United States
Environmental Protection
Agency
Air
Office Of Air Quality
Planning And Standards
Research Triangle Park, NC 27711
EPA-452/R-01-013
October 2002
FINAL REPORT
Regulatory Impact Analysis
for the
Proposed Automobile and Light Duty
Truck Coating NESHAP
Final Report
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Regulatory Impact Analysis
for the
Proposed Automobile and Light Duty Truck
Coating NESHAP
U.S. Environmental Protection Agency
Office of Air and Radiation
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
MD-15; Research Triangle Park, N.C. 27711
Final Report
October 2002
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Disclaimer
This report is issued by the Air Quality Standards & Strategies
Division of the Office of Air Quality Planning and Standards of the
U.S. Environmental Protection Agency (EPA). It presents technical
data on the National Emission Standard for Hazardous Air Pollutants
(NESHAP)for Reciprocating Internal Combustion Engines, which is of
interest to a limited number of readers. It should be read in
conjunction with the Background Information Document (BID) for the
NESHAP and other background material used to develop the rule, which
are located in the public docket for the NESHAP proposed rulemaking.
Copies of these reports and other material supporting the rule are in
Docket A-95-35 at EPA's Air and Radiation Docket and Information
Center, 1200 Pennsylvania Avenue, N.W.; Washington D.C. 20460. The
EPA may charge a reasonable fee for copying. Copies are also
available through the National Technical Information Services, 5285
Port Royal Road, Springfield, VA 22161. Federal employees, current
contractors and grantees, and nonprofit organizations may obtain
copies from the Library Services Office (MD-35), U.S. Environmental
Protection Agency, Research Triangle Park, N.C. 27711; phone (919)
541-2777.
v
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CONTENTS
Section Page
1 Introduction 1-1
1.1 Agency Requirements for Conducting an RIA 1-1
1.2 Organization of the Report 1-2
2 Industry Profile 2-1
2.1 Supply Side Overview 2-1
2.1.1 Coating Process 2-1
2.1.1.1 Priming Operations 2-3
2.1.1.2 Finishing Operations 2-5
2.1.1.3 Final Assembly Activities 2-5
2.1.2 Coating Characterization 2-6
2.1.3 Final Products 2-8
2.1.4 Costs of Production 2-8
2.1.5 Costs Associated with Coatings 2-9
2.1.5.1 Capital Costs forthePaint Shop 2-9
2.1.5.2 Variable Costs forthe Paint Shop 2-12
2.2 Industry Organization 2-14
2.2.1 Market Structure 2-14
2.2.2 Automobile and LDT Assembly Facilities 2-17
2.2.2.1 Characteristics of Automobile and LDT
Assembly Plants 2-17
2.2.2.2 Trends in the Automobile and LDT Assembly
Industries 2-23
2.2.3 Companies that Own Automobile and LDT Assembly
Facilities 2-24
2.2.3.1 Company Characteristics 2-24
2.2.3.2 Vertical and Horizontal Integration 2-25
iii
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2.2.4 Companies that Manufacture Automotive Coatings 2-27
2.3 Demand Side Overview Characteristics 2-27
2.3.1 Substitution Possibilities in Consumption 2-32
2.3.1.1 Demand Elasticity 2-33
2.4 Market Data 2-33
2.4.1 Domestic Production and Consumption 2-34
2.4.2 International Trade 2-35
2.4.3 Market Prices 2-37
2.4.4 Industry Trends 2-38
3 Engineering Costs 3-1
3.1 Methodology 3-1
3.2 Results 3-3
3.3 Alternative Regulatory Options Based on Risk 3-7
3.3.1 Applicability Cutoffs for Threshold Pollutants
Under §112(d)(4) of the CAA 3-8
3.3.2 Subcategory Delisting Under §112(c)(9)(B) of the CAA 3-15
3.3.3 Consideration of Criteria Pollutants 3-16
4 Economic Impact Analysis 4-1
4.1 Methodology 4-1
4.1.1 Product Differentiation 4-2
4.1.2 Imperfect Competition 4-3
4.1.3 Role of Dealerships 4-3
4.1.4 Foreign Trade 4-4
4.2 Operational Model 4-5
4.3 Economic Impact Results 4-8
4.3.1 Market-Level Impacts 4-8
4.3.2 Industry-Level Impacts 4-8
IV
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4.3.2.1 Changes in Profitability 4-8
4.3.2.2 Facility Closures and Changes in Employment 4-10
4.3.3 Foreign Trade 4-11
4.3.4 Social Costs 4-11
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4.4 Energy Impacts 4-13
4.4.1 Increase in Energy Consumption 4-13
4.4.2 Reduction in Energy Consumption 4-14
4.4.3 Net Impact on Energy Consumption 4-14
5 Other Impact Analyses 5-1
5.1 Small Business Impacts 5-1
5.2 Unfunded Mandates 5-1
5.3 Impact on New Sources 5-2
6 Benefits Analysis 6-1
6.1 Identification of Potential Benefit Categories 6-1
6.1.1 Benefits of Reducing HAP Emissions 6-1
6.1.1.1 Health Benefits of Reduction in HAP Emissions 6-2
6.1.1.2 Welfare Benefits of Reducing HAP Emissions 6-6
6.1.2 Benefits of Reducing VOC Emissions due to HAP Controls 6-9
6.2 Lack of Approved Methods to Quantify HAP Benefits 6-10
6.2.1 Evaluation of Alternative Regulatory Options Based
on Risk 6-11
6.2.1.1 Characterization of Industry Emissions and
Potential Baseline Health Effects 6-11
6.2.1.2 Results of Rough Ri sk Assessments of Alternative Control
Options Under CAA Sections 112 (d)4 and 112(c)(9) 6-13
References R-l
Appendix A Economic Model for Automobile and LDT Market Under
Imperfect Competition A-1
Appendix B Estimating Social Costs Under Imperfect Competition B-l
VI
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LIST OF FIGURES
Number Page
2-1 Car Painting Process 2-2
2-2 Priming Operations 2-3
2-3 Map of Facility Locations 2-18
2-4 Consumer Price Indexes for All Items Compared to New Cars and
Trucks (1992 = 100), 1990-1999 2-40
4-1 Pricing in Automobile Markets 4-3
4-2 Baseline Equilibrium 4-6
4-3 With-Regulation Equilibrium 4-7
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LIST OF TABLES
Number Page
2-1 Properties of Coatings Used in Automobile and LDT Assembly Facilities 2-7
2-2 Finished Vehicle Categorization 2-8
2-3 Number of Establishments, Value of Shipments, and Production Costs
for the SIC and NAICS Codes that Include Automobile and LDT
Assemblers, 1992-1997 2-10
2-4 Number of Establishments, Employment, and Payroll Costs for the SIC and
NAICS Codes that Include Automobile and LDT Assemblers, 1992-1997 2-11
2-5 Automotive Coatings Usage, 1989, 1993, and 1998 with Projections
to 2008 2-13
2-6 Pricing Trends in Automotive Coatings, Sealants, and Adhesives, 1989,
1993, and 1998 with Projections to 2008 (Dollars per Pound) 2-14
2-7 Measures of Market Concentration for Automobile Manufacturers, 1992
and 1998-1999 2-16
2-8 Number of Automobile and LDT Assembly Plants by Employment Range,
1998-1999 2-19
2-9 Capacity Utilization 2-19
2-10 Facility-Level Car Production Data by Market: 1999 2-20
2-11 Plant-Level Truck Production Data by Market: 1999 2-22
2-12 Financial Data for Companies that Own Automobile and LDT Assembly
Facilities, 1998-1999 2-26
2-13 Examples of Subsidiaries and Affiliates Partially or Wholly Owned by
Automotive Companies 2-28
2-14 Market Shares in the Automotive Coatings Industry, 1998 2-29
2-15 Company Data for Coatings Manufacturers, 1998 2-29
2-16 U.S. Car Sales by Market Sector, 1980-1997 2-30
2-17 Demographics of New Automobile and LDT Buyers, 1998 2-31
2-18 Own Price Elasticities of Demand by Vehicle Class 2-34
2-19 Domestic Car and Truck Production: 1995-1999 (103 Units) 2-35
2-20 North American Consumption of Cars and Trucks: 1997-2000 (103 Units) .... 2-36
vui
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2-21 Imports for Consumption for NAICS 336111 (Automobiles and Light Duty
Motor Vehicles, Including Chassis) by Country of Origin:
1997-2000 (103 units) 2-36
2-22 Domestic Exports for NAICS 336111 (Automobiles and Light Duty
Motor Vehicles, Including Chassis) by Country of Origin:
1997-2000 (103 units) 2-37
2-23 Average Vehicle Prices by Class 2-39
3-1 Engineering Cost Estimates for Affected Facilities: 1999 ($103) 3-4
3 -2 Dose-Response Assessment Values for HAP Reported Emitted by the Automobile and
Light-Duty Truck Surface Coating Source Category 3-10
4-1 Market-Level Impacts by Vehicle Class: 1999 4-9
4-2 National-Level Industry Impacts: 1999 4-10
4-3 Distributional Impacts Across Facilities: 1999 4-11
4-4 Foreign Trade Impacts: 1999 4-12
4-5 Distributional of Social Costs: 1999 4-13
4-6 Energy Usage in Automobile and LDT Production (1997) 4-15
6-1 Potential Health and Welfare Effects Associated with Exposure to
Hazardous Air Pollutants 6-3
rx
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LIST OF ABBREVIATIONS
AAMA American Automobile Manufacturers Association
ABS anti-lock braking systems
CAA Clean Air Act
CPI consumer price index
CR4s four-firm concentration ratios
CR8s eight-firm concentration ratios
EIA economic impact analysis
EPA U.S. Environmental Protection Agency
HAP hazardous air pollutants
HHIs Herfindahl-Hirschman indexes
ISEG Innovative Strategies and Economics Group
LOT light-duty truck
MACT maximum achievable control technology
MSRP Manufacturers Suggested Retail Price
NAFTA North American Free Trade Agreement
NAICS North American Industry Classification System
NESHAP national emission standards for hazardous air pollutants
NUMMI New United Motor Manufacturing, Inc.
OAQPS Office of Air Quality Planning and Standards
SBA Small Business Administration
SIC Standard Industrial Classification
UMRA Unfunded Mandates Reform Act
VOC volatile organic compound
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EXECUTIVE SUMMARY
Under the Clean Air Act (CAA), Congress gave the U.S. Environmental Protection
Agency (EPA) broad authority to protect air resources throughout the nation. Under Section 112
of the CAA, EPA is developing a National Emission Standard for Hazardous Air Pollutants
(NESHAP) designed to reduce emissions generated during the automobile coating process. This
report presents a regulatory impact analysis (RIA) to evaluate the economic impacts associated
with the regulatory options under consideration.
ES.l Industry Profile
The domestic automobile and light duty truck (LDT) manufacturing industry is a large,
mature industry spanning NAICS 336111 and NAICS 336112. In 1998 and 1999, this industry
comprised 65 establishments, which were owned by 14 domestic and foreign companies and
employed more than 160,000 workers. The industry operates in a global marketplace and
competes with foreign producers of vehicles. Many of the companies that own these facilities are
foreign-based companies.
Three companies supply the majority of automobile coatings used in vehicle assembly
plants: DuPont Performance Coatings, PPG Industries, and BASF Coatings AG. Sherwin-
Williams is also a major player in automobile coatings, but they tend to supply auto body shops and
other aftermarket operations rather than assembly plants.
Market Structure
Within the United States, the market for automobiles and LDTs is considered an
oligopolistic differentiated products market (Berry, Levinsohn, and Pakes, 1995) because the
facilities that assemble these vehicles in the United States are owned by only 14 companies and
because the products produced are highly differentiated by manufacturer. Entry and exit of
companies in the industry are difficult because the capital outlays required to begin manufacturing
cars are extremely large; thus, entry depends on the ability of a new manufacturer to secure outside
ES-1
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funding. Entry is also difficult because brand name recognition is critical for establishing a market
for a particular vehicle.
Market structure of the industry is particularly influenced by the high degree of product
differentiation. Vehicles vary in their functions as sedans, coupes, wagons, pickups, and minivans,
and in their characteristics such as carrying capacity, gas mileage, safety features, comfort features,
visual aesthetics, and reliability ratings. Brand names are also important in this industry in that they
embody consumers' perceptions of the characteristics and reliability of the vehicles. The prices for
similar type vehicles across manufacturers can vary based on multiple characteristics; thus, nonprice
competition, if it occurs, would be particularly difficult to discern.
Market Data
Over 12 million cars and LDTs were manufactured in the United States in 1999. LDT
production accounted for approximately 55 percent of total production in 1999 and has shown
strong growth over the past 5 years. In contrast, car production has shown small declines over the
same period with an average annual growth rate of-2.6 percent. These trends reflect the growing
consumer preference for SUVs and minivans (U.S. Department of Commerce, 1999c). Although
Japan is the primary source of imported cars and trucks, the flow of imports has declined recently.
Exports have remained relatively stable over the past 4 years with Canada accounting for half of all
domestic exports.
Industry Trends
Domestic production of motor vehicles in the United States is projected to increase in the
next 5 years primarily due to two factors. First, foreign automobile manufacturers, such as Honda
and BMW, are locating more of their production facilities in the United States to serve the U.S.
market. Second, the LDT market, in which U.S. manufacturers dominate, is surging especially as
manufacturers are offering more car-like amenities in these vehicles. The U.S. Department of
Commerce (1999c) projects that domestic automobile manufacturing facilities will have capacity
utilization rates of 90 percent or more over the next few years.
Offsetting these increases in domestic production is the fact that U.S. manufacturers are
expected to move some production facilities to locations with lower costs of production such as
Mexico and Canada. Relocation to Mexico and Canada has become easier partly because of
ES-2
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NAFTA. In addition to lower costs of production, other countries may have less stringent
environmental regulations than the United States' regulations, which translates into lower costs as
well. To serve the markets in other countries, however, U.S. manufacturers have developed and
will continue to develop smaller, less costly models than those produced for the U.S. market. Most
of the growth in the global vehicle market will be in less developed countries such as China, India,
Latin America, and eastern Europe in which the typical U.S. automobile is overly equipped and
prohibitively expensive.
ES.2 Regulatory Control Costs
For this analysis, EPA assumed that these facilities will adopt the following strategies to
reduce their emissions and comply with the proposed NESHAP:
Strategy 1: Facilities that do not presently have controls on the electrodeposition oven
will add an oxidizer to control HAP emissions from the oven. This equates, on average,
to about $8,200 per ton of HAP controlled.
Strategy 2: If the HAP/VOC ratio for the primer-surfacer coating material exceeds
0.3, a modified surface coating material will be used to meet this ratio. This equates,
on average, to about $540 per ton of HAP controlled.
Strategy 3: If the HAP/VOC ratio for the topcoat material exceeds 0.3, a reformulated
top coating material will be used to meet this ratio.
Strategy 4: Any remaining HAP emissions in excess of the MACT floor will be
reduced by introducing controls on the exhaust from automated zones of spray booths.
The associated abatement costs could include capital costs incurred to purchase or upgrade
pollution control equipment, cost for operation and maintenance of this abatement equipment such
as cost of energy needed to operate it and coating materials replacement costs, and other
administrative costs associated with monitoring, reporting, and record keeping.
New facilities and new paint shops would incur little additional cost to meet the proposed
emission limit. These facilities would already include bake oven controls and partial spray booth
exhaust controls for VOC control purposes. New facilities might need to make some downward
adjustment in the HAP content of their materials to meet the proposed emission limit.
ES-3
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The total annual capital cost estimate includes the annualized capital cost associated with all
applicable strategies. Similarly, the total variable cost estimate includes the variable cost associated
with all applicable strategies. The nationwide total cost is estimated at $154 million, with $75
million in annual capital costs, $76 million in operation and maintenance costs, and $2 million in
administrative costs.1 This equates, on average, to about $25,000 per ton of HAP controlled.
ES.3 Summary of EIA Results
Automobile/LDT manufacturers will attempt to mitigate the impacts of higher production
costs by shifting as much of the burden on other economic agents as market conditions allow.
Potential responses include changes in production processes and inputs, changes in output rates, or
closure of the plant. This analysis focuses on the last two options because they appear to be the
most viable for auto assembly plants, at least in the short term. We expect upward pressure on
prices as producers reduce output rates. Higher prices reduce quantity demanded and output for
each vehicle class, leading to changes in profitability of facilities and their parent companies. These
market and industry adjustments determine the social costs of the regulation and its distribution
across stakeholders (producers and consumers). We report key results below:
•• Price and Quantity Impacts: The EIA model predicts the following:
— The regulation is projected to increase the price of all vehicle classes by at most
0.01 percent (or at most $3.08 per vehicle). Similarly, the model projects small
declines in domestic production across all vehicle classes (ranging from 17 to 384
vehicles).
— Given the small changes in domestic vehicle prices projected by the economic
model, EPA estimates foreign trade impacts associated with the rule are negligible.
Plant Closures and Changes in Employment: EPA estimates that no automobile or
LDT assembly plant is likely to prematurely close as a result of the regulation.
However, employment in the automobile and LDT assembly industry is projected to
decrease by 37 full-time equivalents (FTEs) as a result of decreased output levels. This
represents a 0.02 percent decline in manufacturing employment at these assembly
plants.
All values are reported in 1999 constant dollars.
ES-4
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Small Businesses: The Agency has determined that there are no small businesses within
this source category that would be subject to this proposed rule. Therefore, because
this proposed rule will not impose any requirements on small entities, EPA certifies that
this action will not have a significant economic impact on a substantial number of small
entities.
Social Costs: EPA estimates the total social cost of the rule to be $161 million. Note
that social cost estimates exceeds baseline engineering cost estimates by $7 million.
The projected change in welfare is higher because the regulation exacerbates a social
inefficiency (see Appendix B). In an imperfectly competitive equilibrium, the marginal
benefit consumers place on the vehicles, the market price, exceeds the marginal cost to
producers of manufacturing the product. Thus, social welfare would be improved by
increasing the quantity of the vehicles provided. However, producers have no incentive
to do this because the marginal revenue effects of lowering the price and increasing
output is lower than the marginal cost of these extra units.
— Higher market prices lead to consumer losses of $9.1 million, or 6 percent of the
total social cost of the rule.
— Although automobile or LDT producers are able to pass on a limited amount of
cost increases to final consumers, the increased costs result in a net decline in
profits at assembly plants of $152 million.
ES.4 Summary of Benefit Analysis
The emission reductions achieved by the automobile and light-duty truck surface coating
source category will provide benefits to society by improving environmental quality. In general, the
reduction of HAP emissions resulting from the regulation will reduce human and environmental
exposure to these pollutants and thereby reduce the likelihood of potential adverse health and
welfare effects.
Seven HAP account for over 95 percent of the total HAP emitted in this source category.
Those seven HAP are toluene, xylene, glycol ethers (including ethylene glycol monobutyl ether
(EGBE)), MEK, MBK, ethylbenzene, and methanol. According to baseline emission estimates,
this source category will emit approximately 10,000 tons per year of HAPs at affected sources in
the fifth year following promulgation. The regulation will reduce approximately 6,000 tons of
emissions per year of the HAPs listed above.
ES-5
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Of the seven HAP emitted in the largest quantities by this source category, all can cause
toxic effects following sufficient exposure. The potential toxic effects of these HAP include effects
to the central nervous system, such as fatigue, nausea, tremors, and loss of motor coordination;
adverse effects on the liver, kidneys, and blood; respiratory effects; and, developmental effects. In
addition, one of the seven predominant HAP, EGBE, is a possible carcinogen, although information
on this compound is not currently sufficient to allow us to quantify its potency.
The rule will also achieve reductions of 12,000 to 18,000 tons of VOCs and hence may
reduce ground-level ozone and particulate matter (PM). Major adverse health effects from ozone
include alterations in lung capacity and breathing frequency; eye, nose and throat irritation; reduced
exercise performance; malaise and nausea; increased sensitivity of airways; aggravation of existing
respiratory disease; decreased sensitivity to respiratory infection; and extra pulmonary effects
(CNS, liver, cardiovascular, and reproductive effects). Other welfare benefits associated with
reduced ozone concentrations include the value of avoided losses in commercially valuable timber
and aesthetic losses suffered by nonconsumptive users (EPA, 1995b). There are a number of
benefits from reduced PM concentrations, including reduced soiling and materials damage,
increased visibility, and reductions in cases of respiratory illness, hospitalizations, and deaths.
ES-6
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SECTION 1
INTRODUCTION
In 1999, the automobile and LDT assembly industry was comprised of 65 establishments,
which were owned by 14 domestic and foreign companies and employed more than 160,000
workers.1 The coating operations of 59 of these facilities are major sources of hazardous air
pollutant (HAP) emissions.2 The majority of HAP emissions from the automobile coating process
are released in the coating operations. Under Section 112 of the 1990 Clean Air Act (CAA)
Amendments, the U.S. Environmental Protection Agency (EPA) is currently developing national
emission standards for hazardous air pollutants (NESHAP) to limit these emissions. This report
presents a regulatory impact analysis (RIA) to evaluate the economic impacts associated with the
regulatory options under consideration.
1.1 Agency Requirements for Conducting an RIA
Congress and the Executive Office have imposed statutory and administrative requirements
for conducting economic analyses to accompany regulatory actions. Section 317 of the CAA
specifically requires estimation of the cost and economic impacts for specific regulations and
standards proposed under the authority of the Act. In addition, Executive Order (EO) 12866 and
the Unfunded Mandates Reform Act (UMRA) require a more comprehensive analysis of benefits
and costs for proposed significant regulatory actions.3 Other statutory and administrative
requirements include examination of the composition and distribution of benefits and costs. For
example, the Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory
Automobiles are defined as vehicles designed to carry up to seven passengers but do not include sport utility vehicles (SUVs),
vans, or trucks. Light duty trucks are defined as vehicles not exceeding 8,500 pounds that are designed to transport light
loads of property and include SUVs and vans (AAMA/AIAM/NPCA, 2000).
A major source of HAP emissions is defined as a facility that emits, or has the potential to emit, 10 or more tons of any HAP or
25 or more tons of any combination of HAPs.
Office of Management and Budget (OMB) guidance under EO 12866 stipulates that a full benefit-cost analysis is required when
the regulatory action has an annual effect on the economy of $100 million or more.
