industry
Butyl
Amount
Percentage
EPDM
Amount
Percentage
EPI
Amount
Percentage
Halobutyl
Amount
Percentage
NBL
Amount
Percentage
NBR
Amount
Percentage
Neoprene
Amount
Percentage
SBL
Amount
Percentage
SBR
Amount
Percentage
BR
Amount
Percentage
Price
Increases1
$0.009
2.50%
$0.019
0.87%
$0.022
0.82%
$0.002
0.68%
$0.004
0.18%
$0.007
0.31%
$0.008
1.12%
$0.009
0.64%
$0.005
0.40%
$0.020
1.91%
Production
Decreases2
(2.96)
(4.95%)
(3.25)
(1.21%)
(0.08)
(1.28)%
(1.18)
(1.37%)
(0.20)
(0.69%)
(0.74)
(1.17%)
(1.69)
(1.51%)
(2.91)
(0.80%)
(10.22)
(1.58%)
(24.53)
(4.52%)
Value of
Domestic
Shipments3
($0.55)
(2.58%)
($2.01)
(0.35%)
($0.08)
(0.47%)
($0.22)
(0.70%)
($0.34)
(0.51%)
($1.15)
(0.87%)
($0.34)
(0.41%)
($0.82)
' (0.16%)
($8.88)
(1.18%)
($15.24)
(2.70%)
Facility
Closures
None
None
None
None
None
None
None
None
None
None
NOTES: 'Prices are shown in price per kilogram ($1989).
2Annual production quantities are shown in millions of kilograms.
3Values of domestic shipments are shown in millions of 1989 dollars.
'Brackets indicate decreases or negative values.
5Hypalon is omitted from the analysis.
91
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analyses are contained in Appendix A. Sensitivity analyses were performed for low- and
high-end estimates of demand and supply elasticities, respectively. In general, the
sensitivity analysis shows that the estimated primary impacts are relatively insensitive to
reasonable changes of price elasticity of demand and price elasticity of supply estimates.
5.3 CAPITAL AVAILABILITY ANALYSIS
The capital availability analysis involves examining pre- and post-control values of
selected financial ratios. The ratios selected for use in this analysis are the rate of return
on investment and the debt-equity ratio. (Each of these ratios are explained in detail in
Section 3.4.) Net income was averaged for a five-year period (1987 through 1991) to avoid
annual fluctuations that may occur in income due to changes in the business cycle. Debt
and equity capital are not subject to annual fluctuations; therefore, the most recent data
available (1990 or 1991) was used in this analysis.
These financial statistics provide insight regaiding firms' abilities to raise capital to
finance the investment in emission control equipment. Tables 5-2 and 5-3 show the
estimated impact on financial ratios for the industry. The total capital investment in
control equipment was applied to current debt-equity ratios for the affected firms.
Sufficient long-term debt and equity data were available for 11 of the 18 affected firms.
Firms which are not represented in Table 5-2 include: BASF, DSM Copolymer, General
Tire, Reichhold Chemical, Uniroyal, Ameripol Synpol, and Zeon Chemical. Table 5-2
shows the baseline and post-control debt-equity ratios for each of the firms in the sample.
The effects of investment in control equipment on these firms' equity ratios are minimal,
with the percentage increases in the debt-to-equity ratios ranging from no change for
several firms to 1.5 percent for American Synthetic Rubber.