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Enforcement and Fairness Act of 1996 (SBREFA), requires EPA to consider the economic
impacts of regulatory actions on small entities. The Agency's Economic Analysis Resource
Document provides detailed instructions and expectations for economic analyses that support
rulemaking (EPA, 1999).
1.2 Organization of the Report
This report is divided into five sections and two appendixes that describe the industry and
economic methodology and present results of this RIA:
Section 2 provides a summary profile of the automobile and light-truck industry. It
describes the affected production process, inputs, outputs, and costs of production. It
also describes the market structure and the uses and consumers of automobiles and
light trucks.
Section 3 reviews the regulatory control alternatives and the associated costs of
compliance. This section is based on EPA's engineering analysis conducted in support
of the proposed NESHAP.
Section 4 outlines the methodology for assessing the economic impacts of the
proposed NESHAP and the results of this analysis, including market, industry, and
social welfare impacts.
Section 5 addresses the proposed regulation's impact on small businesses, unfunded
mandates, and new sources.
•• Section 6 analyzes the benefits associated with the proposed regulation.
•• Appendix A provides a detailed description of the Agency's economic model.
Appendix B presents the methodology for estimating social costs under imperfect
competition.
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SECTION 2
INDUSTRY PROFILE
The domestic automobile and light duty truck (LDT) manufacturing industry is a large,
mature industry spanning NAICS 336111 and NAICS 336112. In 1998 and 1999, this industry
was comprised of 65 establishments, which were owned by 14 domestic and foreign companies
and employed more than 160,000 workers. The industry's size is expected to increase as foreign
producers locate additional production facilities in the United States and as the LDT market
continues to grow. The proposed NESHAP will directly impact facilities that use coatings in their
automobile and LDT assembly operations. This industry profile provides information that will be
used in Section 4 to estimate the size and nature of these impacts.
This section is organized as follows. Section 2.1 describes the supply side including the
affected production process, inputs, outputs, and costs of production. Section 2.2 describes the
industry organization, including market structure, manufacturing plants, and parent company
characteristics. Section 2.3 describes the demand side of the market including the uses and
consumers of automobiles and light trucks. Finally, Section 2.4 provides market data on the
automobile and light truck industry, including market volumes, prices, and projections. While the
industry profile focuses largely on the automobile and light duty truck assembly industry, information
is also provided when available on the indirectly affected coating manufacturing industry.
2.1 Supply Side Overview
Motor vehicle assembly plants combine automotive systems and subsystems to produce
finished vehicles. Once the components of the vehicle body have been assembled, the body goes
through a series of coating operations. In this section, the coating process and the characteristics of
the coatings used are described.
2.1.1 Coating Process
As illustrated in Figure 2-1, the coating process for automobiles and LDTs consists of the
following operations:
2-1
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Step 1
Body Shop
Bake W-
Step 2
Primer
Electrodeposition
Cleaning
Operation
Install Plastic
Parts
Zinc Phosphate
Bath
>
Chromic
r
Acid Dip
Seal Deck
Step 3
Clearcoat Booth
>
r
^
^,
Main Color Booth
^
^.
Wet Sand Deck
Antichip Booth
>.
1
Primer -
Surfacer Water -
Wash Booth
>
t
Bake
Bake
Finesse
Operations
Deadener
Trim Shop
Repairs and
Two-Tone Finishing
Assembly
Final Repairs
Figure 2-1. Car Painting Process
Sources: American Automobile Manufacturers Association. 1998. Motor Vehicle Facts and Figures 1998.
Detroit: AAMA.
U.S. Environmental Protection Agency. September 1995a. Profile of the Motor Vehicle Assemble
Industry. EPA 310-R-95-009. Washington, DC: U.S. Government Printing Office.
2-2
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Step 1: Surface preparation operations—cleaning applications, phosphate bath, and
chromic acid bath;
Step 2: Priming operations—electrodeposition primer bath, joint sealant application,
antichip application, and primer surface application; and
Step 3: Finishing operations—color coat application, clearcoat application, and any
painting necessary for two-tone color or touch-up applications (EPA, 1995a).
Most releases of HAPs occur during the priming operations (Step 2) and the finishing operations
(Step 3); thus, these steps are described in more detail here, followed by a description of the final
vehicle assembly activities. However, the order and the method by which these operations occur
may vary for individual facilities. Once completed, the coating system typically is as shown in
Figure 2-2.
Clearcoat
t
Basecoat
t
Primer Surfacer
t
Electrocoat Primer
t
Substrate: Steel and Inhibition Layer
Figure 2-2. Priming Operations
Adapted from: Poth, U. 1995. "Topcoats for the Automotive Industry." Automotive Paints and Coatings, G.
Fettis, ed. New York: VCH Verlagsgesellschaft mbH.
2.1.1.1 Priming Operations
After the body has been assembled, anticorrosion operations have been performed, and
plastic parts to be finished with the body are installed, priming operations begin (Step 2). The
purpose of the priming operations is to further prepare the body for finishing by applying various
layers of coatings designed to protect the metal surface from corrosion and assure good adhesion of
subsequent coatings.
2-3
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First, a primer coating is applied to the body using an electrodeposition method in which a
negatively charged auto body is immersed in a positively charged bath of primer for approximately
3 minutes (EPA, 1995a). The coating particles migrate toward the body and are deposited onto
the body surface, creating a strong bond between the coating and the body to provide a durable
coating (EPA, 1995a). Once deposition is completed, the body is rinsed in a succession of
individual spray and/or immersion rinse stations and then dried with an automatic air blow-off
(Vachlas, 1995). Following the rinsing stage, the deposited coating is cured in a electrodeposition
curing oven for approximately 20 minutes at 350 to 380°F (EPA, 1995a).
Next, the body is further water-proofed by sealing spot-welded joints of the body. A
sealant, usually consisting of polyvinyl chloride and small amounts of solvent, is applied to the joints.
The body is again baked to ensure that the sealant adheres thoroughly to the spot-welded areas
(EPA, 1995a).
After sealing, the body proceeds to the antichip booth. The purpose of antichip primers is
to protect the vulnerable areas of the body, such as the door sills, door sides, under-body floor
pan, and front and rear ends, from rocks and other small objects that can damage the finish. In
addition, antichip primers allow for improved adhesion of the top coat. In the process, a substance
usually consisting of a urethane or an epoxy ester resin, in conjunction with solvents, is applied
locally to certain areas along the base and sill sections of the body (EPA, 1995a; Vachlas, 1995).
The final step in the priming operation is applying the primer-surfacer coating. The purpose
of the primer-surfacer coating is to provide "filling" or hide minor imperfections in the body, provide
additional protection to the vehicle body, and bolster the appearance of the topcoats (Ansdell,
1995). Unlike the initial electrodeposition primer coating, primer-surfacer coatings are applied by
spray application in a water-wash spray booth. The primer-surfacer consists primarily of pigments,
polyester or epoxy ester resins, and solvents. Because of the composition of this coating, the
primer-surfacer creates a durable finish that can be sanded. Primer-surfacers can be color-keyed
to specific topcoat colors and thus provide additional color layers in case the primary color coating
is damaged. Since water-washed spray booths are usually used, water that carries the overspray is
captured and processed for recycling (Poth, 1995; EPA, 1995a). Following application of the
primer-surfacer, the body is baked to cure the film, minimize dirt pickup, and reduce processing
time.
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2.1.1.2 Finishing Operations
After the primer-surfacer coating is baked, the body is then sanded, if necessary, to remove
any dirt or coating flaws. The next step of the finishing process is the application of the topcoat,
which usually consists of a color basecoat and a clearcoat. This is accomplished in a manner similar
to the application of primer-surfacer in that the coatings are sprayed onto the body. In addition to
pigments and solvents, aluminum or mica flakes can be added to the color basecoat to create a
finish with metallic or reflective qualities.
After the color basecoat is allowed to flashoff, the clearcoat is applied. The purpose of the
clearcoat is to add luster and durability to the vehicle finish and protect the total coating system
against solvents, chemical agents, water, weather, and other environmental effects. This coating
generally consists of acrylic resins or melamine resins and may contain additives. Once the
clearcoat is applied, the vehicle body is baked for approximately 30 minutes to cure the basecoat
and clearcoat.
2.1.1.3 Final Assembly Activities
Once the clearcoat is baked, deadener is applied to certain areas of the automobile
underbody to reduce noise. In addition, anticorrosion wax is applied to other areas, such as the
inside of doors, to further seal the automobile body and prevent moisture damage. Hard and soft
trim are then installed on the vehicle body. Hard trim, such as instrument panels, steering columns,
weather stripping, and body glass, is installed first. The car body is then passed through a water
test where, by using phosphorus and a black light, leaks are identified. Soft trim, including seats,
door pads, roof panel insulation, carpeting, and upholstery, is then installed (EPA, 1995a).
Next, the automobile body is fitted with the gas tank, catalytic converter, muffler, tail pipe,
bumpers, engine, transmission, coolant hoses, alternator, and tires. The finished vehicle is then
inspected to ensure that no damage has occurred as a result of the final assembly stages. If there is
major damage, the entire body part may be replaced. However, if the damage is minor, such as a
scratch, paint is taken to the end of the line and applied using a hand-operated spray gun. Because
the automobile cannot be baked at temperatures as high as in earlier stages of the finishing process,
the paint is catalyzed prior to application to allow for faster drying at lower temperatures.
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2.1.2 Coating Characterization
Automobile coatings enhance a vehicle's durability and appearance. Coatings therefore
add value to the vehicle. Some of the coating system characteristics that automotive assemblers
test for include adhesion, water resistance, humidity resistance, salt spray resistance, color, gloss,
acid etch resistance, and stone chip resistance.
Coatings inputs are combined with other inputs, such as labor, capital, and energy, to
complete the coating process for automobiles and LDTs. The primary coatings used in vehicle
assembly that the NESHAP will affect are the electrodeposition primer, the primer surfacer coating,
and the topcoat (basecoat and clearcoat). Table 2-1 shows the coatings and their physical state,
their purpose, and if they release HAPs.
As the table indicates, powder coatings used for primer surface coating do not release
significant HAPs, but their liquid counterparts may (Green, 2000a); thus, automotive and LDT
assembly plants may consider substituting powder coatings for liquid coatings in addition to
installing control equipment to comply with the NESHAP. However, powder coatings tend to be
more costly to use than liquid coatings because the technology has not been developed to allow
powder to be applied as thinly as liquid coating. In particular, "the normal liquid film build-up for a
clearcoat is 2 mils while for a powder clearcoat it takes 2.5 to 3 mils or more to make it look good"
(Galvin, 1999). As a result, using powder means using a larger quantity of coating, thus an
increased cost. However, some believe the cost difference between powder and liquid may be
eliminated for applications such as automobile primers over the next 5 years (RTI, 2000). Already,
one coating manufacturer, PPG, is experimenting with charging automotive manufacturers based on
the number of vehicles coated rather than the units of coatings used (Galvin, 1999).
HAP emissions depend on HAP content, transfer efficiency, and the presence and extent of
HAP control equipment. To reduce HAP content, liquid coatings can be reformulated. In addition,
non-HAPs such as ethyl acetate and butyl acetate can substitute for HAPs such as toluene and
xylene. It should also be noted that there are overlapping ranges of HAP contents and HAP
emission rates for solventborne and waterborne materials.
Volatile organic compound (VOC) emissions depend on VOC content, transfer efficiency,
and the presence and extent of VOC control equipment. Although most of the HAPs in these
2-6
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coatings are also VOCs, there are non-HAP VOCs. To lower VOC content,
Table 2-1. Properties of Coatings Used in Automobile and LDT Assembly Facilities
Coating
Purpose
Physical State
Significant HAP
Releases3'"
Cleaning agents
Electrodeposition
primer
Primer surfacer
Basecoat
Clearcoat
To clean spray booths and
application equipment and purge
lines between color changes
To prepare body for primer
surface and for corrosion
protection
To prepare body for paint
To add color
To protect the color coat
Solvent
Liquid—waterbome
Liquid—solventborne or
waterborne
Powder
Liquid—waterborne or
solventborne
Liquid—solventborne
Powder'
Primarily specific aromatic s
(toluene and xylene),
blends containing aromatic s,
MIBK
Primarily glycol ethers,
methanol, MIBK, xylene,
MEK
Glycol ethers, methanol,
xylene, ethylbenzene,
formaldehyde, MEK
None
1,2,4 trimethyl benzene,
ethylbenzene, xylene, toluene,
aromatic 100, naptha,
formaldehyde, mineral spirits,
glycol ethers, MEK, methanol
Ethyl benzene, xylene, 1,2,4
trimethyl benzene, aromatic
solvent 100, napthol spirits,
MIBK, aromatic solvent,
formaldehyde
None
a Although liquid coatings may be associated with significant H AP releases, all can be reformulated using non-HAP
chemicals.
b MIBK = methyl isobutyl ketone; MEK = methyl ethyl ketone.
0 Powder clearcoats are currently not used in the United States.
Sources: Adapted from U.S. Environmental Protection Agency. September 1995a. Profile of the Motor Vehicle
Assembly Industry. EPA310-R-95-009. Washington, DC: U.S. Government Printing Office.
Green, David, RTI. Email correspondence with Aaiysha Khursheed, EPA. November 8, 2000a.
2-7
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liquid coatings can be reformulated. VOC contents and emission rates for solventborne and
waterborne materials also have overlapping ranges.
2.1.3 Final Products
Motor vehicle assembly plants combine automotive parts from parts manufacturers to
produce finished vehicles. There is a great diversity in the type of final vehicles available for sale to
the consumer. Vehicles can vary in their functions such as sedans, pickup trucks, and minivans as
well as in their characteristics such as fuel efficiency, carrying capacity, and comfort features. In this
report, the Agency has categorized automobiles and light trucks into the eight vehicle classes listed
below in Table 2-2.
Table 2-2. Finished Vehicle Categorization
Vehicle Class Examples of Vehicle Models
Subcompact Honda Civic, Nissan Sentra
Compact Ford Focus, Toyota Corolla, Chevrolet Prizm
Intermediate/standard Honda Accord, Dodge Stratus, Toyota Camry
Luxury Cadillac Deville, Lincoln Towncar
Sports Chevrolet Corvette, Dodge Viper
Pick-up Dodge Ram, Ford F Series
Van Dodge Caravan, Ford Windstar
Sports utility vehicle (SUV) Jeep Grand Cherokee, Ford Explorer
2.1.4 Costs of Production
The overall costs of production for automobiles and LDTs include capital expenditures,
labor, energy, and materials. The cost of coating a vehicle is only a subset of these overall costs.
Costs of production, as reported by the Census Bureau for the relevant SIC and NAICS codes,
include costs for automobile and LDT assemblers and for establishments that manufacture chassis
and passenger car bodies. In addition, the relevant SIC code includes establishments that assemble
commercial cars and buses and special-purpose vehicles for highway use, none of which are
2-8
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included in the NAICS code. In either case, the data presented here overstate the costs of
production for plants that assemble vehicles. However, the hourly wages and the proportion of
costs relative to the value of shipments provide us with information on relative costs in the industry.
Table 2-3 presents data on the value of shipments, payroll, cost of materials, and new
capital expenditures for SIC 3711 and for NAICS 336111 (automobiles) and 336112 (LDTs). As
indicated, payroll costs, which include wages and benefits, for these codes account for
approximately 6 to 7 percent of the value of shipments. Materials account for a large portion of
value of shipments at 64 to 73 percent. According to the Census definition, materials include parts
used in the manufacture of finished goods (materials, parts, containers, and supplies incorporated
into products or directly consumed in the process); purchased items later resold without further
manufacture; fuels; electricity; and commission or fees to outside parties for contract manufacturing
(U.S. Department of Commerce, 1996). The energy component of the materials cost averages less
than 1 percent. Finally, new capital expenditures account for approximately 2 percent of the value
of shipments.
Table 2-4 provides further detail on the labor component of production costs. Average
hourly wages including benefits for production workers ranged from $21.66 per hour in 1992 to
$26.30 per hour in 1997. However, real wages have been relatively constant over this time period.
2.1.5 Costs Associated with Coatings
According to the National Paint and Coatings Association (2000), the cost of paint on an
average automobile accounts for approximately 1 percent of the showroom price. In addition to
the costs of the coatings themselves, the total costs of coating a vehicle also include annualized
capital expenditures for the "paint shop," labor, energy, and other material inputs. The costs
associated with the coating process are described in more detail below.
2.1.5.1 Capital Costs for the Paint Shop
The capital costs associated with coating vehicles, or the "paint shop," include the cost of
•• physical space within the assembly plant;
•• conveyor system;
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Table 2-3. Number of Establishments, Value of Shipments, and Production Costs for the SIC and NAICS Codes that
Include Automobile and LDT Assemblers, 1992-1997
Year
1992
1993
1994
1995
1996
1997
Value of
Shipments
Number of
Industry Code Establishments ($10')
SIC 3711
SIC 3711
SIC 3711
SIC 3711
SIC 3711
Total NAICS
3361 11 and
336112
NAICS 3361 11
(autos)
NAICS 3361 12
(LDTs)
456
NA
NA
NA
NA
306
194
112
152,949
167,826
197,554
201,171
200,704
205,786
95,386
110,400
Payroll
($10')
10,439.8
11,154.2
12,437.7
12,955.9
12,310.9
11,773.9
6,412.0
5,362.0
%ofVOS
7%
7%
6%
6%
6%
6%
7%
5%
Cost of Materials
($10*)
107,636.6
120,458.8
144,809.9
145,143.7
145,134.1
137,473.5
66,546.2
70,927.3
%ofVOS
70%
72%
73%
72%
72%
67%
70%
64%
New Capital
Expenditures
($10')
2,989.5
4,033.9
4,245.7
4,521.0
4,381.7
5,125.4-
3,355.8'
1,769.6-
%ofVOS
2%
2%
2%
2%
2%
2%
4%
2%
a Capital expenditures for the NAICS codes include both new and used capital equipment purchases. Used capital expenditures are not reported for SIC 3711 in
the Annual Survey of Manufactures.
NA = Not available
Sources: U.S. Department of Commerce. 1995. 1992 Census of Manufactures: Industry Series—Motor Vehicles and Equipment. Washington, DC: Government
Printing Office.
U.S. Department of Commerce. 1996. 1994 Annual Survey of Manufactures. Washington, DC: Government Printing Office.
U.S. Department of Commerce. 1998. 1996 Annual Survey of Manufactures. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Census Bureau. October 1999a. "Automobile Manufacturing." 1997 Economic Census Manufacturing Industry Series.
EC97MO-3361A. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Census Bureau. October 1999b. "Light Truck and Utility Vehicle Manufacturing." 1997 Economic Census
Manufacturing Industry Series. EC97M-3361B. Washington, DC: Government Printing Office.
-------
Table 2-4. Number of Establishments, Employment, and Payroll Costs for the SIC and NAICS Codes that Include
Automobile and LDT Assemblers, 1992-1997
All Employees
Production Workers
Payroll ($10')
Payroll
($10*)
Average Hourly Wage
Number of
Industry Establishment
Year
1992
1993
1994
1995
1996
1997
Code
SIC 37 11
SIC 37 11
SIC 3711
SIC 37 11
SIC 37 11
Total NAICS
3361 11 and
336112
NAICS
336111
(autos)
NAICS
336112
(LDTs)
s
456
NA
NA
NA
NA
306
194
112
(103)
228.4
234.0
224.2
237.9
225.2
208.1
114.1
94.0
Current$
10,438.8
12,437.7
11,154.2
12,955.9
12,310.9
11,773.9
6,412.0
5,362.0
1992$
10,438.8
12,075.4
10,562.7
11,929.9
11,011.5
10,292.0
5,604.9
4,687.1
(103) Hours (106)
193.3
202.5
191.0
208.3
196.3
184.4
98.0
86.5
397.3
447.5
409.6
449.1
418.8
377.9
197.6
180.3
Current$
8,606.8
10,448.3
9,262.6
10,996.0
10,304.2
9,936.8
5,197.2
4,739.6
1992$
8,606.8
10,144.0
8,771.4
10,125.2
9,216.6
8,686.0
4,543.0
4,143.0
Current$
21.66
23.35
22.61
24.48
24.60
26.30
26.30
26.29
1992$
21.66
22.67
21.40
22.54
22.00
22.99
22.99
22.98
NA = Not available
Sources: U.S. Department of Commerce. 1995. 1992 Census of Manufactures: Industry Series—Motor Vehicles and Equipment. Washington, DC: Government
Printing Office.
U.S. Department of Commerce. 1996. 1994 Annual Survey of Manufactures. Washington, DC: Government Printing Office.
U.S. Department of Commerce. 1998. 1996 Annual Survey of Manufactures. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Census Bureau. October 1999a. "Automobile Manufacturing." 1997 Economic Census Manufacturing Industry Series.
EC97MO-3361A. Washington, DC: Government Printing Office.
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•• sanding, paint spray, and demasking booths;
•• vats for storing coatings;
•• flash and cooling tunnels;
•• electrocoat, sealer, and topcoat ovens;
•• inspection and repair decks;
•• pollution abatement system; and
•• various other equipment (Graves, 2000).
Industry estimates that the capital costs for a new powder primer-surfacer system within an existing
plant are $26 to $30 million (Praschan, 2000) and the total cost of removing and demolishing the
previous equipment is in the range of $8 to $10 million. The expected life of a paint shop is
approximately 15 years (Green, 2000b).
2.1.5.2 Variable Costs for the Paint Shop
The variable costs associated with coating vehicles include the coatings, labor, energy, and
other material inputs. While specific information on the labor, energy, and other material input costs
for the coating process could not be obtained, information on the costs of the coatings themselves is
available. First, the relative size of the coating input cost can be estimated based on Census data.
According to the 1997 Economic Census (U.S. Department of Commerce, Bureau of the Census,
1999a and 1999b), establishments classified in NAICS 336111 Automobile Manufacturing, which
includes both assembly plants and chassis manufacturing, spent $605.8 million on materials
purchased from establishments classified in NAICS 32551 Paints, Varnishes, Lacquers, Stains,
Shellacs, Japans, Enamels, and Allied Products. This implies that the coatings themselves
accounted for approximately 0.9 percent of the cost of materials ($66.5 billion) and 0.6 percent of
the value of shipments ($95.4 billion) in 1997. Correspondingly, establishments classified in
NAICS 336112 Light Truck and Utility Vehicle Manufacturing, which also include both assembly
plants and chassis manufacturing, spent $969.8 million on materials purchased from establishments
classified in NAICS 32551. Thus, coatings accounted for approximately 1.4 percent of the cost of
materials ($137.5 billion) and 0.9 percent of the value of shipments ($205.8 billion) in 1997.