The effect of the proposed NESHAP on rates of return on investment was analyzed for
16 affected firms. Each affected firm is included in this analysis with the exception of
Zeon Chemical and Ameripol Synpol for which the necessary time-series income and
assets data were not available. The results of this analysis are shown in Table 5-3. As
described in Section 3.4, the effect of the proposed regulation on net income includes the
net effect of new market prices on revenue and the incurrence of control costs. For
marginal firms, the effect on net income also incorporates the loss in revenue due to post-
92
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TABLE 5-2. POST-NESHAP EFFECTS ON FIRMS' DEBT-EQUITY RATIOS
Long-Term Debt-Equity Ratios (%)
Firm
Difference Percentage
Baseline Post-NESHAP in Ratios Change (%)
American Synthetic Rubber 66.3%
Bridgestone/Firestone 68.1%
Dow 62.7%
DuPont 60.7%
Exxon 20.4%
Gencorp 61.8%
Goodyear 46.6%
Miles 53.1%
Rhone-Poulenc 32.2%
Rohm & Haas 35.1%
W.R. Grace 46.7%
67.3%
68.4%
62.7%
60.7%
20.4%
61.8%
46.6%
53.1%
32.2%
35.1%
46.7%
0.97
0.37
0.00
0.01
0.00
0.03
0.02
0.01
0.00
0.00
0.00
1.46%
0.55%
0.00%
0.02%
0.01%
0.05%
0.03%
0.02%
0.01%
0.01%
0.00%
93
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TABLE 5-3. POST-NESHAP EFFECTS ON FIRMS' RETURN ON
INVESTMENT LEVELS
Net Income to Assets Ratio (%)
Firm
American Synthetic Rubber*
BASF
Bridgestone/Firestone
Dow Chemical
DSM Copolymer
DuPont
Exxon
Gencorp
General Tire*
Goodyear
Miles
Reichhold
Rhone-Poulenc
Rohm & Haas
Uniroyal
W.R. Grace
Baseline
3.7%
18.4%
(6.4%)
8.7%
2.1%
2.7%
5.9%
3.5%
3.4%
4.2%
2.2%
1.3%
11.5%
9.8%
10.4%
3.5%
After-Tax
Post-NESHAP
4.7%
18.4%
(6.8%)
8.7%
2.1%
2.7%
5.9%
3.5%
2.5%
4.3%
2.1%
1.3%
11.4%
9.9%
10.5%
3.5%
Difference
in Ratios
1.04
0.00
(0.35)
(0.01)
0.00
0.00
0.00
0.01
(0.89)
0.03
(0.08)
(0.01)
0.00
0.02
0.04
0.04
Percentage
Change (%)
28.22%
0.01%
(5.44%)
(0.11%)
(0.13%)
(0.12%)
(0.03%)
0.18%
(26.07%)
0.74%
(3.50%)
(0.41%)
0.04%
0.18%
0.38%
0.11%
NOTES: "These 2 firms are subsidiaries of larger firms. The financial data used in this analysis represent data for the
subsidiary company.
94
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NESHAP decreases in production. The effect of the proposed regulation on firms' asset
levels is equal to the capital investment necessary for the purchase of control equipment.
Table 5-3 shows the incremental change in net income-to-assets ratios after incurrence of
NESHAP costs, as well as the percentage change in return on investment for each firm.
Incremental changes in net income-to-assets ratio range from a decrease of 0.89
percentage points to an increase of 1.04 percentage points. Effects range from a negative
percentage change of 26.07 percent for General Tire to a positive percentage change of
28.22 percent for American Synthetic Rubber. Although both of these firms are
subsidiaries of larger firms, the data used in this analysis reflect data for the affected
subsidiary only. Several firms are expected to experience a positive financial impact as a
result of the regulations. This occurs primarily as a result of the estimated per unit price
increase for the industry exceeding the firm's per unit compliance cost. The results of the
financial impact and capital availability analyses are consistent with the worst-case
assumption made in the model that facilities with the highest control costs per unit of
production are assumed to also have the highest pre-control per unit costs of production.
Facilities with the highest per unit costs relative to the expected increase in market price,
therefore, are predicted to experience the most significant adverse post-NESHAP impacts.
The results in Table 5-3 are consistent with assumptions made in the partial equilibrium
model.
In analyzing the financial performance and resources of the affected firms, however, it
is important to keep in mind the scope of their activities. The major portion of revenues
generated by these firms do not derive from Group I elastomer production. For example,
BASF is primarily a chemical corporation which produces industrial organics. BASF's
polymers division, while vertically integrated, accounted for only 15.7 percent of all BASF
sales revenues for 1992. Dow Chemical owns 91 percent of SBR production capacity. In
their annual report, SBR production is included in their "value added industrial
specialties" category. All products produced in this category accounted for 24 percent of
Dow sales for 1991. Du Porit reports show that sales from their polymers division have
represented 12 percent of gross sales for the past three years. Goodyear does not provide
industry segmented revenues, although its principal business is identified as "the
development, manufacture, distribution, and sale of tires." Although Goodyear owns 26
percent of SBR production capacity and 39.2 percent of polybutadiene capacity, synthetic
rubber is listed in its 1992 annual report as a tertiary source of sales revenue. Given
95
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Goodyear's significant degree of vertical integration, much of the synthetic rubber
Goodyear produces is captively consumed by their tire production sector.
5.4 LIMITATIONS
Several qualifications of the primary impact results are required. A single national
market for a homogenous product is assumed in the partial equilibrium analysis. There
may, however, be some regional trade barriers that would protect individual Group I
elastomer producers. The analysis also assumes that the facilities with the highest
control costs are marginal in the post-control market. The result of these qualifications is
overstatement of the impacts of the chosen alternative on the market equilibrium price
and quantity, and revenues. Finally, some facilities may find it profitable to expand
production in the post-control market. This would occur when a firm found its post-
control incremental unit costs to be smaller than the post-control market price.
Expansion by these firms would result in a smaller decrease in output and increase in
price than would otherwise occur.
The results of the sensitivity analysis of demand and supply elasticities are reported
in Appendix A. These results show slightly less adverse impacts on producers when
demand is less elastic, or when supply is less elastic, in terms of reduction in market
output and reduction in value of domestic shipments. The results of the economic
analysis are therefore relatively insensitive to reasonable variations in the price elasticity
of demand or the price elasticity of supply.
The capital availability analysis also has limitations. First, future baseline
performance may not resemble past levels. Additionally, the tools used in the analysis
are limited in scope.
5.5 SUMMARY
The estimated price increases for each Group I industry range from a low of $0.002
per kilogram for halobutyl to a high of $0.022 per kilogram for EPI, based upon 1989
price levels. These predicted price increases represent percent increases ranging from a
low of 0.18 percent for NBL to a high of 2.5 percent for butyl rubber. Domestic production
96
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will decrease for each of the Group I synthetic rubbers in amounts ranging from 0.08
million kilograms for EPI to 24.53 million kilograms for BR. This estimated percent
decrease in annual production for each of the elastomers varies from a low of 0.69 percent
for NBL to a high of 4.95 percent for butyl rubber. Emission control costs are small
relative to the financial resources of affected producers, and on average, Group I
producers should not find it difficult to raise the capital necessary to finance the purchase
and installation of emission controls.
97
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6.0 SECONDARY ECONOMIC IMPACTS
6.1 INTRODUCTION
In addition to impacts on price, production, and revenue, implementation of emission
controls is likely to have secondary impacts including changes in labor inputs, changes in
energy inputs, balance of trade impacts, and regional effects. The potential changes in
employment, use of energy inputs, balance of trade, and regional impact distribution are
presented individually in the following sections.
6.2 LABOR MARKET IMPACTS
The estimated labor impacts associated with the proposed NESHAP are based on the
results of the partial equilibrium analyses of each Group I industry, and are reported in
Table 6-1. The number of workers employed by firms in SIC code 2822 is estimated to
decrease by approximately 100 workers as a result of the proposed emission controls.
se job losses should be considered transitory in natureT^Fhe estimated loss in number
of workers is the result of the projected reductions in levefs of production reported in
Chapter 5 for each of the Group I elastomers. Gains in employment anticipated to result
from operation and maintenance of control equipment have not been included in the
analysis due to the lack of reliable data. Estimates of employment losses do not consider
potential employment gains in industries that produce substitutes for Group I elastomers.