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Table 2-5. Automotive Coatings Usage, 1989,1993, and 1998 with Projections to 2008
Item 1989 1993 1998 2003 2008
Motor vehicle assembly and parts $246.1 $255.1 $337.6 $388.0 $448.2
manufacturing shipments (109 $1992)
Pounds of coatings per $1,000 in shipments 3.69 3.32 2.70 2.44 2.19
Total automotive coating usage 909 847 910 945 980
(106 pounds)
Coating weight by application (106 pounds)
Solvent-based
Water-based
Powder
Other
Coating weight by resin (106 pounds)
Acrylic
Urethane
Epoxy
Alkyd
Other
765
100
24
20
310
285
89
150
75
675
109
41
22
300
280
90
110
67
615
180
65
50
330
290
110
100
80
560
225
95
65
350
305
115
90
85
505
260
135
80
370
320
120
80
90
Source: Freedonia Group. September 1999. Automotive Coatings, Sealants andAdhesives in the United States
to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
Table 2-5 provides a breakdown of automotive coatings usage for both motor vehicle
assembly and parts manufacturing establishments in 5-year increments from 1989 with projections
to 2008. In 1998, the majority of coatings were solvent-based (67.5 percent in 1998). Water-
based coatings accounted for 19.8 percent of coating usage and powder coatings accounted for
7.1 percent. Over the next 10 years, Freedonia projects that the relative quantities of both water-
based and powder coatings will increase relative to solvent-based coatings.
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When comparing liquid coatings to powder coatings, a general rule of thumb in the industry
is to equate the cost of 3 pounds of powder, at a cost of $2.50 to $6.00 per pound, to 1 gallon of
liquid coatings (RTI, 2000). One can also compare the cost of reformulated liquid coating
materials that contain ethyl acetate and butyl acetate to those containing aromatics such as toluene
and xylene. Inputs to coating, such as ethyl acetate and butyl acetate, cost about $0.40/lb, while
toluene and xylene cost about $0.17/lb (Green, 2001). Overall coatings used in the automobile
industry averaged $3.74 per pound in 1998. Table 2-6 shows an example of one private research
firm's estimates of the pricing trends in automotive coatings, sealants, and adhesives in 5-year
increments from 1989 with projections to 2008 (Freedonia Group, 1999).
Table 2-6. Pricing Trends in Automotive Coatings, Sealants, and Adhesives, 1989,
1993, and 1998 with Projections to 2008 (Dollars per Pound)
Item
Weighted average
Coatings
Sealants
Adhesives
1989
2.48
3.36
1.09
1.18
1993
2.60
3.66
1.17
1.20
1998
2.59
3.74
1.23
1.33
2003
2.69
3.92
1.31
1.41
2008
2.76
4.08
1.39
1.48
Source: Freedonia Group. September 1999. Automotive Coatings, Sealants and Adhesives in the United States
to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
2.2 Industry Organization
This subsection describes the market structure of the automobile and LDT assembly
industries, the characteristics of the assembly facilities, and the characteristics of the firms that own
them. In addition, we provide information on the market structure of the automotive coatings
industry and the characteristics of the firms that manufacture the coatings used at the assembly
facilities.
2.2.1 Market Structure
Market structure is important because it determines the behavior of producers and
consumers in the industry. If an industry is perfectly competitive, then individual producers are not
able to influence the price of the output they sell or the inputs they purchase. This condition is most
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likely to hold if the industry has a large number of firms, the products sold and the inputs purchased
are undifferentiated, and entry and exit of firms are unrestricted. Product differentiation can occur
both from differences in product attributes and quality and from brand name recognition of
products. Entry and exit are unrestricted for most industries except, for example, in cases where
one firm holds a patent on a product, where one firm owns the entire stock of a critical input, or
where a single firm is able to supply the entire market.
The automobile and LDT assembly industry operates in a global marketplace and competes
with foreign producers of vehicles. Many of the companies that own these facilities are foreign-
based companies. Within the United States, the market for automobiles and LDTs is considered an
oligopolistic differentiated products market (Berry, Levinsohn, and Pakes, 1995) because the
facilities that assemble these vehicles in the United States are owned by only 14 companies and
because the products produced are highly differentiated by manufacturer. Entry and exit of
companies in the industry are difficult because the capital outlays required to begin manufacturing
cars are extremely large; thus, entry depends on the ability of a new manufacturer to secure outside
funding. Entry is also difficult because brand name recognition is critical for establishing a market
for a particular vehicle.
Market structure of the industry is particularly influenced by the high degree of product
differentiation. Vehicles vary in their functions as sedans, coupes, wagons, pickups, and minivans,
and in their characteristics such as carrying capacity, gas mileage, safety features, comfort features,
visual aesthetics, and reliability ratings. Brand names are also important in this industry in that they
embody consumers' perceptions of the characteristics and reliability of the vehicles. The prices for
similar type vehicles across manufacturers can vary based on multiple characteristics; thus, nonprice
competition, if it occurs, would be particularly difficult to discern.
In addition to evaluating the factors that affect competition in an industry, one can also
evaluate four-firm concentration ratios (CR4s), eight-firm concentration ratios (CR8s), and
Herfindahl-Hirschmann indexes (HHIs). These values are reported at the four-digit SIC level for
1992, the most recent year available, in Table 2-7. Also included in the table are the same ratios
independently calculated from sales data for 1998/1999 for the 14 companies that own vehicle
assembly plants. Comparing these two sets of numbers provides some insights into how the
companies owning assembly plants differ from the rest of the SIC 3711 companies.
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Table 2-7. Measures of Market Concentration for Automobile Manufacturers, 1992 and
1998-1999
Description
SIC 3711 (1992)a
Companies that own
assembly plants (1998/99)b
CR4
84
72
CR8
91
94
Hffl
2,676
1,471
Number of
Companies
398
14
Number of
Establishments
465
65
a Concentration ratios, as calculated by the Department of Commerce, are based on value added for the SIC code.
b Independently calculated concentration ratios were based on overall sales for the companies that own assembly plants.
Sources: U.S. Department of Commerce. 1992. Concentration Ratios in Manufacturing. Washington, DC:
Government Printing Office.
Hoover's Online. Company capsules, . As obtained on January 13,2000.
Table 2-7 suggests that companies that own assembly plants have similar concentration
ratios compared to all companies in SIC 3711 based on the CR4s and CR8s. The values for both
of these measures are high relative to other industries. The criteria for evaluating the HHIs are
based on the 1992 Department of Justice's Horizontal Merger Guidelines. According to these
criteria, industries with HHIs below 1,000 are considered unconcentrated (i.e., more competitive),
those with HHIs between 1,000 and 1,800 are considered moderately concentrated (i.e.,
moderately competitive), and those with HHIs above 1,800 are considered highly concentrated
(i.e., less competitive). The HHI as calculated by the Department of Commerce indicates that SIC
3711 is considered highly concentrated, whereas the Hffl calculated based on the sales of
companies that own assembly plants indicates that the industry is moderately concentrated. In
general, firms in less-concentrated industries are more likely to be price takers, while firms in more-
concentrated industries are more likely to be able to influence market prices. While the
concentration measures are high for the automobile and LOT industries, the high degree of product
differentiation is likely a more important determinant of the industry's structure.
As with the assembly industry, the automotive coatings industry is oligopolistic in that three
companies provide nearly all of the coatings used by vehicle assemblers. These multinational
companies—Dupont, BASF, and PPG Industries—provide coatings to a variety of industries. The
coatings they provide to the vehicle assemblers are differentiated based on their uses and specific
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formulations. Because little information is available on how they market their products to the
automotive industry, the degree of competition in the automotive coatings industry is not known.
2.2.2 Automobile andLDTAssembly Facilities
Facilities comprise a site of land with a plant and equipment that combine inputs (raw
materials, fuel, energy, and labor) to produce outputs (in this case, automobiles and light trucks, and
coatings). The terms facility, establishment, and plant are synonymous in this report and refer to the
physical locations where products are manufactured. As of 1999, there were 65 facilities that
assemble autos and LDTs. This section provides information on their characteristics, the vehicles
manufactured at these facilities, and trends for these facilities.
2.2.2.1 Characteristics of Automobile and LDT Assembly Plants
As shown in Figure 2-3, most automobile and LDT facilities are located in Michigan (30
percent of plants) and six Midwestern and Southern states south of Michigan (50 percent of plants).
The remaining plants are located primarily in California and on the Eastern seaboard. Most
assembly plants employ from 2,000 to 3,999 workers (see Table 2-8). However, the largest plant,
a Honda plant in Marysville, Ohio, employs 13,000 people.
Capacity utilization indicates how well the current facilities meet current demand. For the
years 1988-1997 the automobile industry capacity utilization was lower than the manufacturing
sector (see Table 2-9). However, capacity utilization is highly variable from year to year depending
on economic conditions. In comparison to the data in Table 2-9, capacity utilization for automotive
manufacturers, including those that make medium- and heavy-duty trucks, reached 91 percent in
1997 (U.S. Department of Commerce, 1999c) and nearly 100 percent in 1999 (Tables 2-10 and
2-11).
Tables 2-10 and 2-11 provide detailed information on automobile and LDT assembly
facilities by company, including the location of each facility, production volume, capacity, utilization
rate, and the class of vehicles produced at the plant in 1999. As these tables illustrate, a variety of
vehicle classes can be produced at a single plant. Car companies engage in joint ventures since
several models can be produced with one plant. Generally models that are produced within one
plant are similar (i.e., Prizm and Corolla). The New United Motor Manufacturing, Inc. (NUMMI)
facility is owned and used for manufacture by both Toyota and General Motors (GM). In other
cases, the facility may be wholly owned by
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to
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Table 2-8. Number of Automobile and LDT Assembly Plants by Employment Range,
1998-1999
Employment Range
<1,000
1,000 to 1,999
2,000 to 2,999
3,000 to 3,999
4,000 to 4,999
5,000 to 5,999
6,000 or greater
Not available
Total plants
Number of Plants
1
6
13
14
5
5
3
18
65
Source: Harris Info Source. 2000. Selected Online Profiles. As obtained on January 2000.
Table 2-9. Capacity
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Average
Utilization
All
Manufacturing
83.8
83.6
81.4
77.9
79.4
80.5
82.5
82.8
81.4
81.7
81.5
Motor Vehicle
Percent Change and Parts Mfg.
3.1 81.2
-0.2 79.5
-2.6 71.6
-4.3 64.0
1.9 69.9
1.4 77.3
2.5 83.5
0.4 76.9
-1.7 72.4
0.4 73.4
0.1 75.0
Percent Change
5.7
-2.1
-9.9
-10.6
9.2
10.6
8.0
-7.9
-5.9
1.4
-0.2
Source: American Automobile Manufacturers Association. 1998. Motor Vehicle Facts and Figure 1998. Detroit:
AAMA.
2-19
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Table 2-10. Facility-Level Car Production Data by Market: 1999
Plant ID
City
State
Market
Capacity
Production
Utilization
Rate
Daimler-Chrysler
010A
010B
010E
Ford
012A
012N
012M
012C
012K
012L
GM
013A
015A
016A
017A
018A
030B
030A
035A
031A
019A
032A
033A
Auto Alliance
005A
Belvidere
Detroit
Sterling Heights
Atlanta
Chicago
Dearborn
Kansas City
Wayne
Wixom
Bowling Green
Flint
Detroit-Hamtramck
Fairfax
Lake Orion
Lansing (C)
Lansing (M)
Lansing (Craft
Center)
Lordstown
Oklahoma City
Spring Hill
Wilmington
Flat Rock
IL
MI
MI
GA
IL
MI
MO
MI
MI
KY
MI
MI
KS
MI
MI
MI
MI
OH
OK
TN
DE
MI
Compact
Sports
Intermediate/Standard
Intermediate/Standard
Intermediate/Standard
Sports
Compact
Compact
Luxury
Sports
Luxury
Luxury
Luxury
Luxury
Compact
Subcompact and Compact
Compact
Subcompact and Compact
Intermediate/Standard
Compact
Intermediate/Standard
Compact and
Intermediate/Standard
244,160
5,712
258,944
508,816
247,520
247,520
186,592
239,904
285,600
198,016
1,405,152
28,560
190,400
228,480
228,480
228,480
160,320
210,240
NR
388,960
247,520
288,200
122,080
2,321,720
178,976
178,976
232,134
4,468
195,231
431,833
243,842
245,443
191,432
152,918
243,544
147,938
1,225,117
33,243
66,759
214,375
272,368
143,223
212,804
192,996
318
385,754
249,413
238,140
83,942
2,093,335
165,143
165,143
0.951
0.782
0.754
0.849
0.985
0.992
1.026
0.637
0.853
0.747
0.872
1.164
0.351
0.938
1.192
0.627
1.327
0.918
NR
0.992
1.008
0.826
0.688
0.902
0.923
0.923
(continued)
2-20
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Table 2-10. Facility-Level Car Production Data by Market: 1999 (continued)
Plant ID City
BMW
007A Spartanburg
Honda
034A&B Marysville
002A East Liberty
Mitsubishi
001 A Normal
NUMMI
009A Fremont
Nissan
004A Smryna
Subaru-Isuzu
003A South Bend
Toyota
008A Georgetown
State Market
SC Sports
OH Intermediate/Standard and
Luxury
OH Subcompact and Compact
IL Intermediate/Standard,
Sports
CA Compact
TN Subcompact
IN Intermediate/Standard
KY Intermediate/Standard
Total:
Capacity
50,000
50,000
383,040
220,864
603,904
228,480
228,480
228,480
228,480
224,672
224,672
106,624
106,624
357,952
357,952
6,214,776
Production
48,393
48,393
448,140
237,760
685,900
161,931
161,931
210,726
210,726
167,742
167,742
93,070
93,070
356,840
356,840
5,640,030
Utilization
Rate
0.968
0.968
1.170
1.076
1.136
0.709
0.709
0.922
0.922
0.747
0.747
0.873
0.873
0.997
0.997
0.908
NR = Not reported
Sources: Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI: Grain Automotive
Group.
U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer file].
. As obtained December 13, 2000.
Edmunds.com. 2001. "New and Used Vehicles." . As obtained January 2001.
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Table 2-11. Plant-Level Truck Production Data by Market: 1999
Plant ID
City
State Market
1999
Capacity
1999 1999
Production Utilization Rate
DaimlerChrysler
010J
010C
010F
010G
010H&I
010D
006A
Ford
0121
012B
012D
0120
012E
012F
012G
012H
012J
012P
GM
021 A
020A
014A
022A
023A
024A
025A
026A
027A
028A
029A
Warren
Detroit
St. Louis (N)
St. Louis (S)
Toledo
Newark
Vance
Avon Lake
Edison
Kansas City
Louisville
Lorain
Louisville
Wayne
Norfolk
St. Louis
St. Paul
Baltimore
Arlington
Doraville
Flint
Fort Wayne
Janeville
Linden
Moraine
Pontiac (E)
Shreveport
Wentzville
MI
MI
MO
MO
OH
DE
AL
OH
NJ
MO
KY
OH
KY
MI
VA
MO
MN
MD
TX
GA
MI
IN
WI
NJ
OH
MI
LA
MO
Pickup
SUV
Pickup
Van
SUV
SUV
SUV
Van
Pickup
Pickup
Pickup and SUV
Van
Pickup and SUV
SUV
Pickup
SUV
Pickup
Van
SUV
Van
Van and Pickup
Pickup
Pickup and SUV
Pickup and SUV
SUV
Pickup
Pickup
Van
236,096
324,870
133,280
285,600
266,560
171,360
72,352
1,490,118
110,880
152,320
182,784
301,400
213,248
312,256
286,000
182,784
190,400
159,936
2,092,008
190,400
190,400
239,904
66,640
201,600
201,824
190,400
285,600
252,000
190,400
152,320
2,161,488
256,955
343,536
160,162
260,471
287,062
220,097
77,696
1,605,979
94,658
169,024
224,637
392,701
233,178
331,161
299,251
237,142
249,700
213,836
2,445,288
168,057
123,593
285,872
120,558
257,574
242,581
202,513
303,312
309,775
219,741
173,221
2,406,797
1.09
1.06
1.20
0.91
1.08
1.28
1.07
1.08
0.85
1.11
1.23
1.30
1.09
1.06
1.05
1.30
1.31
1.34
1.17
0.88
0.65
1.19
1.81
1.28
1.20
1.06
1.06
1.23
1.15
0.88
1.11
(continued)
2-22
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Table 2-11. Plant-Level Truck Production Data by Market: 1999 (continued)
Plant ID City State Market
BMW
007A Spartanburg SC SUV
NUMMI
009B Fremont CA Pickup
Nissan
004B Smryna TN Pickup and SUV
Subaru-Isuzu
038A Lafayette IN SUV
Toyota
008B Georgetown KY Van
NA Princeton IN Pickup
Total:
1999
Capacity
NR
NR
152,320
152,320
217,056
217,056
103,680
103,680
121,856
102,816
224,672
6,441,342
1999 1999
Production Utilization Rate
2,413
2,413
156,395
156,395
155,398
155,398
99,130
99,130
120,686
56,176
176,862
7,048,262
NR
NR
1.03
1.03
0.72
0.72
0.96
0.96
0.99
0.55
0.55
1.09
NR = Not reported
Sources: Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI: Grain Automotive
Group.
U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer file].
. As obtained December 13, 2000.
Edmunds.com. 2001. "New and Used Vehicles." . As obtained January 2001.
one company, while another company contracts with them to have their vehicles produced there.
For instance, DaimlerChrysler contracts with Mitsubishi to produce its Sebring and Avenger
models at Mitsubishi's Illinois facility. In this relationship, Mitsubishi assembles the vehicles for
DaimlerChrysler based on Mitsubishi components (U.S. Department of Commerce, 1999c).
2.2.2.2 Trends in the Automobile andLDTAssembly Industries
Because of the large capital outlays necessary to build a new plant, new plants come online
on average less than one per year. Most recently, Toyota finished construction of a new plant in
1999 to produce its new Toyota Tundra, which is a LDT. In 2000, GM announced that it will
2-23
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open two new plants near Lansing, Michigan. Honda is currently building a new auto and engine
plant in Lincoln, AL (Honda, 2000). Both Nissan and Hyundai are also considering new facilities in
the United States.
Although new plants are not built often, companies are constantly revamping old equipment
in existing plants to replace aging equipment, upgrade to new technologies, and switch to new car
models. The paint shops within assembly plants are refitted every 10 to 15 years. When refitted
with new equipment, new technologies have allowed for lower pollutant emissions than the replaced
equipment. The innovations for these new technologies come from both the coatings manufacturers
as well as automobile assembly company engineers. Examples of paint shop innovations include
lower VOC and lower HAP content materials, electrostatic spray equipment, robotic spray
equipment, waterborne coatings, and powder coatings.
2.2.3 Companies that Own Automobile andLDTAssembly Facilities
Companies that own individual facilities are legal business entities that have the capacity to
conduct business transactions and make business decisions that affect the facility. The terms
"company" and "firm" are synonymous, and refer to the legal business entity that owns one or more
facilities. This subsection presents information on the parent companies that own automobile and
LDT assembly plants.
2.2.3.1 Company Characteristics
The 65 automobile and LDT assembly facilities listed in Tables 2-10 and 2-11 are owned
by 14 domestic and foreign companies (see Table 2-12). The largest number of facilities is
operated by GM—23 facilities or 35 percent of the total—and by Ford Motor Company—16
facilities or 25 percent of the total. The foreign-based companies—BMW, DaimlerChrysler,
Mitsubishi Motors Corporation, Honda, Nissan, and Toyota—own between one and 11 facilities in
the United States. Isuzu and Subaru jointly operate one facility as do Mazda and Ford. NUMMI,
which is wholly owned through a joint partnership between Toyota and GM, is not individually
publicly traded; all of the remaining companies are publically traded.
Sales in the 1998 and 1999 time period for all lines of business at companies that own
automobile and LDT facilities range from $4.7 billion for the jointly owned Toyota and GM
company, NUMMI, to $161.3 billion for GM itself. With the exception of Nissan Motors, which
2-24
-------
generated a loss of $229 million in 1999, all of these companies generated positive returns ranging
from $43 million for Mitsubishi to $22.1 billion for Ford. Profit-to-sales
2-25
-------
ratios ranged from 0.2 percent for Mitsubishi Motors Corporation to 15.3 percent for Ford.
Employment for all lines of business at companies that own automobile and LDT assembly
facilities ranges from 4,800 workers for NUMMI to 594,000 for GM. The Small Business
Administration (SB A) defines a small business in this industry as follows:
•• NAICS 33611 (Automobile Manufacturing)—1,000 employees or less
• NAICS 336112 (Light Truck and Utility Vehicle Manufacturing)—1,000 employees or
less.
Based on these size standards and company employment data presented in Table 2-12, there are
no small businesses within this industry.
2.2.3.2 Vertical and Horizontal Integration
Companies within the automotive industry may be horizontally and/or vertically integrated.
Vertical integration refers to the degree to which firms own different levels of production and
marketing. Vertically integrated firms may produce the inputs used in their production processes
and own the distribution network to sell their products to consumers. These firms may own several
plants, each of which handles these different stages of production. For example, a company that
owns an automobile assembly plant may also own a plant that molds the dashboard or makes the
seat coverings. An automotive company may be integrated as far back as the foundry that makes
parts for an automobile, as in the cases of Ford, GM, and DaimlerChrysler. However, it may not
be integrated into retail dealership operations because of various state franchise laws.