Similarly, losses in employment in industries that use Group I synthetic rubbers as
inputs, or in industries that provide complement goods are not considered. The changes
in employment reflected in this analysis are only direct employment losses due to
reductions in the domestic production levels of Group I elastomers.
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TABLE 6-1. SUMMARY OF SECONDARY ECONOMIC IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP
Estimated Impacts1'4
Group I Industry
Labor Input2
Energy Input3
Butyl
Amount
Percentage
EPDM
Amount
Percentage
EPI
Amount
Percentage
Halobutyl
Amount
Percentage
NBL
Amount
Percentage
NBR
Amount
Percentage
Neoprene
Amount
Percentage
SBL
Amount
Percentage
SBR
Amount
Percentage
BR
Amount
Percentage
(2)
(4.95%)
(13)
(1.21%)
(0.4)
(1.28%)
(1)
(1.34%)
(1)
(0.69%)
(3)
(1.17%)
(2)
(1.51%)
(8)
(0.80%)
(22)
(1.58%)
(48)
(4.23%)
($0.05)
(2.2%)
($0.31)
(0.68%)
($0.01)
(0.66%)
($0.02)
(0.61%)
($0.02)
(0.28%)
($0.07)
(0.48%)
($0.06)
(0.89%)
($0.18)
(0.35%)
($0.53)
(0.77%)
($0.11)
(2.12%)
NOTES: ' Brackets indicate decreases or negative values.
2 Indicates estimated reduction in number of jobs.
3 Reduction in energy use in millions of 1989 dollars.
4 Hypalon is omitted from the analysis.
100
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The loss in employment is relatively small in terms of the number of eliminated jobs.
The magnitude of predicted job losses directly results from the relatively small estimated
decrease in production anticipated and the relatively low labor intensity in these synthetic
rubber industries.
6.3 ENERGY INPUT MAEKET
The method used to estimate reductions in energy input use relates the baseline
energy expenditures to the level of production. An estimated decrease in annual energy
use of $1.36 million (1989$) for all of the Group I industries collectively is expected to
result from this proposed regulation. The changes in energy inputs for individual Group I
industries are reported in Table 6-1. As production decreases, the amount of energy input
utilized by each affected Group I industry also declines. The estimated changes in energy
use do not consider the increased energy use associated with the operation and
maintenance of emission control equipment. Insufficient data were available to consider
such changes in energy costs.
6.4 FOREIGN TRADE
The implementation of the proposed NESHAP will increase the costs of production for
domestic Group I elastomer producers relative to foreign elastomer producers, all other
factors being equal. This change in the relative price of imports will cause domestic
imports of Group I synthetic rubbers to increase and domestic exports of Group I rubbers
to decrease. The overall balance of trade for Group I elastomers is positive in the baseline
(exports exceed imports). The proposed NESHAP is likely to cause the balance of trade to
become less positive. The range of estimated net export decreases ranges from 0.03
million kilograms annually for EPI to 6.8 million kilograms for BR annually. The
predicted changes in the trade balance for each individual Group I industry are reported
in Table 6-2.
101
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TABLE 6-2. FOREIGN TRADE (NET EXPORTS) IMPACTS OF POLYMERS AND
RESINS GROUP I NESHAP
Estimated Impacts1'4
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Amount2
(1.41)
(1.19)
(0.03)
(0.56)
(0.05)
(0.20)
(0.69)
(0.79)
(2.46)
(6.80)
Percentage
(27.05%)
(1.59%)
(2.50%)
(7.43%)
(34.38%)
(58.34%)
(2.00%)
(2.79%)
(2.35%)
(9.23%)
Dollar Value of Net
Export Change3
($0.47)
($1.18)
($0.06)
($0.18)
($0.12)
($0.42)
($0.23)
($0.85)
($2.37)
($5.75)
NOTES: ' Brackets indicate reductions or negative values.