Vertical integration within the automotive industry has been decreasing as competition has
increased and outsourcing has become a more attractive option. Outsourcing refers to hiring an
outside company to produce some of the materials necessary for manufacture. As a result,
companies may not produce a number of the inputs used in their automobiles. In 1997, Ford
outsourced 50 percent of its vehicle content. GM was expected to have similar levels after it spun
off Delphi automotive systems, a subsidiary of GM. And, finally, before Chrysler merged with
Daimler-Benz, it outsourced 70 percent of its inputs (Brunnermeier and Martin, 1999). "Reduced
vertical integration allows vehicle makers to buy parts from the best suppliers. The spun-off parts
companies are assumed to operate more efficiently and become more competitive (and thus yield
lower unit costs) as independent entities" (U.S. Department of Commerce, 1999c).
2-26
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2-27
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Table 2-12. Financial Data for Companies that Own Automobile and LDT Assembly Facilities, 1998-1999
to
to
oo
Joint
Company Ownership
AAI (Auto Alliance Mazda-Ford
International)
BMW —
DaimlerChryslerAG —
Ford Motor Company —
Fuji Heavy Industries (owns GM owns 20%
Subaru)
General Motors Corporation —
Honda Motor Company, Ltd. —
Isuzu Motors Limited GM owns 49%
Mazda Motor Corporation Ford owns 33%
Mitsubishi Motors Corporation —
Nissan Motor Co., Ltd. —
NUMMI GM-Toyota
(50-50)
Renco Group Inc. (AM —
General/Humvee)0
Toyota Motor Corporation —
Number of
Assembly
Plants
r
i
11
16a
ib
23
3
lb
a
i
2
2
1
4
Company
Sales (S106)
NA
$37,881
$154,615
$144,416
$11,355
$161,315
$51,688
$13,593
$17,271
$26,832
$54,380
$4,699
$2,500
$105,832
Company
Profits (S106)
NA
$542
$5,656
$22,071
$283
$2,956
$2,530
$52
$325
$43
-$229
NA
NA
$3,747
Profit/Sales
Ratio
NA
1.4%
3.7%
15.3%
2.5%
1.8%
4.9%
0.4%
1.9%
0.2%
-0.4%
0.0%
NA
3.5%
Company
Employment
NA
115,927
441,500
345,175
14,945
594,000
112,200
13,035
24,076
11,650
143,681
4,800
15,000
183,879
Year
NA
1998
1998
1998
1999
1998
1999
1999
1999
1999
1999
1998
1999
1999
a The AAI plant jointly owned by Mazda and Ford is included only in the AAI plant total.
b Isuzu and Subaru jointly own one plant.
0 Vehicles manufactured may now be outside of the auto/LDT source category.
Source: Hoover's Online. 2000. Company Capsules, . As obtained on January 13,2000.
-------
Horizontal integration refers to a company that produces a diversity of products. The
companies may be directly integrated by direct ownership of additional facilities or indirectly
integrated by owning additional facilities through affiliations with other companies and subsidiaries.
Several of the automobile manufacturers have high degrees of horizontal integration. First, most of
the companies are horizontally integrated within their own industry in that they own multiple
assembly plants and produce multiple automobile and LDT models. Second, most companies are
also involved in other activities including automobile rentals, automobile and other credit financing,
and electronics manufacturing. Table 2-13 provides examples of the subsidiaries and affiliates
associated with companies that assemble automobiles and LDTs (Hoover's, 2000).
2.2.4 Companies that Manufacture Automotive Coatings
Three companies supply the majority of automobile coatings used in vehicle assembly
plants: DuPont Performance Coatings, PPG Industries, and BASF Coatings AG. Sherwin-
Williams is also a major player in automobile coatings, but they tend to supply auto body shops and
other aftermarket operations rather than assembly plants. Other minor suppliers may supply
adhesives and sealers to the vehicle assembly industry (Green, 2000c). In total, the industry had
estimated sales of $3.4 billion in 1998 (Freedonia, 1999). Table 2-14 lists the market shares of
U.S. automotive coating manufacturers, including both sales to assembly plants and to aftermarket
users.
The parent companies for DuPont, PPG, and BASF, are all large with 1998 sales ranging
from $7.5 billion for PPG to $32.4 billion for BASF (Hoover's, 2000). Table 2-15 shows sales,
income, and employment for these three coating manufacturers. Based on the SBA definition of a
small company for NAICS 32551 (paint and coating manufacturing) (i.e., 500 or fewer
employees), none of these companies are small.
2.3 Demand Side Overview Characteristics
Individual consumers, companies, and the government lease or purchase automobiles and
LDTs. Over the past several years, consumption by individual consumers, which accounted for 47
percent of 1997 sales, has decreased, while consumption by businesses, which accounted for 51
percent of 1997 sales, has increased (see Table 2-16). Government purchases make up 1 to 2
percent of consumption. While individuals generally purchase automobiles and LDTs for personal
use, companies purchase automobiles so their employees
2-29
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Table 2-13. Examples of Subsidiaries and Affiliates Partially or Wholly Owned by
Automotive Companies
DaimlerChry sler AG
Detroit Diesel Corporation
DaimlerChry sler Canada Inc.
DaimlerChrysler Rail Systems GmbH
Freightliner Corporation
Ford Motor Company
Automobile Protection Corporation
Ford Motor Company of Canada, Ltd.
Ford Motor Credit Company
The Hertz Corporation
Kwik-Fit Holdings PLC
Mazda Motor Corporation
Visteon Automotive Systems
Ford Motor Company/Buffalo Stamping Division
General Motors Corporation
Adam Opel AG
GM Acceptance Corporation
GM of Canada Ltd.
Hughes Electronics Corporation
Integon Corporation
Isuzu Motors Ltd.
Saab Automobile AB
AMI instruments, Inc.
Delco Defense Systems Operations
Delphi Harrison Thermal Systems
GM Corporation/Allison Transmission Divisions
GM Corporation/Powertrain
HRL Laboratories, LLC
Hughes Network Systems
Hughes Space and Communications Company
Lexel Imaging Systems, Inc.
Packard Hughes Interconnect
Rockwell Collins Passenger Systems
Spectrolab, Inc.
Isuzu Motors Limited
American Isuzu Motors Inc.
Tri Fetch Isuzu Sales Company, Ltd.
Toyota Motor Corporation
Daihatsu Motor Company, Ltd.
New United Motor Manufacturing, Inc.
Toyota Motor Credit Corporation
Toyota Motor Sales, USA, Inc.
Toyota Motor Thailand Company Ltd.
Source: Hoover's Online. 2000. Company Capsules, . As obtained January 13, 2000.
may use them on work-related business or so their customers may use them, as in the case of
automobile rental companies. Federal, state, and local governments purchase automobiles for use
during government-related work, including military operations, escorting officials, and site visits. In
general, government-purchased vehicles are more utilitarian than vehicles purchased by individual
consumers and companies.
2-30
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Table 2-14. Market Shares in the Automotive Coatings Industry, 1998
Company Percent
DuPont 29.4
PPG Industries 28.8
BASF 15.9
Sherwin-Williams 8.8
Others 17_L
Source: Freedonia Group. September 1999. Automotive Coatings, Sealants andAdhesives in the United States
to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
Table 2-15. Company Data for Coatings Manufacturers, 1998
Company
BASF Aktiengesellschaft
E.I du Pont de Nemours and Co.
PPG Industries
Location of HQ
Germany
Wilmington, DE
Pittsburgh, PA
Sales (106)
$32,439
$24,767
$7,510
Income (106)
$1,994
$4,480
$801
Employment
105,945
101,000
32,500
Source: Hoover's Online. Company Capsules, . As obtained on January 13,2000.
In 1997, sales of passenger cars and LDTs were approximately equal (AAMA, 1998).
However, the individual consumers who purchase new passenger cars differ somewhat from those
who purchase new LDTs. As shown in Table 2-17, purchasers of new passenger cars are fairly
evenly split between male and female, but men make up three-quarters of the LDT purchasers.
New passenger car purchases are greatest for the 45 to 54 age range, but LDT purchases are high
for the broader 35 to 54 age range. The highest education level for vehicle purchases is similar for
both vehicle types, with the high percentages for the categories of some college and college
graduates. Passenger car purchases are higher than LDT purchases in the Northeast and lower
than LDT purchases in the North Central. Differences in these purchases are minor in the South
and West. Finally, median household income for passenger car purchasers is lower at $59,900
compared to $68,000 for LDT purchasers.
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Table 2-16. U.S. Car Sales by Market Sector, 1980-1997
Units by Consuming Sector (103)
Year
1980
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Consumer
6,062
7,083
7,658
6,748
6,802
6,375
5,768
4,538
4,558
4,669
4,612
4,313
4,065
3,880
Business
2,791
3,822
3,666
3,395
3,699
3,402
3,567
3,752
3,683
3,941
4,255
4,211
4,328
4,233
Government
126
134
127
135
138
136
149
97
113
108
124
162
134
131
Total
8,979
11,039
11,450
10,278
10,639
9,913
9,484
8,387
8,354
8,718
8,991
8,686
8,527
8,245
Consumer
67.5%
64.2%
66.9%
65.7%
63.9%
64.3%
60.8%
54.1%
54.6%
53.6%
51.3%
49.7%
47.4%
47.1%
% of Total
Busines
s
31.1%
34.6%
32.0%
33.0%
34.8%
34.3%
37.6%
44.8%
44.1%
45.2%
47.3%
48.5%
50.7%
51.3%
Sales
Government
1.4%
1.2%
1.1%
1.3%
1.3%
1.4%
1.6%
1.2%
1.4%
1.2%
1.4%
1.9%
1.6%
1.6%
Source: U.S. Department of Commerce, Bureau of Economic Analysis, as reported in American Automobile
Manufacturers Association (AAMA). 1998. Motor Vehicle Facts and Figure 1998. Detroit: AAMA.
When choosing an automobile or LDT to purchase or lease, consumers consider the
following characteristics:
•• function of the vehicle (e.g., sedan, coupe, wagon, pickup truck, minivan, SUV);
performance characteristics, such as capacity, mileage per gallon, horsepower, four-
wheel drive versus two-wheel drive;
•• aesthetic characteristics, such as design and visual appeal;
•• comfort characteristics, such as seating, equipment adjustments, and air conditioning;
•• safety characteristics, such as air bags and advanced braking systems (ABS);
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Table 2-17. Demographics of New Automobile and LDT Buyers, 1998
Characteristic
Gender
Male
Female
No Answer
Total
Age of Principal Purchaser (in years)
Under 25
25-29
30-34
35-39
40^4
45^9
50-54
55-59
60-64
65 and over
No Answer
Total
Highest Education Level
8th grade or less
Some high school
High school/no college
Some college
College graduate
Post graduate
Trade/technical
Other
No answer
Total
Census Region
Northeast
North central
South
West
Total
Median Household
Income
New Passenger Car Buyers
Total
51.6%
43.1%
5.3%
100.0%
7.0%
7.7%
8.3%
8.0%
9.3%
11.5%
11.0%
7.6%
6.7%
17.3%
5.6%
100.0%
0.6%
2.1%
15.5%
23.5%
28.7%
20.2%
4.7%
1.3%
3.3%
100.0%
21.8%
28.4%
31.6%
18.2%
100.0%
$59,900
New Light Truck Buyers
Total
71.2%
24.3%
4.5%
100.0%
4.0%
7.4%
10.0%
12.7%
13.3%
12.7%
12.3%
8.5%
6.2%
8.7%
4.1%
100.0%
1.1%
3.0%
18.1%
23.9%
25.5%
16.1%
8.3%
1.0%
3.1%
100.0%
17.2%
32.4%
32.0%
18.4%
100.0%
$68,000
Source: J.D. Power and Associates, 1998 Vehicle Quality Survey as reported in American Automobile Manufacturers
Association (AAMA). 1998. Motor Vehicle Facts andFigure 1998. Detroit: AAMA.
2-33
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•• perceived reliability and durability; and
•• price, including financing and leasing options.
According to a survey conducted by Consumers Union, reliability, price, and appearance are the
top three reasons why a consumer chooses a particular vehicle {Consumer Reports, 2000c).
Coatings obviously affect the appearance of a vehicle, but they also affect its durability
since they provide protection from rust, acid rain, chipping, and scratching. A consumer can readily
observe the appearance characteristics of coatings, including, most obviously, its color and gloss.
For the year 2000, metallic silver is expected to make up 22 percent of car sales, followed by
black at 17 percent, white at 15 percent, blue at 12 percent, and green at 11 percent (Consumer
Reports, 2000a). In the future, metallic paints on vehicles are expected to remain popular and
special effects coatings are expected to increase.
While the benefits of coatings for the appearance of vehicles are easily observable when a
consumer purchases a car, the durability aspects of the coatings are only observable over time.
The average age of a passenger vehicle on the road in 1997 was 8.7 years and has been increasing
over time from an average age of 5.6 years in the 1970s (AAMA, 1998). As the vehicle ages,
coatings that rust, chip, and scratch easily greatly diminish the appearance and, hence, value of the
vehicle. Thus, because the quality of the coating cannot be entirely observed at the time of
purchase, the reputation of the company that manufactures the cars is important.
2.3.1 Substitution Possibilities in Consumption
The possibilities for substitution in the automobile and LDT industries arise from the choices
among different makes and models of vehicles, between purchasing a vehicle versus leasing,
between new versus used vehicles, and among different forms of alternative transportation. The
quality of the coatings on a vehicle may subtly affect these choices. As described above, a
company with a history of problems with its coatings may lose market share over time to companies
that manufacture vehicles with durable coatings. The market for used vehicles may also be
potentially affected by the quality of coatings because consumers would be more willing to purchase
a used vehicle if its appearance is satisfactory but less willing if the coatings are declining as the
vehicle ages. Thus, the market for used vehicles may affect manufacturers of new vehicles in two
opposite directions. If good quality used vehicles are available for purchase, consumers may
purchase used vehicles as a substitute for new vehicles, thus reducing the size of the market for new
2-34
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vehicles. However, if the resale market for a particular model is good (i.e., the model retains its
value over time), then the manufacturer may be able to obtain a higher price for the same model
when it is new. The last possibility for substitution, the use of alternative forms of transportation
such as buses, subways, and bicycles, is likely much less affected by appearance and quality of
coatings because these forms of transportation tend to be lifestyle choices for particular individuals.
2.3.1.1 Demand Elasticity
Estimates of own-price elasticity of demand for vehicles are available at different levels of
aggregation from a number of sources in the economics literature. Trandel (1991) estimates an
overall own-price elasticity of-2.42 by aggregating data for 210 models from 1983-1985. Berry,
Levinsohn, and Pakes (1995) report own-price elasticities of demand for vehicles ranging from -
3.515 to -6.358 for individual models. Aggregate elasticity estimates for domestic, European, and
Asian vehicles of-1.06, -1.85 and -1.42 respectively are reported in McCarthy (1996). One of
the most disaggregated sets of elasticity estimates is available from Goldberg (1995). She estimates
own price elasticities for different vehicle classes using micro data on transaction prices and
make/models from the Consumer Expenditure Survey and the Automotive News Market Data
Book. Her estimates of average own price elasticities by vehicle class are reported in Table 2-18.
All estimates are greater than one in absolute value, but vary in an intuitive manner across vehicle
classes. For example, the demand for intermediate and standard automobiles is highly elastic, while
that for sports and luxury cars is the least price elastic.
Cross-price semi-elasticities refer to the percentage change in quantity demanded of model
j when price of model i changes, but all other model prices remain unchanged. Goldberg (1995)
estimates cross price semi-elasticities of demand for some specific vehicle models and finds that
these semi-elasticities are low if the models belong to different classes. For example, the cross
price semi-elasticity between a Honda Civic and a Honda Accord is only 14.9E-07. McCarthy
(1996) also finds that the cross-price elasticities of demand are relatively inelastic.
2.4 Market Data
EPA collected the market information to characterize the baseline year of the regulatory
impact analysis and identify trends in production, consumption, prices, and international trade. The
primary sources of this data are the Automotive News Market Data Book, U.S. International
Trade Commission's trade data base, and the Commerce Department's U.S. Industry and trade
2-35
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Table 2-18. Own Price Elasticities of Demand by Vehicle Class
Vehicle Class Elasticity
Subcompact -3.286
Compact -3.419
Intermediate -4.179
Standard -4.712
Luxury -1.912
Sports -1.065
Pick-up -3.526
Van -4.363
Other -4.088
Sources: Goldberg, Pinelopi K. 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the
U.S. Automobile Industry." Econometrica 63(4): 891-951.
outlook. The following section provides a discussion of these data, with emphasis on the baseline
data set used to develop an economic model of the industry.
2.4.1 Domestic Production and Consumption
Over 12 million cars and LDTs were manufactured in the United States in 1999. As shown
in Table 2-19, this was an increase of 8 percent from 1998. LDT production accounted for
approximately 55 percent of total production in 1999 and has shown strong growth over the past 5
years. The average annual growth rate for trucks is 5.3 percent between 1995 and 2000. In
contrast, car production has shown small declines over the same period with an average annual
growth rate of-2.6 percent. These trends reflect the growing consumer preference for SUVs and
minivans (U.S. Department of Commerce, 1999c).
2-36
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Table 2-19. Domestic Car and Truck Production: 1995-1999 (103 Units)
Year
1995
1996
1997
1998
1999
2000
Average annual growth rate
Cars
6,327
6,056
5,922
5,550
5,640
5,543
-2.6%
Trucks3
5,392
5,488
5,958
6,163
7,048
6,949
5.3%
Total
11,719
11,544
11,880
11,713
12,688
12,492
1.4%
a Excludes other medium/heavy trucks.
Sources: Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI: Grain Automotive
Group.
Grain Automotive Group. 2001. Automotive News Market Databook—2001. Detroit, MI: Grain Automotive
Group.
Industry data and forecasts show North American sales1 of cars and trucks peaked in
1999-2000 with sales reaching 19 million (see Table 2-20). Total annual sales are projected to be
18.1 and 19 million between 2001 and 2005. Truck sales are projected to grow, increasing from
9.1 million in 1999 to 9.7 million in 2005, or 6.6 percent. However, cars sales are projected to
decline from 10.0 million in 1999 to 9.3 million in 2005, or 7 percent. Again, this reflects the
growing use of LDTs for personal transportation.
2.4.2 International Trade
Although Japan is the primary source of imported cars and trucks, the flow of imports has
declined recently (see Table 2-21). Levy (2000) attributes this decline to currency fluctuations that
have encouraged the production of foreign models in North America. He notes Japanese and
European automakers are increasing their U.S. production capacity, suggesting additional future
declines in imports.
Includes the United States, Canada, and Mexico.
2-37
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Table 2-20. North American Consumption of Cars and Trucks: 1997-20003 (103 Units)
Year
1997
1998
1999
2000
2001C
2002C
2003C
2004C
2005C
Cars
9,333
9,353
10,017
10,453
9,575
9,363
9,319
9,224
9,336
Trucks"
7,710
8,275
9,111
9,361
8,782
8,811
9,208
9,604
9,703
Total
17,043
17,628
19,128
19,814
18,357
18,174
18,527
18,828
19,039
a North American sales (includes the United States, Canada, and Mexico).
b Excludes other medium/heavy trucks.
0 Forecast.
Source: Grain Automotive Group. 2001. Automotive News Market Databook—2001. Detroit, MI: Grain Automotive
Group.
Table 2-21. Imports for Consumption for NAICS 336111 (Automobiles and Light Duty
Motor Vehicles, Including Chassis) by Country of Origin: 1997-2000 (103 units)
Country
Japan
Canada
Mexico
Germany
Other
Total
1997
3,763
1,726
778
707
522
7,495
1998
3,490
1,839
594
844
421
7,188
1999
3,431
2,170
640
974
736
7,953
2000
2,941
2,139
934
611
942
7,567
Source: U.S. International Trade Commission. 2001. ITC Trade Dataweb. http://205.197.120.17/. Obtained May 31,
2001.
2-38
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Exports have remained relatively stable over the past 4 years (see Table 2-22) with
Canada accounting for half of all domestic exports. As a result of NAFTA, the Mexican export
market has recently expanded. U.S. vehicles are typically equipped with bigger engines and more
accessories relative to other vehicles produced overseas. This limits demand from countries with
lower incomes and higher fuel prices (Levy, 2000). As a result, U.S. companies will increasingly
have to consider development of manufacturing operations in foreign countries where production
costs are lower. This will likely further limit growth in exports of U.S. manufactured vehicles (Levy,
2000).
Table 2-22. Domestic Exports for NAICS 336111 (Automobiles and Light Duty Motor
Vehicles, Including Chassis) by Country of Origin: 1997-2000 (103 units)
Country
Canada
Mexico
Germany
Japan
Other
Total
1997
633
68
64
84
386
1,236
1998
608
97
57
53
329
1,144
1999
637
135
53
48
226
1,099
2000
666
190
55
39
221
1,171
Source: U.S. International Trade Commission. 2001. ITC Trade Dataweb. http://205.197.120.17/. Obtained May 31,
2001.
2.4.3 Market Prices
The relationship between the prices paid by consumers for cars and the wholesale prices
received by car manufacturers is not readily known. The Manufacturers Suggested Retail Price
(MSRP) is usually above the price that consumers actually pay for a vehicle and includes the
markup received by the dealership that sells the vehicle. Invoice prices, which would appear to be
a wholesale price, are readily available from automobile pricing services, such as Autobytel.com,
nadaguides.com, and Edmunds.com, but do not reflect the actual prices received by manufacturers
(Consumer Reports., 2000b). The prices they receive may be below the invoice base price
because of dealer holdbacks, dealer incentives, and rebates (Edmunds, 2000a). Dealer holdback
2-39
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is a percentage of the MSRP that the manufacturer pays the dealer to assist with the dealer's
financing of the vehicle while it is on the dealer's lot (Edmunds.com, 2000b).
EPA collected price information by vehicle class using the following methodology. First,
EPA identified car and truck models produced in 1999.2 Models were assigned a vehicle class
using EPA's Fuel Economy Guide data (EPA, 2000), car buyers guides such as Edmunds.com
(Edmunds, 2001), and the Automotive News Market Data Book (Grain Automotive Group,
2000). Next, the Agency collected base price data for the low and high values for these models
reported in the Automotive News Market Data Book (Grain, 2000). The prices includes the
MSRP and destination price. Finally, EPA computed a sales-weighted average price for each
vehicle class using the median base price for each model and 1999 model sales. Prices for each
class are reported in Table 2-23.
In addition to 1999 price data, the Agency collected data on price trends from the U.S.