2 Millions of kilograms.
3 Millions of dollars ($1989).
" Hypalon is omitted from the analysis.
102
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6.5 REGIONAL IMPACTS
No significant regional impacts are expected from implementation of the proposed
NESHAP. No facility closures are predicted to occur as a result of the regulations. In
general, market impacts are not significant and will not affect any particular region of the
country disproportionately.
6.6 LIMITATIONS
The estimates of the secondary impacts associated with the emission controls are
based on changes predicted by the partial equilibrium model for each of the Group I
industries. The limitations described in Section 5.4 of this report are also applicable to
the secondary economic impacts presented in this chapter. As previously noted, the
employment losses do not consider potential employment gains for operating the emission
control equipment. Likewise, the gains or losses in markets indirectly affected by the
regulations, such as substitute product markets, complement products markets, or
markets that use Group I synthetic rubbers as inputs to production, have not been
considered. It is important to note that the potential job losses predicted by the model are
only those which are attributable to the estimates of production losses in the Polymers
and Resins Group I industries.
6.7 SUMMARY
The estimated secondary economic impacts are relatively small. Approximately 100
job losses may occur nationwide. Energy input reductions are estimated to be $1.36
million annually (1989$). A decrease in net exports of 14.18 million kilograms annually
for all Group I industries is predicted. No significant regional impacts are expected.
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7.0 POTENTIAL SMALL BUSINESS IMPACTS
7.1 INTRODUCTION
The Regulatory Flexibility Act requires that special consideration be given to the
effects of all proposed regulations on small business entities. The Act requires that a
determination be made as to whether the subject regulation will have a significant impact
on a substantial number of small entities. Four main criteria are frequently used for
assessing whether the impacts are significant. EPA typically uses one or more of the
following criteria to determine the potential for a regulation to have a significant impact
on small firms:
• Annual compliance costs (annualized capital, operating, reporting, etc.) expressed
as a percentage of cost of production for small entities for the relevant process or
product increase significantly;
• Compliance costs as a percentage of sales for small entities are significantly
higher than compliance costs as a percent of sales for large entities;
• Capital costs of compliance represent a significant portion of capital available to
small entities, considering internal cash flow plus external financing capabilities;
and
•, The requirements of the regulation are likely to result in closure of small
e'ntities.
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7.2 METHODOLOGY
Data are not readily available to compare compliance costs to either production costs
or to the capital available to small firms. The information necessary to make such
comparisons are generally considered proprietary by small business firms. In order to
determine if the potential for small business impacts is significant for the proposed Group
I NESHAP, this analysis will focus on the remaining two criteria: the potential for
closure, and a comparison of the compliance costs as a percentage of sales. EPA's most
recent guidance on implementing the Regulatory Flexibility Act provides that any impact
on small businesses is considered to be significant, and that any number of small entities
is considered to be substantial. The potential for closure, and cost-to-sales ratios are
analyzed for this analysis based on available data. EPA, however, is responsible for
determining whether the results presented in this chapter indicate that further analysis
of the impact on small business affected by the Group I NESHAP is warranted.
7.3 SMALL BUSINESS CATEGORIZATION
Consistent with U.S. Small Business Administration (SBA) size standards, an
elastomer producing firm is classified as a small business if it employs less than 1,000
workers. A firm must also be unaffiliated with a larger business entity to be considered a
small business entity. Information necessary to determine whether any affected Group I
firms were small businesses was obtained from national directories of corporations.
Based upon the SBA size criterion and the employee data which were presented in
Chapter 2.0 of this report, the firms affected by the Group I NESHAP that employ less
than 1,000 employees include: American Synthetic Rubber Corporation, Ameripol Synpol,
DSM Copolymer, Hampshire Chemical, and Zeon Chemical. Of these 5 firms, American
Synthetic Rubber Corporation and Ameripol Synpol are affiliated with larger business
entities; there are, therefore, 3 affected small firms.