Bureau of Labor Statistics. As shown in Figure 2-4, the consumer price index (CPI) for new cars
rose more slowly than the CPI for all items, even while new cars improved and added safety and
emissions equipment. In comparison, the CPI for new truck rose slightly faster than the CPI for all
items.
2.4.4 Industry Trends
The motor vehicle industry in the United States is a large, mature market in which most of
the vehicles produced are geared toward the preferences of U.S. consumers. U.S. consumers
generally prefer larger, more powerful vehicles than consumers in other parts of the world, in part
because gas prices are significantly lower in the United States relative to other countries.
Domestic production of motor vehicles in the United States is projected to increase in the
next 5 years primarily due to two factors. First, foreign automobile manufacturers, such as Honda
and BMW, are locating more of their production facilities in the United States to serve the U.S.
market. Automobiles produced from these facilities would previously have been classified as
imports, but after relocation of production facilities, they are considered domestic production.
Second, the LOT market, in which U.S. manufacturers dominate, is surging especially as
manufacturers are offering more car-like amenities in these vehicles.
For LDTs, we selected sample of top sales models (with price data) in each market class reported by Grain Automotive Group
2000. pp. 50-51.
2-40
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Table 2-23. Average Vehicle Prices by Class"
Vehicle Class Price ($/unit)
Compact $16,487
Intermediate/standard $21,155
Luxury $33,587
Pick-up $22,126
Sports $25,797
Subcompact $15,522
SUV $27,694
Van $22,910
a Includes the MSRP and destination price reported by the Automotive News Market Data Book (Grain, 2000; p: 75).
Prices current as of April 2000 and were considered representative of 1999 prices.
Sources: Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI: Grain Automotive
Group.
Edmunds.com. 2001. "New and Used Vehicles." . As obtained January 2001.
U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer file].
. As obtained December 13,2000.
The U.S. Department of Commerce (1999c) projects that domestic automobile manufacturing
facilities will have capacity utilization rates of 90 percent or more over the next few years.
Offsetting these increases in domestic production is the fact that U.S. manufacturers are
expected to move some production facilities to locations with lower costs of production such as
Mexico and Canada. Relocation to Mexico and Canada has become easier partly because of
NAFTA. In addition to lower costs of production, other countries may have less-stringent
environmental regulations than the United States' regulations, which translates into lower costs as
well. When production facilities are relocated to other countries, what was formerly considered
domestic production becomes imports if the vehicles are delivered to the U.S. market. However, if
the vehicles are intended for the domestic country in which they are produced, they are no longer
considered either "domestic production" or "imports." To serve the markets in other countries,
however, U.S. manufacturers have developed and will continue to develop smaller, less costly
2-41
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0.8
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-All Items
• New Cars
• New Trucks
Figure 2-4. Consumer Price Indexes for All Items Compared to New Cars and Trucks
(1992 = 100), 1990-1999
Sources: U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers: CUUROOOOSAO, All
Items: 1990-1999. . As obtained on September 9, 2000.
U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers: CUUROOOOSS45011,
New Cars: 1990-1999. . As obtained on January 3, 2001a.
U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers: CUUROOOOSS45021,
New Trucks: 1990-1999. . As obtained on January 3, 2001b.
models than those produced for the U.S. market. Most of the growth in the global vehicle market
will be in less-developed countries such as China, India, Latin America, and eastern Europe in
which the typical U.S. automobile is overly equipped and prohibitively expensive.
Over time, automobile manufacturers are adopting a more global approach to automobile
manufacturing. This change in approach comes as the industry continues to consolidate and foreign
and domestic firms merge or form joint ventures (e.g., Mazda and Ford, Daimler-Benz and
Chrysler). In the more global approach, automobile manufacturers are reducing the number of
unique automobile platforms and using them throughout the world. This approach allows them to
2-42
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reduce product development costs and spread the development costs over a greater number of
vehicles. In addition, under the global approach, automobile manufacturers can locate plants in the
countries in which production costs are lowest.
Overall, the U.S. Department of Commerce (1999c) projects that the U.S. share of the
world motor vehicle markets, including cars, trucks, and buses, will increase from 22 percent in
1997 to 27 percent in 2003. U.S. output in these markets is projected to rise an average of 4.6
percent per year from 1997 to 2003 with a corresponding net increase of 25 percent in value of
shipments.
2-43
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SECTION 3
ENGINEERING COSTS
This section presents the Agency's estimates of the compliance costs associated with the
regulatory alternatives developed to reduce HAP emissions during automobile and light-truck
coating operations. These engineering costs are defined as the annual capital, operation and
maintenance, and monitoring costs assuming no behavioral market adjustment by producers or
consumers. An overview of the methodology used to develop these engineering cost estimates is
provided below. A more detailed discussion of this methodology can be found in docket
A-2001-22.
3.1 Methodology
As indicated in Tables 2-10 and 2-11, there were 65 facilities operating in the U.S.
automobile and LDT assembly industry in our baseline year of 1999. The proposed regulation will
affect 60 of those assembly facilities.1 It is assumed that these facilities will adopt the following
strategies to reduce their emissions and comply with the proposed NESHAP:
Strategy 1: Facilities that do not presently have controls on the electrodeposition oven
will add an oxidizer to control HAP emissions from the oven. This equates, on average,
to about $8,200 per ton of HAP controlled.
Strategy 2: If the HAP/VOC ratio for the primer-surfacer coating material exceeds
0.3, a modified surface coating material will be used to meet this ratio. This equates,
on average, to about $540 per ton of HAP controlled.
Strategy 3: If the HAP/VOC ratio for the topcoat material exceeds 0.3, a reformulated
top coating material will be used to meet this ratio.
Five facilities would not incur significant costs under the proposed regulation because they only assemble vehicles and do not
paint them. One of these facilities, AM General, is not subject to the proposed rule because it is no longer producing or
planning to produce vehicles classified as autos or LDTs. Hence, it is more appropriately regulated under the
Miscellaneous Metal Parts Subcategory.
3-1
-------
Strategy 4: Any remaining HAP emissions in excess of the MACT floor will be
reduced by introducing controls on the exhaust from automated zones of spray booths.
The associated abatement costs could include capital costs incurred to purchase or upgrade
pollution control equipment, cost for operation and maintenance of this abatement equipment such
as cost of energy needed to operate it and coating materials replacement costs, and other
administrative costs associated with monitoring, reporting and record keeping. The following
assumptions were used to estimate the engineering costs associated with each of the strategies listed
above:
All capital costs are annualized over the equipment's expected lifetime of 15 years at a
7 percent discount rate in accordance with OMB guidelines (OMB, 1996).
For Strategy 1, Vatavuk (1999) estimates that a regenerative thermal oxidizer of
15,000 standard cubic feet per minute (scfm) capacity with 95% heat recovery costs
approximately $1.08 million. This equipment is associated with annualized capital costs
of $117, 967 and annual operating costs of $127,000.
Strategies 2 and 3 essentially involve the purchase of reformulated coating materials that
contain ethyl acetate and butyl acetate instead of coating materials containing aromatics
such as toluene and xylene. Ethyl acetate costs about $0.40/lb while xylene costs about
$0.17/lb (Green, 2001). No new capital equipment is required to apply these
reformulated coatings.
The Agency estimates that it costs $10,000/ton to reduce VOC emissions from
automated zones of spray booths. For Strategy 4, it is assumed that annual VOC
control costs of $10,000/ton imply annual HAP control costs of $40,000 per ton. This
cost is split evenly between annual capital and operating expenses.
Monitoring, reporting and record keeping activities will involve professional, technical,
and clerical labor at an hourly wage rate of $40, $30, and $18 respectively.
The Agency assumes that a performance test is required if a facility installs or upgrades
a control system but not if it merely switches to a reformulated coating input. Facilities
that adopt both Strategy 1 and Strategy 4 are required to perform two performance
tests. Testing is assumed to take 280 technical hours per system; once every 15 years;
plus 10 percent for repeat tests. These performance test costs are amortized over the
life of the control system.
3-2
-------
All plants have in place elaborate record keeping programs to demonstrate compliance
with existing VOC regulations. These programs will have to be modified to
accommodate the tracking of HAP emissions. The Agency assumes that this
modification will require 500 professional hours and these costs are amortized over the
life of the system.
•• Record keeping is estimated to take 1 technical hour per shift for 10 shifts per week.
• Monitoring activities are also estimated to take 1 technical hour per shift for 10 shifts
per week.
Finally, reporting is assumed to take 40 technical hours per year plus 40 clerical hours
per year.
New facilities and new paint shops would incur little additional cost to meet the proposed
emission limit. These facilities would already include bake oven controls and partial spray booth
exhaust controls for VOC control purposes. New facilities might need to make some downward
adjustment in the HAP content of their materials to meet the proposed emission limit.
3.2 Results
The Agency's facility level engineering cost estimates are summarized in Table 3-1. The
total annual capital cost estimate includes the annualized capital cost associated with all applicable
strategies. Similarly, the total variable cost estimate includes the variable cost associated with all
applicable strategies. The nationwide total cost is estimated at $154 million, with $75 million in
annual capital costs, $76 million in operation and maintenance costs, and $2 million in administrative
costs.2 This equates, on average, to about $25,000 per ton of HAP controlled.
All values are reported in 1999 constant dollars.
3-3
-------
Table 3-1. Engineering Cost Estimates for Affected Facilities: 1999 (S103)
Plant ID Plant Name
005A
007A
010A
010B
010C
010D
010F
010G
010E
010H
0101
010J
006A
012A
0121
012N
012M
012B
012C
012D
012O
012E
012F
012G
Auto Alliance International Inc.
BMW Manufacturing Corp.
DC-Belvidere Assembly Plant
DC-Connor Assembly Plant
DC- Jefferson North Assembly Plant
DC-Newark Assembly Plant
DC-St. Louis North Assembly Plant
DC-St. Louis South Assembly Plant
DC-Sterling Heights Assembly Plant
DC-Toledo Assembly Plant I
DC-Toledo Assembly Plant II
DC-Warren Truck Assembly Plant
Mercedes-Benz U.S. Interational, Inc.
Ford Atlanta Assembly Plant
Ford Avon Lake Assembly Plant
Ford Chicago Assembly Plant
Ford Dearborn Assembly Plant
Ford Edison Assembly Plant
Ford Kansas City Passenger Assembly
Plant
Ford Kansas City Truck Plant
Ford Kentucky Truck Plant
Ford Lorain Assembly Plant
Ford Louisville Assembly Plant
Ford Michigan Truck Plant
City
Flat Rock
Greer
Belvidere
Detroit
Detroit
Newark
Fenton
Fenton
Sterling Heights
Toledo
Toledo
Warren
Vance
Hapeville
Avon Lake
Chicago
Dearborn
Edison
Kansas City
Kansas City
Louisville
Lorain
Louisville
Wayne
State
MI
SC
IL
MI
MI
DE
MO
MO
MI
OH
OH
MI
AL
GA
OH
IL
MI
NJ
MO
MO
KY
OH
KY
MI
Total Total Annual
Annualized Operating and Total Monitoring, Total
Capital Maintenance Recordkeeping, and Annual
Costs Costs Reporting Costs Costs
$0
$0
$0
$0
$0
$0
$0
$0
$0
$754
$0
$0
$164
$1,898
$1,795
$2,896
$2,028
$1,301
$2,206
$1,983
$1,796
$0
$6,447
$0
$0
$2
$0
$0
$0
$0
$0
$0
$0
$763
$0
$0
$169
$1,960
$1,795
$2,905
$2,037
$1,323
$2,248
$1,993
$1,819
$0
$6,491
$42
$20
$20
$20
$0
$20
$20
$20
$20
$20
$37
$0
$20
$36
$37
$36
$37
$37
$36
$37
$37
$36
$0
$36
$20
$20
$21
$20
$0
$20
$20
$20
$20
$20
$1,555
$0
$20
$369
$3,896
$3,625
$5,838
$4,102
$2,660
$4,491
$4,013
$3,651
$0
$12,974
$61
(continued)
-------
Table 3-1. Engineering Cost Estimates for Affected Facilities: 1999($103)a (Continued)
Plant ID Plant Name
012H
012J
012P
012K
012L
003A
020A
013A
015A
014A
017A
022A
023A
016A
024A
030B
030A
035A
025A
031A
026A
021 A
019A
018A
Ford Norfolk Assembly Plant
Ford St. Louis Assembly Plant
Ford Twin Cities Assembly Plant
Ford Wayne Assembly Plant
Ford Wixom Assembly Plant
Subaru-Isuzu Automotive Inc.
GM Arlington Assembly Plant
GM Bowling Green Assembly
GM Buick City Assembly Center
GM Doraville Assembly Plant
GM Fairfax Assembly Plant
GM Flint Assembly Plant
GM Ft. Wayne Assembly
GM Hamtramck Assembly Plant
GM Janesville Assembly Plant
GM Lansing Car Assembly - C Plant
GM Lansing Car Assembly - M Plant
GM Lansing Craft Centre Plant #2
GM Linden Assembly
GM Lordstown Assembly Plant
GM Morain Assembly Plant
GM North American Truck Group
GM Oklahoma City Assembly Plant
GM Orion Assembly
City
Norfolk
Hazelwood
St. Paul
Wayne
Wixom
Lafayette
Arlington
Bowling Green
Flint
Doraville
Kansas City
Flint
Roanoke
Detroit
Janesville
Lansing
Lansing
Lansing
Linden
Lordstown
Dayton
Baltimore
Oklahoma City
Lake Orion
Total Total Annual
Annualized Operating and Total Monitoring, Total
Capital Maintenance Recordkeeping, and Annual
State Costs Costs Reporting Costs Costs
VA
MO
MN
MI
MI
IN
TX
KY
MI
GA
KS
MI
IN
MI
WI
MI
MI
MI
NJ
OH
OH
MD
OK
MI
$720
$3,360
$308
$892
$75
$1,568
$2,813
$1,568
$901
$4,643
$2,064
$400
$2,252
$1,760
$1,811
$333
$268
$0
$738
$1,606
$121
$686
$1,922
$1,527
$786
$3,457
$324
$926
$75
$1,528
$2,813
$1,528
$926
$4,794
$2,123
$409
$2,313
$1,769
$1,816
$344
$282
$0
$738
$1,645
$131
$686
$1,932
$1,545
$37
$36
$36
$36
$36
$33
$36
$33
$36
$36
$37
$37
$36
$37
$36
$36
$36
$0
$36
$36
$36
$36
$37
$36
$1,543
$6,852
$668
$1,855
$186
$3,129
$5,662
$3,129
$1,863
$9,473
$4,224
$846
$4,601
$3,566
$3,663
$713
$587
$0
$1,511
$3,287
$288
$1,408
$3,891
$3,107
(continued)
-------
Table 3-1. Engineering Cost Estimates for Affected Facilities: 1999 ($103)a (Continued)
Oi
Plant ID Plant Name
027A
028A
029A
033A
032A
002A
034B
034A
001A
004B
004A
009A
009Bb
038AC
500
008A
008B
Totals
GM Pontiac East Assembly Plant
GM Shreveport Assembly Plant
GM Wentzville Assembly Center
GM Wilmington Assembly Plant
Saturn Corporation
Honda East Liberty Auto Plant
Honda Marysville Auto Plant-Line 2
Honda Marysville Auto Plant-Line 1
Mitsubishi Normal Assembly Plant
Nissan Motor Manfacturing Corp., USA-
Line HF
Nissan Motor Manufacturing Corp. USA-
Line IV
New United Motor Mfg. Inc. NUMMI-
CarLine
New United Motor Mfg. Inc. NUMMI-
Truck Line
AM General Assembly Plant
Toyota
Toyota Motor Manufacturing Kentucky
Inc. Paint #1
Toyota Motor Manufacturing Kentucky
Inc. Paint #2
City
Pontiac
Shreveport
Wentzvile
Newport
Spring Hill
East Liberty
Marysville
Marysville
Normal
Smyrna
Smyrna
Fremont
Fremont
South Bend
Princeton
Georgetown
Georgetown
State
MI
LA
MO
DE
TN
OH
OH
OH
IL
TN
TN
CA
CA
IN
IN
KY
KY
Total
Annualized
Capital
Costs
$3,679
$0
$2,396
$357
$1,988
$614
$1,512
$1,928
$675
$1,985
$0
$1,268
$455
$0
$0
$2,037
$772
$75,270
Total Annual
Operating and Total Monitoring, Total
Maintenance Recordkeeping, and Annual
Costs
$3,870
$0
$2,409
$358
$1,988
$639
$1,512
$1,928
$715
$1,994
$0
$1,268
$461
$0
$0
$2,037
$772
$76,387
Reporting Costs
$36
$20
$36
$36
$36
$36
$36
$36
$37
$37
$20
$36
$72
$0
$33
$36
$36
$2,004
Costs
$7,585
$20
$4,842
$751
$4,012
$1,289
$3,060
$3,893
$1,426
$4,016
$20
$2,572
$989
$0
$33
$4,109
$1,580
$153,661
All costs are reported in 1999 dollars, the base year of the economic analysis. EPA used the GDP deflator to make these adjustments.
TABC, Inc. only manufactures parts such as truck beds and does not assemble vehicles. These truck beds are supplied to NUMMI—Truck Line. Since our
economic model pertains to final vehicles and not to parts, TABC Inc. compliance costs will be assigned to NUMMI—Truck Line in the subsequent analysis.
AM General is not subject to the proposed rule because it is more appropriately regulated under the Miscellaneous Metal Parts Subcategory.
-------
3.3 Alternative Regulatory Options Based on Risk
We have made every effort in developing this proposal to minimize the cost to the regulated
community and allow maximum flexibility in compliance options consistent with our statutory
obligations. We recognize, however, that the proposal may still require some facilities to take
costly steps to further control emissions even though those emissions may not result in exposures
which could pose an excess individual lifetime cancer risk greater than one in one million or exceed
thresholds determined to provide an ample margin of safety for protecting public health and the
environment from the effects of HAP. We are, therefore, specifically soliciting comment in the
preamble on whether there are further ways to structure the rule to focus on the facilities which
pose significant risks and avoid the imposition of high costs on facilities that pose little risk to public
health and the environment.
Representatives of the plywood and composite wood products industry provided EPA with
descriptions of three mechanisms that they believed could be used to implement more cost-effective
reductions in risk. The docket for the proposed rule contains "white papers" prepared by the
plywood and composite wood products industry that outline their proposed approaches (see
docket number A-2001-22, Item# II-D-78). These approaches could be effective in focusing
regulatory controls on facilities that pose significant risks and avoiding the imposition of high costs
on facilities that pose little risk to public health or the environment, and we are seeking public
comment in the preamble on the utility of each of these approaches with respect to this rule.
One of the approaches, an applicability cutoff for threshold pollutants, would be
implemented under the authority of CAA §112(d)(4); the second approach, subcategorization and
delisting, would be implemented under the authority of CAA §§ 112(c)(l) and 112(c)(9); and the
third approach would involve the use of a concentration-based applicability threshold.
The MACT program outlined in CAA §112(d) is intended to reduce emissions of HAP
through the application of MACT to major sources of toxic air pollutants. Section 112(c)(9) is
intended to allow EPA to avoid setting MACT standards for categories or subcategories of sources
that pose less than a specified level of risk to public health and the environment.
3.3.1 Applicability Cutoffs for Threshold Pollutants Under §112(d)(4) of the CAA
The first approach is an "applicability cutoff' for threshold pollutants that is based on EPA's
authority under CAA §112(d)(4) to establish standards for HAP which are "threshold pollutants."
3-7
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A "threshold pollutant" is one for which there is a concentration or dose below which adverse
effects are not expected to occur over a lifetime of exposure. For such pollutants, §112(d)(4)
allows EPA to consider the threshold level, with an ample margin of safety, when establishing
emission standards. Specifically, §112(d)(4) allows EPA to establish emission standards that are
not based upon the MACT specified under §112(d)(2) for pollutants for which a health threshold
has been established. Such standards may be less stringent than MACT. Historically, EPA has
interpreted §112(d)(4) to allow categories of sources that emit only threshold pollutants to avoid
further regulation if those emissions result in ambient levels that do not exceed the threshold, with an
ample margin of safety.3
A different interpretation would allow us to exempt individual facilities within a source
category that meet the §112(d)(4) requirements. There are three potential scenarios under this
interpretation of the §112(d)(4) provision. One scenario would allow an exemption for individual
facilities that emit only threshold pollutants and can demonstrate that their emissions of threshold
pollutants would not result in air concentrations above the threshold levels, with an ample margin of
safety, even if the category is otherwise subject to MACT. A second scenario would allow the
§112(d)(4) provision to be applied to both threshold and non-threshold pollutants, using the 1 in a
million cancer risk level for decisionmaking for non-threshold pollutants.
A third scenario would allow a §112(d)(4) exemption at a facility that emits both threshold
and non-threshold pollutants. For those emission points where only threshold pollutants are emitted
and where emissions of the threshold pollutants would not result in air concentrations above the
threshold levels, with an ample margin of safety, those emission points could be exempt from the
MACT standards. The MACT standards would still apply to non-threshold emissions from other
emission points at the source. For this third scenario, emission points that emit a combination of
threshold and non-threshold pollutants that are co-controlled by MACT would still be subject to
the MACT level of control. However, any threshold HAP eligible for exemption under §112(d)(4)
that are controlled by control devices different from those controlling non-threshold HAP would be
able to use the exemption, and the facility would still be subject to the parts of the standards that
control non-threshold pollutants or that control both threshold and non-threshold pollutants.
3See 63 FR 18503, 18765 (April 15, 1998) (Pulp and Paper I NESHAP).
3-8
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Estimation of hazard quotients and hazard indices. Under the §112(d)(4) approach EPA
would have to determine that emissions of each of the threshold pollutants emitted by
automobile and light-duty truck surface coating operations at the facility do not exceed the
threshold levels, with an ample margin of safety.
The common approach for evaluating the potential hazard of a threshold air pollutant is to
calculate a "hazard quotient" by dividing the pollutant's inhalation exposure concentration (often
assumed to be equivalent to its estimated concentration in air at a location where people could be
exposed) by the pollutant's inhalation Reference Concentration (RfC). An RfC is an estimate (with
uncertainty spanning perhaps an order of magnitude) of a continuous inhalation exposure that, over
a lifetime, likely would not result in the occurrence of adverse health effects in humans, including
sensitive individuals.