7.4 SMALL BUSINESS IMPACTS
Since the results of the partial equilibrium analysis lead to the conclusion that none
of the affected Group I facilities are at risk of closure, this criterion for adverse small
business effects is not met
106
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The remaining criterion for determining the significance of small business impacts is
to analyze the total annual compliance costs as a percentage of sales for small firms.
Sales and annualized compliance cost data for the three small businesses are shown in
Table 7-1. In 1991, sales for these firms ranged from $94 million (1989 dollars) for DSM
Copolymer to $195 million (1989 dollars) for Hampshire Chemical. Total compliance cost
estimates for these firms based on 1991 production range from $82,577 for Hampshire
Chemical to $799,835 for DSM Copolymer. Expressed as percentages of total sales, costs
range from 0.04 percent for Hampshire Chemical to 0.85 percent for DSM Copolymer.
Because the ratios in Table 7-1 are low, the conclusion is drawn that a significant number
of small businesses are not adversely affected by the proposed regulations.
107
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TABLE 7-1. COMPLIANCE COSTS AS A PERCENTAGE OF SALES AT SMALL
GROUP I FIRMS
Firm
DSM Copolymer
Hampshire Chemical
Zeon Chemical
1991 Sales
(Million 1989 $)*
$94
$195
$98
Compliance Costs
(Million 1989 $)
$0.80
$0.08
$0.30
Cost-to-Sales
Ratio
0.85%
0.04%
0.31%
NOTE: ' Economic Indicators
108
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REFERENCES
1. U.S. Congress, Council of Economic Advisors. Economic Indicators: September 1993.
Prepared for the Joint Economic Committee. Washington, DC. September 1993.
109
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APPENDIX A
SENSITIVITY ANALYSIS
The sensitivity analysis contained in this Appendix explores the degree to which the
results presented earlier in this report are sensitive to the estimates of the price
elasticities of demand and supply which were used as inputs to the models. The analysis
of the price elasticity of demand will presume the supply elasticity is 1.49 as hypothesized
in the partial equilibrium model. Alternatively, the sensitivity analysis of supply
elasticities will assume that the demand elasticity estimates postulated in the model and
listed under the Elasticity Measure column in Table A-l are accurate for each of the
Group I elastomers.
The results presented in this appendix are based upon price elasticities of demand
estimates for each Group I industry that differ by one standard error from those used in
the model. Table A-l presents the alternative measures of price elasticities of demand for
each Group I elastomer.
TABLE A-l. PRICE ELASTICITY OF DEMAND ESTIMATES
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Elasticity Measure
-1.17
-1.23
-1.17
1.17
-2.78
-2.78
-1.17
-0.99
-3.58
-2.04
High Estimate
-1.72
-1.90
-1.72
-1.72
-1.87
-1.87
-1.72
-1.17
-4.44
-2.37
Low Estimate
-0.62
-0.56
-0.62
-0.62
-3.69
-3.69
-0.62
-0.81
-2.72
-1.71
The results of the sensitivity analysis results relative to demand elasticity estimates
are presented in Tables A-2 and A-3. Table A-2 reports results under the low-end
estimate of the price elasticity of demand scenario, and Table A-3 reports results under
the high-end measure of the price elasticity of demand scenario.
A-l
-------
The results of the low-end demand elasticity scenario differ very little from the
reported results presented in Chapter 5 of this report. The signs of the changes in price
and quantity are unchanged, and the relative size of the changes are not significantly
altered. Revenue changes become slightly positive for some Group I industries with
inelastic price elasticity of demand measures. The results of this analysis tend to present
relatively more favorable results for the Group I industries with lower output and revenue
declines and larger price increases. In general, the scenario for the high-end elasticity
results in primary market impacts that do not differ significantly from previously
reported results for price increases and quantity decreases for most of the Group I
industries. However, the results are less favorable for Group I industries with lower price
increases and greater output and revenue decreases.