The EPA typically establishes an RfC by applying uncertainty factors to the critical toxic
effect derived from the lowest- or no-observed-adverse-effect level of a pollutant.4 A hazard
quotient less than one means that the exposure concentration of the pollutant is less than the RfC,
and, therefore, presumed to be without appreciable risk of adverse health effects. A hazard
quotient greater than one means that the exposure concentration of the pollutant is greater than the
RfC. Further, EPA guidance for assessing exposures to mixtures of threshold pollutants
recommends calculating a hazard index (HI) by summing the individual hazard quotients for those
pollutants in the mixture that affect the same target organ or system by the same mechanism.5 The
HI values would be interpreted similarly to hazard quotients; values below one would generally be
considered to be without appreciable risk of adverse health effects, and values above one would
generally be cause for concern.
"Methods for Derivation of Inhalation Reference Concentrations and Applications of Inhalation Dosimetry."
EPA-600/8-90-066F, Office of Research and Development, USEPA, October 1994.
Supplementary Guidance for Conducting Health Risk Assessment of Chemical Mixtui
Panel," EPA/630/R-00/002. USEPA, August 2000. http://www.epa.gov/nceawwwl/pdfs/chem mix/chem.mix.08. 2001 .pdf.
""Supplementary Guidance for Conducting Health Risk Assessment of Chemical Mixtures. Risk Assessment Forum Technical
3-9
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Table 3-2. Dose-Response Assessment Values for HAP Reported Emitted by the
Automobile and Light-Duty Truck Surface Coating Source Category
Chemical Name
Chromium (VI) compounds
Chromium (VI) trioxide,
chromic acid mist
Ethylene glycol
Ethyl benzene
Formaldehyde
Diethylene glycol monobutyl
ether
Ethylene glycol monobutyl
ether
Hexamethylene-1, 6-
diisocyanate
n-Hexane
Manganese compounds
Methanol
Methyl ethyl ketone
Methyl isobutyl ketone
Methyl methacrylate
Methylene chloride
Methylene diphenyl
diisocyanate
Nickel compounds
CAS No.
18540-29-9
11115-74-5
107-21-1
100-41-4
50-00-0
112-34-5
111-76-2
822-06-0
110-54-3
7439.96-5
67-56-1
78-93-3
108-10-1
80-62-6
75-09-2
101-68-8
7440-02-0
Reference
Concentration3
(mg/m3)
l.OE-04 (IRIS)
8.0E-06 (IRIS)
4.0E-01 (CAL)
l.OE+00 (IRIS)
9.8E-03 (ATSDR)
2.0E-02 (HEAST)
1.3E+01 (IRIS)
l.OE-05 (IRIS)
2.0E-01 (IRIS)
5.0E-05 (IRIS)
4.0E+00 (CAL)
l.OE+00 (IRIS)
8.0E-02 (HEAST)
7.0E-01 (IRIS)
l.OE+00 (ATSDR)
6.0E-04 (IRIS)
2.0E-04 (ATSDR)
Unit Risk
Estimate1"
(l/(ug/m3))
1.2E-02 (IRIS)
1.3E-05 (IRIS)
4.7E-07 (IRIS)
(continued)
3-10
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Table 3-2. Dose-Response Assessment Values for HAP Reported Emitted by the
Automobile and Light-Duty Truck Surface Coating Source Category (continued)
Chemical Name
Nickel oxide
Toluene
2,4/2,6-Toluene
diisocyanate mixture (TDI)
Xylenes (mixed)
CAS No.
1313-99-1
108-88-3
26471-62-5
1330-20-7
Reference
Concentration3
(mg/m3)
l.OE-04 (CAL)
4.0E-01 (IRIS)
7.0E-05 (IRIS)
4.3E-01 (ATSDR)
Unit Risk
Estimate"
(l/(ug/m3))
1.1E-05 (CAL)
" Reference Concentration: An estimate (with uncertainty spanning perhaps an order of magnitude) of a continuous
inhalation exposure to the human population (including sensitive subgroups which include children, asthmatics, and the
elderly) that is likely to be without an appreciable risk of deleterious effects during a lifetime. It can be derived from
various types of human or animal data, with uncertainty factors generally applied to reflect limitations of the data used.
b Unit Risk Estimate: The upper-bound excess lifetime cancer risk estimated to result from continuous exposure to an
agent at a concentration of 1 ug/m3 in air. The interpretation of the Unit Risk Estimate would be as follows: if the Unit
Risk Estimate = 1.5 x 10-6 per ug/m3,1.5 excess tumors are expected to develop per 1,000,000 people if exposed daily
for a lifetime to 1 ug of the chemical in 1 cubic meter of air. Unit Risk Estimates are considered upper bound estimates,
meaning they represent a plausible upper limit to the true value. (Note that this is usually not a true statistical
confidence limit.) The true risk is likely to be less, but could be greater.
Sources: IRIS = EPA Integrated Risk Information System (http://www.epa.gov/ iris/subst/index.html)
ATSDR = U. Agency for Toxic Substances and Disease Registry http://www.atsdr.cdc.gov/mrls.html)
CAL = California Office of Environmental Health Hazard Assessment (http://www.oehha.ca.gov/
air/hot_spots/index.html)
HEAST = EPA Health Effects Assessment Summary Tables (#PB(=97-921199, July 1997)
For the determinations discussed herein, EPA would generally plan to use RfC values
contained in EPA's toxicology database, the Integrated Risk Information System (IRIS). When a
pollutant does not have an approved RfC in IRIS, or when a pollutant is a carcinogen, EPA would
have to determine whether a threshold exists based upon the availability of specific data on the
pollutant's mode or mechanism of action, potentially using a health threshold value from an
alternative source, such as the Agency for Toxic Substances and Disease Registry (ATSDR) or the
California Environmental Protection Agency (CalEPA). Table 4 provides RfCs, as well as unit risk
estimates, for the HAP emitted by automobile and light-duty truck surface coating operations. A
3-11
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unit risk estimate is defined as the upper-bound excess lifetime cancer risk estimated to result from
continuous exposure to an agent at a concentration of 1 ug/m3 in the air.
3-12
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To establish an applicability cutoff under §112(d)(4), EPA would need to define ambient air
exposure concentration limits for any threshold pollutants involved. There are several factors to
consider when establishing such concentrations. First, we would need to ensure that the
concentrations that would be established would protect public health with an ample margin of
safety. As discussed above, the approach EPA commonly uses when evaluating the potential
hazard of a threshold air pollutant is to calculate the pollutant's hazard quotient, which is the
exposure concentration divided by the RfC.
The EPA's "Supplementary Guidance for Conducting Health Risk Assessment of Chemical
Mixtures" suggests that the noncancer health effects associated with a mixture of pollutants ideally
are assessed by considering the pollutants' common mechanisms of toxicity6. The guidance also
suggests that when exposures to mixtures of pollutants are being evaluated, the risk assessor may
calculate a HI. The recommended method is to calculate multiple hazard indices for each exposure
route of interest, and for a single specific toxic effect or toxicity to a single target organ. The default
approach recommended by the guidance is to sum the hazard quotients for those pollutants that
induce the same toxic effect or affect the same target organ. A mixture is then assessed by several
His, each representing one toxic effect or target organ. The guidance notes that the pollutants
included in the HI calculation are any pollutants that show the effect being assessed, regardless of
the critical effect upon which the RfC is based. The guidance cautions that if the target organ or
toxic effect for which the HI is calculated is different from the RfC's critical effect, then the RfC for
that chemical will be an overestimate, that is, the resultant HI potentially may be overprotective.
Conversely, since the calculation of a HI does not account for the fact that the potency of a mixture
of HAP can be more potent than the sum of the individual HAP potencies, a HI may potentially be
underprotective in some situations.
Options for establishing a HI limit. One consideration in establishing a HI limit is whether
the analysis considers the total ambient air concentrations of all the emitted HAP to which the public
is exposed7. There are several options for establishing a HI limit for the §112(d)(4) analysis that
reflect, to varying degrees, public exposure.
6 ibid.
Senate Debate on Conference Report (October 27, 1990), reprinted in "A Legislative History of the Clean Air Act Amendments
of 1990," Comm. Print S. Pit. 103-38 (1993) ("Legis. Hist") at 868.
3-13
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One option is to allow the HI posed by all threshold HAP emitted from automobile and
light-duty truck surface coating operations at the facility to be no greater than one. This approach is
protective if no additional threshold HAP exposures would be anticipated from other sources at, or
in the vicinity of, the facility or through other routes of exposure (e.g., through dermal absorption).
A second option is to adopt a "default percentage" approach, whereby the HI limit of the
HAP emitted by the facility is set at some percentage or fraction of one (e.g., 20 percent or 0.2).
This approach recognizes the fact that the facility in question is only one of many sources of
threshold HAP to which people are typically exposed every day. Because noncancer risk
assessment is predicated on total exposure or dose, and because risk assessments focus only on an
individual source, establishing a HI limit of 0.2 would account for an assumption that 20 percent of
an individual's total exposure is from that individual source. For the purposes of this discussion, we
will call all sources of HAP, other than operations within the source category at the facility in
question, "background" sources. If the affected source is allowed to emit HAP such that its own
impacts could result in HI values of one, total exposures to threshold HAP in the vicinity of the
facility could be substantially greater than one due to background sources, and this would not be
protective of public health, since only HI values below one are considered to be without
appreciable risk of adverse health effects. Thus, setting the HI limit for the facility at some default
percentage of one will provide a buffer which would help to ensure that total exposures to threshold
HAP near the facility (i.e., in combination with exposures due to background sources) will generally
not exceed one, and can generally be considered to be without appreciable risk of adverse health
effects.
A third option is to use available data (from scientific literature or EPA studies, for
example) to determine background concentrations of HAP, possibly on a national or regional basis.
These data would be used to estimate the exposures to HAP from non-automobile and light-duty
truck surface coating operations in the vicinity of an individual facility. For example, EPA's
National-Scale Air Toxics Assessment (NATA)8 and ATSDR's Toxicological Profiles9 contain
information about background concentrations of some HAP in the atmosphere and other media.
See http://www.epa.gov/ttn/atw/nata.
See http://www.atsdr.cdc.gov/toxpro2.html.
3-14
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The combined exposures from an affected source and from background emissions (as determined
from the literature or studies) would then not be allowed to exceed a HI limit of 1.0.
A fourth option is to allow facilities to estimate or measure their own facility-specific
background HAP concentrations for use in their analysis.
Tiered analytical approach for predicting exposure. Establishing that a facility meets the
cutoffs established under §112(d)(4) will necessarily involve combining estimates of pollutant
emissions with air dispersion modeling to predict exposures. The EPA envisions that we would
promote a tiered analysis for these determinations. A tiered analysis involves making successive
refinements in modeling methodologies and input data to derive successively less conservative,
more realistic estimates of pollutant concentrations in air and estimates of risk.
As a first tier of analysis, EPA could develop a series of simple look-up tables based on the
results of air dispersion modeling conducted using conservative input assumptions. By specifying a
limited number of input parameters, such as stack height, distance to property line, and emission
rate, a facility could use these look-up tables to determine easily whether the emissions from their
sources might cause a HI limit to be exceeded.
A facility that does not pass this initial conservative screening analysis could implement
increasingly more site-specific and resource-intensive tiers of analysis using EPA-approved
modeling procedures, in an attempt to demonstrate that exposure to emissions from the facility does
not exceed the HI limit. Existing EPA guidance could provide the basis for conducting such a tiered
analysis.10
Accounting for dose-response relationships. In the past, EPA routinely treated carcinogens
as non-threshold pollutants. The EPA recognizes that advances in risk assessment science and
policy may affect the way EPA differentiates between threshold and non-threshold HAP. The
EPA's draft Guidelines for Carcinogen Risk Assessment11 suggest that carcinogens be assigned
non-linear dose-response relationships where data warrant. Moreover, it is possible that dose-
response curves for some pollutants may reach zero risk at a dose greater than zero, creating a
"A Tiered Modeling Approach for Assessing the Risks due to Sources of Hazardous Air Pollutants." EPA-450/4-92-001.
David E. Guinnup, Office of Air Quality Planning and Standards, USEPA, March 1992.
"Draft Revised Guidelines for Carcinogen Risk Assessment." NCEA-F-0644. USEPA, Risk Assessment Forum, July 1999.
pp 3-9ff http://www.epa.gov/ncea/raf/pdfs/cancer_gls.pdf
3-15
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threshold for carcinogenic effects. It is possible that future evaluations of the carcinogens emitted
by this source category would determine that one or more of the carcinogens in the category is a
threshold carcinogen or is a carcinogen that exhibits a non-linear dose-response relationship but
does not have a threshold.
The dose-response assessment for formaldehyde is currently undergoing revision by EPA.
As part of this revision effort, EPA is evaluating formaldehyde as a potential non-linear carcinogen.
The revised dose-response assessment will be subject to review by the EPA Science Advisory
Board, followed by full consensus review, before adoption into the EPA IRIS. At this time, EPA
estimates that the consensus review will be completed by the end of 2003. The revision of the
dose-response assessment could affect the potency factor of formaldehyde, as well as its status as a
threshold or non-threshold pollutant. At this time, the outcome is not known. In addition to the
current reassessment by EPA, there have been several reassessments of the toxicity and
carcinogenicity of formaldehyde in recent years, including work by the World Health Organization
and the Canadian Ministry of Health.
3.3.2 Subcategory Delisting Under §112(c)(9)(B) of the CAA
The EPA is authorized to establish categories and subcategories of sources, as appropriate,
pursuant to CAA §112(c)(l), in order to facilitate the development of MACT standards consistent
with §112 of the CAA. Further, §112(c)(9)(B) allows EPA to delete a category (or subcategory)
from the list of major sources for which MACT standards are to be developed when the following
can be demonstrated: (1) in the case of carcinogenic pollutants, that "no source in the category . ..
emits (carcinogenic) air pollutants in quantities which may cause a lifetime risk of cancer greater
than one in 1 million to the individual in the population who is most exposed to emissions of such
pollutants from the source"; (2) in the case of pollutants that cause adverse noncancer health
effects, that "emissions from no source in the category or subcategory . . . exceed a level which is
adequate to protect public health with an ample margin of safely"; and (3) in the case of pollutants
that cause adverse environmental effects, that "no adverse environmental effect will result from
emissions from any source."
Given these authorities and the suggestions from the white papers prepared by industry
representatives (see docket A-2001-22, Item# n-D-78), EPA is considering whether it would be
possible to establish a subcategory of facilities within the larger source category that would meet the
risk-based criteria for delisting. Such criteria would likely include the same requirements as
3-16
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described previously for the second scenario under the §112(d)(4) approach, whereby a facility
would be in the low-risk subcategory if its emissions of threshold pollutants do not exceed the HI
limits and if its emissions of non-threshold pollutants do not exceed a cancer risk level of 10"6.
Establishing that a facility qualifies for the low-risk subcategory under §112(c)(9) will
necessarily involve combining estimates of pollutant emissions with air dispersion modeling to
predict exposures. The EPA envisions that we would employ the same tiered analysis described
earlier in the §112 (d)(4) discussion for these determinations.
Another scenario under the §112(c)(9) approach would be to define a subcategory of
facilities within the source category based upon technological differences, such as differences in
production rate, emission vent flow rates, overall facility size, emissions characteristics, processes,
or air pollution control device viability. If it could then be determined that each source in this
technologically-defined subcategory presents a low risk to the surrounding community, the
subcategory could then be delisted in accordance with §112(c)(9).
3.3.3 Consideration of Criteria Pollutants
Finally, EPA projects that adoption of the MACT floor level of controls would result in
increases in nitrogen oxide (NOX) emissions. This pollutant is a precursor in the formation of fine
particulate matter (PM), which has been associated with a variety of adverse health effects
(including premature mortality, chronic bronchitis, and increased frequency of asthma attacks).
3-17
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SECTION 4
ECONOMIC IMPACT ANALYSIS
Congress and the Executive Office have imposed statutory and administrative requirements
for conducting economic analyses to accompany regulatory actions. Section 317 of the CAA
specifically requires estimation of the cost and economic impacts for specific regulations and
standards proposed under the authority of the Act. In addition, Executive Order (EO) 12866
requires a more comprehensive analysis of benefits and costs for proposed significant regulatory
actions. Office of Management and Budget (OMB) guidance under EO 12866 stipulates that a full
benefit-cost analysis is only required when a regulatory action has an annual effect on the economy
of $100 million or more. Other statutory and administrative requirements include examination of the
composition and distribution of benefits and costs. For example, the Regulatory Flexibility Act
(RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of 1996
(SBREFA), requires EPA to consider the economic impacts of regulatory actions on small entities.
The OAQPS Economic Analysis Resource Document provides detailed instructions and
expectations for economic analyses that support rulemaking (EPA, 1999).
The engineering analysis described in Section 3 provides estimates of the total annual costs
associated with the abatement strategies that bring each facility into compliance with the proposed
standards. Note, however, that these engineering cost estimates do not account for behavioral
responses by facilities, such as changes in output quantities and prices. In this section, engineering
cost estimates are used as inputs to an economic model of the automobile and LDT assembly
industry to predict market, industry and social welfare impacts of the proposed regulation. Small
business impacts are addressed in Section 5 and a benefits analysis is presented in Section 6 of this
report.
4.1 Methodology
This analysis will address several special characteristics of the automobile industry. First,
the industry's products are highly differentiated with vehicles varying along dimensions such as their
functions, carrying capacity, fuel efficiency, and comfort features. Second, the market for
4-1
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automobiles within the United States may be characterized as imperfectly competitive. Only 14
companies operate in this market. In 1998-1999, the Herfmdahl-Hirschmann Index for the industry
was 1,471, and the four-firm concentration ratio (CR4) was 72 percent. Third, exclusive
dealerships play an intermediary role between manufacturers and final consumers.1 Finally,
international trade is a major component of the U.S. market for automobiles. In 1999, imports
accounted for approximately 20 percent of car sales in the United States (Grain Automotive Group,
2000). Given the data available, we will evaluate the economic effects of the proposed regulation
at the facility level within the context of the overall industry conditions. This approach is consistent
with accepted economic logic and provides consistent estimates for the impacts on all the required
variables.
4.1.1 Product Differentiation
To address the high degree of product differentiation in this industry, the Agency has
segmented the market into eight vehicle classes: subcompacts, compacts, intermediate/ standard,
luxury, sports, pickups, vans, and other.2 Separate demand and cost curves are developed for
each of these market segments.
Since all domestic vehicle categories are subject to price changes due to the proposed
regulation, we will estimate the consumer response to these price changes within each vehicle
class. However, we will not estimate spillover impacts between domestic vehicle classes because
available estimates of the cross-price elasticities of demand suggest that consumers rarely substitute
between vehicle classes in response to relatively small price changes. In particular, Goldberg
(1995) estimates cross price semi-elasticities of demand for some specific vehicle models and finds
that these semi-elasticities are low if the models belong to different classes.3 For example, the cross
price semi-elasticity between a Honda Civic and a Honda Accord is only 14.9 x 10"7.
Furthermore, our priors suggest that the tendency to switch between vehicle categories will be low
given the relatively small magnitude of price changes expected for this NESHAP. Therefore, our
Exclusive dealership arrangements are also found in the sewing machine, agricultural machinery and gasoline markets.
EPA's 1999 Fuel Economy Guide Data (EPA, 2000), car buyers guides such as Edmunds.com (Edmunds, 2001), and the
Automotive News Market Databook (Grain Automotive Group, 2000) were used to assign vehicle models to the
appropriate market segments.
Recall that a semi-elasticity refers to the percentage change in quantity demanded of model j when price of model i changes by
$1 but all other model prices remain unchanged.
4-2
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basic market segmented model is designed to capture the within-segment, first order impacts of the
regulation.
4.1.2 Imperfect Competition
Although the U.S. automobile industry comprises 14 firms, a smaller subset of these firms
operates within each vehicle category segment. Given our assumption of imperfect competition in
the industry as a whole and within each segment in particular, we will use a Cournot model to
characterize the market for each vehicle category. The implicit assumption is that vehicles within a
given category are close substitutes. In the Cournot model, one of several models of oligopoly,
firms are modeled as choosing production quantities. Unlike a competitive market, in which the
price equals the marginal cost of production and firms take the price as given, the Cournot model
reflects the fact that automobile manufacturers may have market power and thus charge a price in
excess of marginal cost by producing a quantity that is less than in a competitive equilibrium.
4.1.3 Role of Dealerships
Manufacturers in the U.S. automobile industry do not actually set final consumer prices.
Instead, they set wholesale prices for dealers which are then marked up to form retail or list prices.
The final transaction price paid by the consumer can also differ from these retail prices because of
dealer-specific rebates, local and state taxes, and individual bargaining power. This pricing scheme
is summarized in Figure 4-1. Note that manufacturer decisions are based on wholesale prices,
while consumer decisions are based on transaction prices.
Manufacturer
Dealer
Consumer
Wholesale Price
List Price
Transaction Price
Figure 4-1. Pricing in Automobile Markets
This relationship can be viewed as a successive oligopoly game, with the manufacturer
adding a markup over the marginal cost of production, and the dealer adding his own markup. In
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stage 1, the manufacturer maximizes his profits by comparing his marginal costs to his marginal
revenues. His marginal revenue depends on the wholesale price and the wholesale price elasticity
of demand. In the second stage, the dealer maximizes her profits by comparing her own marginal
costs to her marginal revenue, which depends on the transaction price and the transaction price
elasticity of demand.
If the marginal cost of production increases, the impacts can be borne by the manufacturer
who changes input-output quantities, the dealer who earns a reduced markup, or the consumer who
faces a higher list price. Gron and Swenson (2000) examine the degree of cost pass-through to
final consumers in the U.S. automobile market. They find that cost shocks common to all
manufacturers have a greater effect on list price than do model-specific cost shocks. This is
consistent with the theoretical predictions of Dornbusch (1987) who showed in the context of
exchange rate shocks that firms competing in a Cournot game will increase the level of cost pass-
through as the proportion of the market that is exposed to the cost increase grows.
Because the proposed regulation covers all facilities assembling vehicles in the United
States, we have made the simplifying assumption that the dealer can charge the same percentage
markup as before the regulation. Assuming that the percentage markup (including discounts, taxes,
etc.) between the wholesale price (Pw) and the transaction price (PT) is constant, i.e. Pw = • PT,
the demand elasticity with respect to wholesale prices coincides with the transaction price elasticity.
Thus we can collapse the two-stage game between the manufacturer, dealer, and consumer to a
one-stage game between the manufacturer and a "composite customer" (dealer/consumer).
4.1.4 Foreign Trade
While the proposed NESHAP will directly affect domestic facilities that use coatings in
automobile and LDT assembly operations, the rule can also have indirect foreign trade
implications.4 On the import side, the demand for imported cars could increase if they become
inexpensive relative to domestic cars that are affected by the coating process standard. We will
assume that foreign firms can meet this spillover demand by using excess capacity in their existing
plants. On the export side, foreign demand for vehicles produced in the United States can
All production facilities located within the United States are subject to the proposed NESHAP regardless of whether they are
owned by domestic or foreign companies. For the purposes of this analysis, imports refers to vehicles produced outside of
the United States.
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decrease if they become relatively more expensive because of the regulation. Finally, domestic
facilities could relocate to foreign countries with laxer environmental regulations if domestic
production costs increase. However, given the small size of the compliance costs relative to
company sale it is unlikely that the proposed regulations will trigger industrial flight at least in the
short run. This assumption is consistent with empirical studies in the literature that have found little
evidence of environmental regulations affecting industry location decisions (Levinson, 1996). This
discussion illustrates the theory underlying estimation of the economic impacts of the proposed
MACT standard. The next task is to operationalize this model to calculate the impacts.
4.2 Operational Model
The proposed regulation will increase the cost of production for existing vehicle assembly
plants. The regulated facilities may alter their current levels of production or even close a plant in
response to the increased costs. These responses will in turn determine the impact of the regulation
on total market supply and ultimately on the equilibrium price and quantity. To determine the
impact on equilibrium price and quantity, we will
• • characterize the demand for each domestic vehicle type;
characterize the costs of production for classes of domestic vehicles at the individual
facility and at the market level;
•• develop the solution algorithm to determine the new with-regulation equilibrium;
characterize spillover impacts on the demand for imported and exported cars and
LDTs; and
• • compute the values for all the impact variables.
An intuitive overview of our economic model is presented below. Details of the modeling exercise
and its implementation are relegated to Appendix A.
The Agency has modeled separate markets for each of the eight vehicle categories:
subcompacts, compacts, intermediate/standard, luxury, sports, pickups, vans, and other. Given the
imperfect competition observed within each market segment, Cournot models are used to reflect
the fact that oligopolistic manufacturers can charge a price in excess of marginal cost by producing
a quantity that is less than the competitive optimum.
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U.S. demand for domestic vehicles in each category is characterized by a downward-
sloping demand curve, which implies that the quantity demanded is low when prices are high and
quantity demanded is high when prices are low due to the usual income and substitution effects.
The demand curve for each vehicle category is constructed using baseline quantity and retail price
data and available estimates of own price elasticities of demand.
Given the capital in place, each automobile and LDT assembly facility will be assumed to
face an upward-sloping marginal cost function. In addition, it is assumed that if revenue falls below
its minimum average variable costs, then the firm's best response is to cease production because
total revenue does not cover total variable costs of production. In this scenario, producers lose
money on operations as well as capital. By shutting down, the firm avoids additional losses from
operations.
Figure 4-2 shows how the market prices and quantities are determined by the intersection
of the marginal revenue and marginal cost curves in a concentrated market model. The baseline
consists of a market price and quantity (P0, Q0) that is determined by the downward-sloping market
demand curve (D) and the upward-sloping marginal cost curve (MC0) that reflects the sum of the
individual marginal cost curves of the assembly facilities. Any individual supplier would produce
amount Q0 (at price P0) and the facilities would collectively produce amount Q0.
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MCo
Figure 4-3. With-Regulation Equilibrium
Now consider the effect of the regulatory control costs (see Figure 4-3). Incorporating the
regulatory control costs will involve shifting the marginal cost curve upward for each regulated
facility by the per-unit variable compliance cost. As a result, the market output declines from Q0 to
Qj and the market price (as determined from the market demand curve, DM) increases from P0 to
PI.
Because the proposed coating standard will only be binding on automobile and LDT
assembly facilities operating within the U.S., the Agency has also modeled the impact of the
predicted domestic price increase on foreign trade. Imports of foreign vehicles into the U.S. could
increase because they become cheap relative to domestic vehicles. The ratio between quantities of
imported versus domestic vehicles purchased by U.S. consumers is modeled as a function of their
relative prices and the ease of substitution between these vehicles. Exports of U.S.-made vehicles
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can also decline if their price increases while other exogenous determinants of foreign demand are
held constant. Foreign demand is modeled as a downward sloping function that depends on
average price of exported U.S. vehicles and the export elasticity of demand.
4.3 Economic Impact Results
Based on the simple analytics presented above, automobile/LDT manufacturers will attempt
to mitigate the impacts of higher production costs by shifting as much of the burden on other
economic agents as market conditions allow. Potential responses include changes in production
processes and inputs, changes in output rates, or closure of the plant. This analysis focuses on the
last two options because they appear to be the most viable for auto assembly plants, at least in the
short term. We expect upward pressure on prices as producers reduce output rates. Higher prices
reduce quantity demanded and output for each vehicle class, leading to changes in profitability of
facilities and their parent companies. These market and industry adjustments determine the social
costs of the regulation and its distribution across stakeholders (producers and consumers).
4.3.1 Market-Level Impacts
The increased costs of production due to the regulation are expected to slightly increase the
price of automobiles/LDT and reduce their production and consumption from 1999 baseline levels.
As shown in Table 4-1, the regulation is projected to increase the price of all vehicle classes by at
most 0.01 percent (or at most $3.08 per vehicle). Similarly, the model projects small declines in
domestic production across all vehicle classes (ranging from 17 to 384 vehicles).
4.3.2 Industry-Level Impacts
Industry revenue, costs, and profitability change as prices and production levels adjust in
response to the increased compliance costs. These impacts are described in detail below.
4.3.2.1 Changes in Profitability
As shown in Table 4-2, the economic model projects that pre-tax earnings for assembly
plants will decrease by $152 million, or 1.1 percent. This is the net result of three effects, the first
two of which partially offset each other:
Decrease in revenue ($21 million): Revenue decreases as a result of reductions in
output. However, these losses were mitigated by increased revenues as a result of
small increases in vehicle prices.
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• Decrease in production costs ($22.5 million): Production costs decline as output
declines.
Table 4-1. Market-Level Impacts by Vehicle Class: 1999
Vehicle Class
Subcompacts
Wholesale Price ($/unit)
Domestic Production (103/yr)
Compacts
Wholesale Price ($/unit)
Domestic Production (lOVyr)
Intermediate/Standard
Wholesale Price ($/unit)
Domestic Production (103/yr)
Luxury
Wholesale Price ($/unit)
Domestic Production (lOVyr)
Sports
Wholesale Price ($/unit)
Domestic Production (lOVyr)
Pickups
Wholesale Price ($/unit)
Domestic Production (103/yr)
Vans
Wholesale Price ($/unit)
Domestic Production (lOVyr)
SUV
Wholesale Price ($/unit)
Domestic Production (103/yr)
Baseline
$15,522
586,257
$16,487
1,766,657
$21,155
2,187,415
$33,587
749,746
$25,797
349,955
$22,126
2,908,018
$22,910
1,447,482
$27,694
2,692,763
Absolute
Change
$0.40
-50
$1.05
-384
$0.61
-280
$3.08
-131
$1.21
-17
$0.23
-106
$0.80
-220
$0.41
-163
Relative
Change
0.00%
-0.01%
0.01%
-0.02%
0.00%
-0.01%
0.01%
-0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
-0.02%
0.00%
-0.01%
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Table 4-2. National-Level Industry Impacts: 1999
Revenues ($106/yr)
Costs (SlOVyr)
Compliance
Production
Pre-Tax Earnings ($106/yr)
Plants (#)
Employment (#)
Baseline
$290,789
$276,746
$0
$276,746
$14,043
65
219,817
Absolute
Change
-$20.7
$131.1
$153.6
-$22.5
-$151.8
0
-37
Relative
Change
-0.01%
0.05%
NA
-0.01%
-1.08%
0.00%
-0.02%
Increase in control costs ($154 million): Costs associated with coating operation HAP
controls increase.
Although aggregate industry pre-tax earnings decline, the regulation creates both winners
and losers based on the distribution of compliance costs across facilities. As shown in Table 4-3,
18 of the 65 plants (28 percent) are projected to become more profitable with the regulation with a
total gain of $2 million. These plants are either not subject to additional controls or have lower per-
unit control costs (less than $1 per vehicle) relative to other assembly plants. The remaining 47
plants are projected to experience a total loss of $154 million. These plants have higher per-unit
costs ($16 per vehicle on average). This results in an average loss of $3.3 million and represents a
1.5 percent decline in the average pre-tax profit of these plants.
4.3.2.2 Facility Closures and Changes in Employment
Economic theory suggests that a facility will cease production if market prices fall below the
minimum average variable cost. EPA estimates that no automobile or LDT assembly plant is likely
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Table 4-3. Distributional Impacts Across Facilities: 1999
Assembly Plants (#)
Baseline Production
Total (units/yr)
Average (units/facility)
Baseline Compliance Costs
Total (SlOVyr)
Average ($/unit)
Change in Pre-Tax Earnings ($10Vyr)
Change in Employment (#)
Pre-Tax
Loss
47
9,642,611
205,162
$153.2
$15.89
-$153.6
-37
Earnings
Gain
18
3,045,681
169,205
$0.5
$0.16
$1.7
1
Total
65
12,688,292
195,204
$153.66
$12.11
-$151.8
-37
to prematurely close as a result of the regulation. However, employment in the automobile and
LDT assembly industry is projected to decrease by 37 full-time equivalents (FTEs) as a result of
decreased output levels. This represents a 0.02 percent decline in manufacturing employment at
these assembly plants.
4.3.3 Foreign Trade
Given the small changes in domestic vehicle prices projected by the economic model, EPA
estimates foreign trade impacts associated with the rule are negligible. The price of domestic
vehicles, averaged across all eight vehicle categories, is expected to rise by 0.003 percent as a
result of the proposed regulation, while the price of imported cars will remain unchanged. The
Agency computed two quantitative measures of foreign trade impacts based on this predicted price
impact. As shown in Table 4-4, the ratio of imports to domestic sales is expected to rise by
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approximately 0.01 percent. Furthermore, export sales are predicted to decline by approximately
0.01 percent.
4.3.4 Social Costs
Table 4-4. Foreign Trade Impacts: 1999
% change
Ratio of imports-to-domestic vehicles 0.01%
Exports -0.01%
The social impact of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The social costs of the proposed rule will be distributed across consumers
and producers alike. Consumers experience welfare impacts due to changes in market prices and
consumption levels associated with the rule. Producers experience welfare impacts resulting from
changes in profits corresponding with the changes in production levels and market prices.
However, it is important to emphasize that this measure does not include benefits that occur outside
the market, that is, the value of reduced levels of air pollution due to the regulation.5
The national baseline compliance cost estimates are often used as an approximation of the
social cost of the rule. The engineering analysis estimated annual costs of $154 million. In this
case, the burden of the regulation falls solely on the affected facilities that experience a profit loss
exactly equal to these cost estimates. Thus, the entire loss is a change in producer surplus with no
change (by assumption) in consumer surplus. This is typically referred to as a "full-cost absorption"
scenario in which all factors of production are assumed to be fixed and firms are unable to adjust
their output levels when faced with additional costs.
In contrast, the economic analysis conducted by the Agency accounts for behavioral
responses by producers and consumers to the regulation (i.e., shifting costs to other economic
agents). This approach results in a social cost estimate that may differ from the engineering estimate
and also provides insights on how the regulatory burden is distributed across stakeholders.
Those impacts are the focus of the benefits analysis presented in Section 6 of this report.
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Table 4-5. Distribution of Social Costs: 1999
Value ($106/yr)
Change in Consumer Surplus -$9.1
Subcompacts -$0.2
Compacts -$1.9
Intermediate/Standard -$1.3
Luxury -$2.3
Sports -$0.4
Pickups -$0.7
Vans -$1.2
SUV -$1.1
Change in Producer Surplus -$151.8
Total Social Cost -$160.9
Higher market prices lead to consumer losses of $9.1 million, or 6 percent of the total
social cost of the rule. Although automobile or LDT producers are able to pass on a limited amount
of cost increases to final consumers, the increased costs result in a net decline in profits at assembly
plants of $152 million. As shown in Table 4-5, EPA estimates the total social cost of the rule to be
$161 million. Note that social cost estimates exceeds baseline engineering cost estimates by $7
million. The projected change in welfare is higher because the regulation exacerbates a social
inefficiency (see Appendix B). In an imperfectly competitive equilibrium, the marginal benefit
consumers place on the vehicles, the market price, exceeds the marginal cost to producers of
manufacturing the product. Thus, social welfare would be improved by increasing the quantity of
the vehicles provided. However, producers have no incentive to do this because the marginal
revenue effects of lowering the price and increasing output is lower than the marginal cost of these
extra units.
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4.4 Energy Impacts
Executive Order 13211 "Actions Concerning Regulations that Significantly Affect Energy
Supply, Distribution, or Use" (66 Fed. Reg. 28355, May 22, 2001) requires federal agencies to
estimate the energy impact of significant regulatory actions. The proposed NESHAP will trigger
both an increase in energy use due to the operation of new abatement equipment as well as a
decrease in energy use due to a small decline in automobile production. The net impact will be an
overall increase in the automobile industry's energy costs by about $26.41 million per year. These
impacts are discussed below in greater detail.
4.4.1 Increase in Energy Consumption
As described earlier in Section 3 of this report, automobile and LDT coating facilities can
adopt multiple strategies to reduce their HAP emissions in compliance with the proposed regulation.
Input substitution strategies 2 and 3 will not require significant amounts of extra energy because they
only involve the application of modified coating materials. However, adoption of strategy 1 and/or
strategy 4 will necessitate extra fan horsepower to convey additional air streams to add-on control
devices, as well as additional natural gas and electricity for operating these devices (which are
assumed to be regenerative thermal oxidizers). The operation of such abatement equipment is
estimated to require an additional 4.9xl09 standard cubic feet per year of natural gas and l.SxlO8
kilowatt hours per year of electricity nationwide at a cost of $3.20 per thousand cubic feet of
natural gas and $0.06 per kilowatt hour of electricity (Green, 2002). Therefore, the nationwide
cost of the energy needed to operate the control equipment required by strategies 1 and 4 is
estimated at $26.48 million per year. This incremental energy cost was included in the operation
and maintenance component of the engineering cost estimates presented in Section 3.
4.4.2 Reduction in Energy Consumption
The economic model described in Section 4.2 predicts that increased compliance costs will
result in an annual production decline of approximately 1,300 vehicles valued at $21 million
collectively. This production decline will lead to a corresponding decline in energy usage by
automobile manufacturers. EPA has computed an average "energy per unit output ratio" and
multiplied it by the decline in production to quantify this impact.
Census data presented in Table 4-6 indicates that the U.S. automobile and LDT industry
incurred energy costs of $669 million to produce $205.8 billion worth of vehicles in 1997. This
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Table 4-6. Energy Usage in Automobile and LPT Production (1997)
Fuel & Electricity
Value of Shipments Costs
Industrial Sector
Automobile Mfg.
Light Truck and Utility Vehicle Mfg.
Total
NAICS
336111
336112
($106)
$95,385
$110,400
$205,785
($106)
$339
$330
$669
Source: U.S. Department of Commerce, Census Bureau. October 1999a. "Automobile Manufacturing." 1997
Economic Census Manufacturing Industry Series. EC97MO-3361A. Washington, DC: Government
Printing Office.
U.S. Department of Commerce, Census Bureau. October 1999b. "Light Truck and Utility Vehicle
Manufacturing." 1997 Economic Census Manufacturing Industry Series. EC97M-3361B. Washington,
DC: Government Printing Office.
translates into an energy consumption per unit of output ratio of about 0.3 percent for the
automobile and LDT industry. Therefore, energy costs are estimated to decline by approximately
$0.07 million per year if the industry's production declines by 1,300 vehicles valued at $21 million
per year.
4.4.3 Net Impact on Energy Consumption
The operation of additional abatement capital is estimated to result in an increase in energy
use worth $26.48 million per year, while the decline in automobile production will result in a
decrease in energy use worth $0.07 million per year. These competing factors will result in a net
increase in annual energy consumption by the automobile industry of approximately $26.41 million,
on balance.
The total electricity generation capacity in the U.S. was 785,990 Megawatts in 1999
(DOE, 1999a). Thus, the electricity requirements associated with the proposed abatement capital
represent a small fraction of domestic generation capacity. Similarly, the natural gas requirements
associated with the proposed NESHAP are insignificant given the 23,755 billion cubic feet of
natural gas produced domestically in the U.S. in 1999 (DOE, 1999b). Hence, the proposed
NESHAP is not likely to have any significant adverse impact on energy prices, distribution,
availability, or use.
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SECTION 5
OTHER IMPACT ANALYSES
The economic- and energy-impacts associated with the proposed NESHAP were
described in the previous section. Statements discussing additional impacts on small businesses,
unfunded mandates, and new sources are presented below.
5.1 Small Business Impacts
The Regulatory Flexibility Act (RFA) of 1980 as amended in 1996 by the Small Business
Regulatory Enforcement Fairness Act (SBREFA) generally requires an agency to prepare a
regulatory flexibility analysis of a rule unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities. Small entities include small
businesses, small organizations, and small governmental jurisdictions.
For purposes of assessing the impacts of the proposed rule on small entities, a small entity is
defined as: (1) a small business according to Small Business Administration (SBA) size standards
for NAICS codes 336111 (automobile manufacturing) and 336112 (light truck and utility vehicle
manufacturing) with 1,000 or fewer employees; (2) a small governmental jurisdiction that is a
government of a city, county, town, school district or special district with a population of less than
50,000; and (3) a small organization that is any not-for-profit enterprise which is independently
owned and operated and is not dominant in its field.
Based on the above definition of small entities and data reported in Section 2 of this report,
the Agency has determined that there are no small businesses within this source category that would
be subject to this proposed rule. Therefore, because this proposed rule will not impose any
requirements on small entities, EPA certifies that this action will not have a significant economic
impact on a substantial number of small entities.
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5.2 Unfunded Mandates
Title H of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4,
establishes requirements for federal agencies to assess the effects of their regulatory actions on
state, local, and tribal governments and on the private sector. Under Section 202 of the UMRA,
EPA generally must prepare a written statement, including a cost-benefit analysis, for proposed and
final rules that includes any federal mandate that may result in expenditures to state, local, and tribal
governments, in the aggregate, or to the private sector, of $100 million or more in any one year. As
indicated below, EPA is responsive to all required provisions of UMRA.
Section 202(a)(l) requires EPA to identify the relevant statutory authority. The proposed
standard to limit emissions of HAPs associated with the automobile and LTD coating process is
being developed under Section 112 of the CAA of 1990.
Section 202(a)(2) requires a quantitative and qualitative assessment of the anticipated costs
and benefits of the regulation. Section 3 of this report provides detailed estimates of the costs
incurred by the private sector to comply with the proposed NESHAP. The estimated effects of the
regulation on the national economy are described in Section 4. Section 6 of this report provides a
qualitative assessment of the benefits of reducing HAP emissions, as well as the additional benefits
of reducing VOC emissions due to HAP controls.
Before EPA establishes any regulatory requirement that significantly or uniquely affects
small governments, including tribal governments, it must develop a small government agency plan
under Section 203 of UMRA. The proposed automobile and LDT coating NESHAP does not
impose an unfunded mandate on state, local, and tribal governments; the cost of the regulation is
borne by industry. Thus, Section 203 of UMRA does not apply to the current rule.
Section 205 of UMRA generally requires EPA to identify and consider a reasonable
number of regulatory alternatives and adopt the least costly, most cost-effective, or least
burdensome alternative that achieves the objectives of the rule. For reasons discussed in the
preamble of the rule, EPA has determined that the current rule constitutes the least burdensome
alternative consistent with the CAA.
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5.3 Impact on New Sources
There is a potential that new sources such as new paint shops at existing plants or new
plants will operate in the automobile industry in the future. The draft rule proposes more stringent
limits on emissions from these new sources. If control costs for new sources and facilities are
sufficiently higher than that for current producers, new source performance standards can raise the
cost of entry in the automobile market. Thus, EPA has analyzed the relative effect of new source
controls to determine whether they are likely to impose significant entry barriers.
It is difficult to predict which of the 65 facilities that currently operate in the U.S. automobile
and LDT assembly industry will replace their existing paint shops in the future. The engineering cost
analysis presented in Section 3 of this report assumes that all existing plants will keep their current
paint shops and make the necessary material changes and control equipment additions to meet the
proposed Maximum Achievable Control Technology (MACT) rule. This is a conservative (higher
MACT-specific compliance cost) assumption compared to assuming that only some of these paint
shops will be replaced.
The construction of greenfield facilities is also difficult to predict. EPA examined the list of
current facilities and determined that over the past 23 years there has been about one new
greenfield plant per year, on average. These were more frontloaded in the earlier years for many
reasons including the industry-wide change to basecoat/clearcoat from single coating topcoats,
"retooling" to take advantage of new production strategies and technologies, and the arrival of
non-U.S. manufacturers such as Honda, Nissan, and Toyota. Thus, the assumption of one new
greenfield plant per year in the future would be an overly generous one. The engineering analysis
does not explicitly include greenfield facilities because they are difficult to predict, the number is
both absolutely and relatively small compared to the existing facility population, and the cost and
economic impacts are likely to be very small.
Even though the number of affected entities cannot be predicted, the impact of new source
controls can be estimated qualitatively. The additional MACT-specific compliance costs for a new
source (greenfield plant or new paint shop at an existing plant) would be very low because these
new sources will comply with existing VOC regulations and already have all of the control
equipment needed to meet the proposed MACT rule. The only incremental costs for new sources
would be the small cost of lower HAP coating materials and some MACT-specific monitoring,
reporting, and record keeping costs that they would not have incurred in the absence of the
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proposed rule. However, these costs are in line with the costs incurred by existing facilities and
thus do not impose any barriers to entry into the industry. Overall, given the minimal impacts on
price and production described in Section 4 of this report, it is very unlikely that a substantial
number of firms who may consider entering the industry will be significantly affected.