TABLE A-2. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
LOW-END PRICE ELASTICITY OF DEMAND SCENARIO1
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Market
Price Change (%)
3.14
1.15
1.03
0.86
0.23
0.39
1.40
0.69
0.49
2.10
Domestic
Market
Output Change (%)
(4.01)
(0.79)
(0.96)
(1-11)
(0.62)
(1.05)
(1.08)
(0.72)
(1.46)
(4.23)
Change in the
Value of Shipments
(%)
(1.00)
0.35
(0.06)
(0.26)
(0.39)
(0.66)
0.31
(0.04)
(0.98)
(2.22)
NOTES: ' Brackets indicate decreases or negative values.
A-2
-------
TABLE A-3. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
HIGH-END PRICE ELASTICITY OF DEMAND SCENARIO1
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Market Price
Change (%)
2.07
0.70
0.68
0.56
0.15
0.26
0.93
0.60
0.35
1.74
Domestic
Market Quantity
Change (%)
(5.57)
(1.46)
(1.49)
(1.54)
(0.74)
(1.25)
(1.79)
(0.86)
(1.67)
(4.75)
Change in the
Value of Shipments
(%)
(3.61)
(0.77)
(0.82)
(0.98)
(0.59)
(1.00)
(-88)
(0.27)
(1.33)
(3.09)
NOTES: 1 Brackets indicate decreases or negative values.
The results of the sensitivity analyses under the low-end and high-end price elasticity
of supply scenarios are reported in Table A-4 and Table A-5, respectively. The high
estimate used in this analysis was 2.49, and the low-end estimate used in this analysis
was 0.49. Again, the results do not differ greatly from those used in the partial-
equilibrium model. The results under the low-end supply elasticity scenario are slightly
more favorable to the Group I industries than those previously reported in Chapter 5,
with smaller output and revenue decreases. The price increases decline, however. In
contrast, the results under the high-end elasticity scenario are generally less favorable for
the affected industries.
In summary, the results of these sensitivity analyses do not indicate that the model
results are overly sensitive to reasonable changes in the price elasticities of demand or
supply. This conclusion provides support for greater confidence in the reported model
results.
A-3
-------
TABLE A-4. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
LOW-END PRICE ELASTICITY OF SUPPLY SCENARIO
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Market Price
Change (%)
1.34
0.45
0.43
0.36
0.08
0.13
0.59
0.35
0.17
0.88
Domestic
Market Quantity
Change (%)
(2.24)
(0.60)
(0.61)
(0.61)
(0.28)
(0.47)
(0.76)
(0.40)
(0.64)
(2.02)
Change in the
Value of Shipments
(%)
(0.94)
(0.15)
(0.18)
(0.25)
(0.20)
(0.34)
(0.17)
(0.05)
(0.48)
(1.16)
NOTES: ' Brackets indicate decreases or negative values.
A-4
-------
TABLE A-5. SENSITIVITY ANALYSIS FOR ESTIMATED PRIMARY IMPACTS:
HIGH-END PRICE ELASTICITY OF SUPPLY SCENARIO
Group I Industry
Butyl
EPDM
EPI
Halobutyl
NBL
NBR
Neoprene
SBL
SBR
BR
Market Price
Change (%)
2.99
1.06
0.99
0.82
0.25
0.42
1.35
0.76
0.56
2.46
Domestic
Market Quantity
Change (%)
(6.90)
(1.53)
(1.70)
(1.92)
(0.99)
(1.68)
(1.93)
(1.03)
(2.24)
(6.08)
Change in the
Value of Shipments
(%)
(4.12)
(0.49)
(0.72)
(1-11)
(0.75)
(1-27)
(0.60)
(0.28)
(1.69)
(3.78)
NOTES: ' Brackets indicate decreases or negative values.
A-5
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