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SECTION 6
BENEFITS ANALYSIS
The emission reductions achieved by this environmental regulation will provide benefits to
society by improving environmental quality. This section provides information on the types and
levels of social benefits anticipated from the automobile and LDT NESHAP. This section discusses
the health and welfare effects associated with the HAPs and other pollutants emitted by automobile
and LDT coating operations.
In general, the reduction of HAP emissions resulting from the regulation will reduce human
and environmental exposure to these pollutants and thereby reduce the likelihood of potential
adverse health and welfare effects. This section provides a general discussion of the various
components of total benefits that may be gained from reducing HAPs through this NESHAP. The
rule will also achieve reductions of VOCs and hence may reduce ground-level ozone and
particulate matter (PM), the benefits of which are presented separately from the benefits associated
with reductions in HAPs.
6.1 Identification of Potential Benefit Categories
The benefit categories associated with the emission reductions predicted for this regulation
can be broadly categorized as those benefits that are attributable to reduced exposure to HAPs and
those attributable to reduced exposure to other pollutants. Benefit categories include reduced
incidence of neurological effects, respiratory irritation, and eye, nose, and throat irritation associated
with exposure to noncarcinogenic HAPs and VOCs. In addition to health impacts occurring as a
result of reductions in HAP and VOC emissions, welfare impacts can also be identified. Each
category is discussed separately below.
6.1.1 Benefits of Reducing HAP Emissions
The HAP emissions reductions achieved by this rule are expected to reduce exposure to
ambient concentrations of ethylbenzene, EGBE, methanol, methyl ethyl ketone (MEK), methyl
isobutyl ketone (MIBK), toluene, and xylenes. According to baseline emission estimates, this
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source category will emit approximately 10,000 tons per year of HAPs at affected sources in the
fifth year following promulgation. The regulation will reduce approximately 6,000 tons of emissions
per year of the HAPs listed above. Human exposure to these HAPs is likely to occur primarily
through inhalation, but people may also be exposed indirectly through ingesting contaminated food
or water or through dermal contact. These substances may also enter terrestrial and aquatic
ecosystems through atmospheric deposition or may be deposited on vegetation and soil. These
HAPs may also enter the aquatic environment from the atmosphere via gas exchange between
surface water and the ambient air or by wet or dry deposition of particles to which they adsorb.
This analysis is focused only on the air quality benefits of HAP reduction. A summary of the range
of potential physical health and welfare effects categories that may be associated with HAP
emissions is provided in Table 6-1. As noted in the table, exposure to HAPs can lead to a variety
of acute and chronic health impacts as well as welfare impacts.
6.1.1.1 Health Benefits of Reduction in HAP Emissions
The HAP emissions resulting from automobile and LDT coating operations are associated
with a variety of adverse health effects. Acute (short-term) exposure to ethylbenzene in humans
results in respiratory effects such as throat irritation and chest constriction, irritation of the eyes, and
neurological effects such as dizziness. Chronic (long-term) exposure of humans to ethylbenzene
may cause eye and lung irritation, with possible adverse effects on the blood. Animal studies have
reported effects on the blood, liver, and kidneys from chronic inhalation exposure to ethylbenzene.
No information is available on the developmental or reproductive effects of ethylbenzene in humans,
but animal studies have reported developmental effects, including birth defects in animals exposed
via inhalation. EPA has established a reference concentration (RfC)1 of 1 mg/m3 to protect against
adverse health effects other than cancer. The RfC is based on the critical effect2 of developmental
toxicity observed in studies with rats and rabbits. EPA has classified ethylbenzene in Group D, not
classifiable as to human carcinogenicity.
In general, the RfC is an estimate (with uncertainty spanning perhaps an order of magnitude) of a daily inhalation exposure of
the human population (including sensitive subgroups) that is likely to be without an appreciable risk of deleterious effects
during a lifetime.
The critical effect is the first adverse effect, or its known precursor, that occurs to the most sensitive species as the dose rate of
an agent increases.
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Table 6-1. Potential Health and Welfare Effects Associated with Exposure to Hazardous
Air Pollutants
Effect
Type
Effect Category
Effect End Point
Citation
Health Mortality
Chronic Morbidity
Acute Morbidity
Carcinogenicity
Genotoxicity
Non-Cancer lethality
Neurotoxicity
Immunotoxicity
Pulmonary function decrement
Liver damage
Gastrointestinal toxicity
Kidney damage
Cardiovascular impairment
Hematopoietic (Blood disorders)
Reproductive/Developmental
toxicity
Pulmonary function decrement
Dermal irritation
Eye irritation
EPA (1990), Graham,
Holtgrave, and Sawery (1989)
Graham, Holtgrave, and
Sawery (1989)
Voorhees, Hassett, and Cote
(1989)
All morbidity end points
obtained from Graham,
Holtgrave, and Sawery (1989),
Voorhees, Hassett, and Cote.
(1989), Cote, Culpit, and
Hassett (1988)
Welfare Materials Damage
Aesthetic
Agriculture
Ecosystem
Structure
Corrosion/deterioration
Unpleasant odors
Transportation safety concerns
Yield reductions/foliar injury
Biomass decrease
Species richness decline
Species diversity decline
Community size decrease
Organism lifespan decrease
Trophic web shortening
NAS (1975)
Stern et al. (1973)
Weinstein and Birk (1989)
Source: Mathtech, Inc. May 1992. Benefit Analysis Issues for Section 112 Regulations. Final report prepared for
U.S. Environmental Protection Agency. Office of Air Quality Planning and Standards. Contract No. 68-D8-0094.
Research Triangle Park, NC.
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EGBE is a member of the glycol ethers HAP category, a large group of related compounds.
Acute exposure in humans to high levels of glycol ethers results in narcosis, pulmonary edema, and
liver and kidney damage. Chronic exposure to glycol ethers may result in neurological and blood
effects, including fatigue, nausea, tremor, and anemia. No information is available on the
reproductive or developmental effects of glycol ethers in humans, but animal studies have reported
such effects, including testicular damage, reduced fertility, maternal toxicity, early embryonic death,
birth defects, and delayed development. EPA has established an RfC of 13 mg/m3 to protect
against adverse health effects other than cancer based on the critical effect of decreases in red
blood cell count observed in studies with rats.
No reliable human epidemiological studies are available that address the potential
carcinogenicity of EGBE, but a draft report of a 2-year rodent inhalation study reported equivocal
evidence of carcinogenic activity in female rats and male mice. Because of the uncertain relevance
of these tumor increases to humans, the fact that EGBE is generally negative in genotoxic tests, and
the lack of human data to support the findings in rodents, the human carcinogenic potential of
EGBE cannot be determined at this time. EPA has classified EGBE as a Group C, possible human
carcinogen.
Acute inhalation exposure to MEK in humans results in irritation to the eyes, nose, and
throat. Little information is available on the chronic effects of MEK in humans, but inhalation
studies in animals have reported slight neurological, liver, kidney, and respiratory effects. No
information is available on the developmental, reproductive, or carcinogenic effects of MEK in
humans. Developmental effects, including decreased fetal weight and fetal malformations, have
been reported in mice and rats exposed to MEK via inhalation and ingestion. EPA has established
an RfC of 1 mg/m3 to protect against adverse health effects other than cancer based on the critical
effect of decreased birth weight observed in studies with mice. EPA has classified MEK in Group
D, not classifiable as to human carcinogenicity.
Acute or chronic exposure of humans to methanol by inhalation or ingestion may result in
blurred vision, headache, dizziness, and nausea. No information is available on the reproductive,
developmental, or carcinogenic effects of methanol in humans. Birth defects have been observed in
the offspring of rats and mice exposed to methanol by inhalation. A methanol inhalation study using
rhesus monkeys reported a decrease in the length of pregnancy and limited evidence of impaired
learning ability in offspring. EPA has not established an RfC for methanol or classified methanol
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with respect to carcinogenicity. The California Environmental Protection Agency has developed a
reference exposure level (similar in concept to an RfC) of 4 mg/m3 based on the critical effect of
birth defects observed in studies with mice.
Acute exposure to MBK may irritate the eyes and mucous membranes and cause
weakness, headache, and nausea. Chronic exposure to workers has been observed to cause
nausea, headache, burning eyes, insomnia, intestinal pain, and slight enlargement of the liver. No
information is available on reproductive or developmental effects of MBK in humans, but studies
with rats and mice have reported neurological effects and increased liver and kidney weights. EPA
has not established an RfC for MIBK or classified it with respect to carcinogenicity. Animal studies
are currently underway that are expected to provide the foundation for an EPA assessment.
Acute inhalation of toluene by humans may cause effects to the central nervous system
(CNS), such as fatigue, sleepiness, headache, and nausea, as well as irregular heartbeat. Adverse
CNS effects reported in chronic abusers exposed to high levels of toluene include tremors;
decreased brain size; involuntary eye movements; and impaired speech, hearing, and vision.
Chronic inhalation exposure of humans to lower levels of toluene also causes irritation of the upper
respiratory tract, eye irritation, sore throat, nausea, dizziness, headaches, and difficulty with sleep.
Studies of children whose mothers were exposed to toluene by inhalation or mixed solvents during
pregnancy have reported CNS problems, facial and limb abnormalities, and delayed development.
However, these effects may not be attributable to toluene alone. EPA has established an RfC of
0.4 mg/m3 to protect against adverse health effects other than cancer. The RfC is based on the
critical effect of decreased neurological performance in workers exposed to toluene emitted from
glue. EPA has classified toluene in Group D, not classifiable as to human carcinogenicity.
Acute inhalation of mixed xylenes (a mixture of three closely related compounds) in humans
may cause irritation of the nose and throat, nausea, vomiting, gastric irritation, mild transient eye
irritation, and neurological effects. Chronic inhalation of xylenes in humans may result in nervous
system effects such as headache, dizziness, fatigue, tremors, and incoordination. Other reported
effects include labored breathing, heart palpitation, severe chest pain, abnormal electrocardiograms,
and possible effects on the blood and kidneys. EPA has not developed an RfC for xylenes. The
Agency for Toxic Substances and Disease Registry has published a minimum risk level (similar to
an RfC) for xylenes of 0.43 mg/m3 based on CNS effects in rodents. EPA has classified xylenes in
Category D, not classifiable with respect to human carcinogenicity.
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For the HAPs covered by the automobile and LDT NESHAP, evidence on the potential
toxicity of the pollutants varies. However, given sufficient exposure conditions, each of these HAPs
has the potential to elicit adverse health or environmental effects in the exposed populations.
EPA recently prepared a relative ranking evaluation for all HAPs for the purpose of
selecting 30 HAPs posing the greatest health risk in urban areas (Smith et al., 1999). This
evaluation combined all available data on toxic potential with nationwide emission and ambient
concentration information (i.e., not just urban) for all 188 HAPs, considering both cancer and
noncancer end points and both inhalation and ingestion exposures. The available database
supported quantitative ranks for more than 150 HAPs, including the seven HAPs most commonly
used in (or emitted by) this source category. None of these seven HAPs were found to present a
hazard sufficient to justify including them on the list of urban air toxics.
EPA recently prepared a draft national-scale assessment as part of its National Air Toxics
Assessment activities (EPA, 2001). This draft assessment estimates human inhalation exposures to
the urban HAPs selected based on the ranking study described above. To the extent that EPA's
ranking analysis was effective, HAPs included in the urban list were likely to present greater health
risks than those that did not. Less than one-third of the noncarcinogens evaluated by the national-
scale assessment were judged likely to have human exposure exceeding the RfC anywhere in the
U.S.
It is important to note that the national-scale assessment did not include ingestion exposures
or acute time-scales and used simplified models that were not efficient at estimating hot spots or
maximum individual exposures. However, the results suggest that most of the noncarcinogens
included in the assessment do not present national concerns. Because the HAPs in the national-
scale assessment arguably present greater potential hazards than the seven HAPs most commonly
used in (or emitted by) this source category, EPA has no information that suggests there is presently
any widespread overexposure to these six HAPs. Nevertheless, given the limitations of the
national-scale assessment, this may not be true in all areas or for all receptors.
6.1.1.2 Welfare Benefits of Reducing HAP Emissions
The welfare effects of exposure to HAPs have received less attention from analysts than the
health effects. However, this situation is gradually changing, as over the past 10 years,
ecotoxicologists have started to build models of ecological systems that focus on interrelationships
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in function, the dynamics of stress, and the adaptive potential for recovery. This perspective is
reflected in Table 6-1 where the end points associated with ecosystem functions describe structural
attributes rather than species-specific responses to HAP exposure. This development is consistent
with the observation that chronic sublethal exposures may affect the normal functioning of individual
species in ways that make them less than competitive and therefore more susceptible to a variety of
factors including disease, insect attack, and decreases in habitat quality (EPA, 1991). All of these
factors may contribute to an overall change in the structure (i.e., composition) and function of the
ecosystem.
The overall environmental behavior of these HAPs can be evaluated using fugacity models.
Fugacity is a thermodynamic property and is equal to the partial pressure of a substance in
compartment. Thus the fugacity of a substance in an environmental medium (e.g., air, water, soil, or
sediment) is a measure of the substance's tendency to escape that medium and enter another
medium. The Mackay Level m model is a relatively rigorous representation of multiple
environmental compartments and the fate and transport process through which chemicals are
moved through them (Mackay, 1991).
The Level m model indicates that the HAPs released from automobile and LDT coating
operations once emitted to the ambient air as vapors are likely to remain in the vapor phase as
VOCs. Model estimates of HAPs remaining in the air compartment range from greater than
99 percent of the ethyl benzene, xylenes, and toluene to approximately 85 percent of methanol
emissions.
The median half-lives for these HAPs in the vapor phase range from 23 hours for xylenes to
57 hours for toluene. As VOCs, they under go various chemical reactions that contribute to the
formation of other atmospheric pollutants that can affect welfare. For example, these VOCs can
contribute to ozone in the environment. EPA has previously stated (59 FR 1788, January 12, 1994)
that ozone's effects on green plants include injury to foliage, reductions in growth, losses in yield,
alterations in reproductive capacity, and alterations in susceptibility to pests and pathogens. Based
on known interrelationships of different components of ecosystems, such effects, if of sufficient
magnitude, may potentially lead to irreversible changes of a sweeping nature to ecosystems.
In addition to directly contributing to ozone formation, the reaction of methanol with
nitrogen dioxide in a smog chamber has been shown to yield methyl nitrite and nitric acid. The
reaction of methanol with nitrogen dioxide may be the major source of methyl nitrite that has the
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potential to cause allergic responses in polluted atmospheres. However, methyl that is short lived in
the atmosphere. It is rapidly photolyzed by sunlight, with a mean lifetime of about 10 to 15 minutes.
The result is the production of NOX, which contributes to an increase in ozone.
Beyond photochemical removal processes, a relatively small portion of these vapor-phase
HAPs, as well as some of the particulates, leave the ambient air via removal processes such as wet
or dry deposition. Compounds such as methanol, EGBE, and MIBK are slightly miscible in water
and can therefore be physically removed from the air by rain. The other HAPs (i.e, toluene,
xylenes, ethyl benzene) are less soluble but can be deposited on surfaces via processes such as dry
deposition or impaction.
In water, the HAPs released from automobile and LDT coating operations exhibit low to
moderate acute aquatic toxicity. Methanol, EGBE, and MIBK represent the low side and MEK,
xylenes, toluene, and ethyl benzene are considered to present moderate acute toxicity. All of these
HAPs exhibit low persistence and low bio-accumulation potential. The persistence, as indicated by
median half-lives in water, range from a low of 96 hours for methanol to a maximum of 312 hours
for toluene. The bio-accumulation factor (B AF) is defined as the concentration of a substance in an
organism divided by the concentration of the chemical in the surrounding medium measured in an
intact ecosystem. As such, the BAF takes into account accumulation through ingested food, as well
as the concentration from the surrounding medium.
A low bio-accumulation potential indicates that they are not likely to bio-concentrate
through the food chain. However, substances that do not tend to readily bio-accumulate or bio-
concentrate may be taken up by biota and still exert a deleterious effect. These effects could
potentially include such impacts as lethality or reproductive impairment to vulnerable species
resulting in impacts to recreational or commercial fishers, as well as the ecosystems supporting
these fisheries. This not only has potential adverse implications for individual wildlife species,
(including threatened or endanger species) and ecosystems as a whole, but also to humans who
may depend on contaminated fish and waterfowl.
Once deposited on soil or sediments these HAPs are subject to a variety of competing
removal mechanisms including evaporation, mobility, bio-transformation, and chemical reactions.
Xylenes deposited on soil can vaporize or, if contained on sediment, be buried. Methanol and ethyl
benzene demonstrate high mobility in soil and can end up in ground water, and EGBE and MIRK
are readily subject to aerobic and anaerobic bio-transformation. The estimated median half-lives
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for these HAPs in soil ranges from 96 hours for MIBK and methanol to 420 hours for xylenes. In
sediment, the estimated median half-lives are 384 hours for MTRK and methanol to 1,248 hours for
toluene. Once deposited on soil or in sediments, these HAPs can enter into terrestrial biota through
diet or directly from the surrounding media. The potential for this uptake of HAPs to adversely
affect individual wildlife species (including threatened or endanger species) as well as ecosystems as
a whole is not understood.
In summary, the potential adverse effects of these HAPs on individual wildlife species or
aquatic terrestrial ecosystems have not been characterized. However, HAP emission reductions
achieved through the automobile and LDT NESHAP should reduce the associated adverse
environmental impacts.
6.1.2 Benefits of Reducing VOC Emissions due to HAP Controls
VOCs are a precursor to tropospheric (ground-level) ozone, and exposure to ground-level
ozone has been linked to acute and chronic effects on human health and welfare. This section
addresses these effects.
Human exposure to elevated concentrations of ozone primarily results in respiratory-related
impacts such as coughing and difficulty in breathing. Eye irritation is another frequently observed
effect. These acute effects are generally short-term and reversible. Nevertheless, a reduction in the
severity or scope of such impacts may have significant economic value.
Recent studies have found that repeated exposure to elevated concentrations of ozone over
long periods of time may also lead to chronic, structural damage to the lungs (EPA, 1995b). To the
extent that these findings are verified, the potential scope of benefits related to reductions in ozone
concentrations could be expanded significantly.
Major ozone adverse health effects are alterations in lung capacity and breathing frequency;
eye, nose and throat irritation; reduced exercise performance; malaise and nausea; increased
sensitivity of airways; aggravation of existing respiratory disease; decreased sensitivity to respiratory
infection; and extra pulmonary effects (CNS, liver, cardiovascular, and reproductive effects). It is
expected that VOC reductions through the automobile and LDT coatings rule will lead to a
reduction in ambient ozone concentrations and, in turn, reduce the incidence of the adverse health
effects of ozone exposure.
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Major ozone adverse welfare effects are reduction in the economic value of certain
agricultural crops and ornamental plants and materials damage. Over the last decade, a series of
field experiments has demonstrated a positive statistical association between ozone exposure and
yield reductions as well as visible injury to several economically valuable cash crops, including
soybeans and cotton. Damage to selected timber species has also been associated with exposure
to ozone. The observed impacts range from foliar injury to reduced growth rates and premature
death. Benefits of reduced ozone concentrations include the value of avoided losses in
commercially valuable timber and aesthetic losses suffered by nonconsumptive users (EPA,
1995b).
There are some benefits from reduced VOC emissions beyond merely a reduction in ozone
concentration. Approximately 1 to 2 percent of VOCs precipitate in the atmosphere to form
particular matter (PM) with an aerodynamic diameter at or below 10 micrometers (called PM-10).
There are a number of benefits from reduced PM concentration, including reduced soiling and
materials damage, increased visibility, and reductions in excess deaths and morbidity. However,
the focus of this part of the benefits section is on the benefits from reduced ozone concentrations
because they are greater than those from reduced PM-10 concentrations. PM-10 control is
already prescribed by primary and secondary National Ambient Air Quality Standards (NAAQS)
promulgated by EPA, which are now under review. For more information on ozone health and
welfare effects, refer to the 1996 Ozone NAAQS Staff Paper developed by the Agency.
Sizable uncertainties exist in any risk estimates, including these. Emissions estimates can be
off by a factor of two or more one time out of three, and air dispersion models can have a similar
uncertainty. Consideration of actual exposures also adds uncertainty. Estimates of the total burden
of disease associated with air pollution and air toxics are rough. Cancer potency factors contribute
additional uncertainty of often greater magnitude. Although we did not formally estimate the
combined uncertainties for these risk estimates, it is very likely that the uncertainty around these
estimates is at least a factor of 10 above or below the stated values.
6.2 Lack Of Approved Methods To Quantify HAP Benefits
In previous analyses of the benefits of reductions in HAPs, EPA has quantified and
monetized the benefits of reduced incidences of cancer.23'24 In some cases, EPA has also
quantified (but not monetized) reductions in the number of people exposed to non-cancer HAP
risks above no-effect levels.25
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However the methods to conduct a risk analysis of HAP reductions produces high-end
estimates of benefits due to assumptions required in such analyses. While we used high-end risk
estimates in past analyses, recent advice from the EPA Science Advisory Board (SAB) and internal
methods reviews have suggested that we avoid using high-end estimates in current analyses. EPA
is working with the SAB to develop better methods for analyzing the benefits of reductions in
HAPs. While not appropriate as part of a primary estimate of benefits, to estimate the potential
baseline risks posed by the Auto and Light-duty Truck source category and the potential impact of
applicability cutoffs discussed in Section 3 of this RIA, EPA performed a "rough" risk assessment,
described below. There are large uncertainties regarding all components of the risk quantification
step, including location of emission reductions, emission estimates, air concentrations, exposure
levels and dose-response relationships. However, if these uncertainties are properly identified and
characterized, it is possible to provide estimates of the reduction in inhalation cancer incidence
associated with this rule. It is important to keep in mind that these estimates will only cover a very
limited portion of the potential HAP effects of the rule, as they exclude non-inhalation based cancer
risks and non-cancer health effects.
6.2.1 Evaluation of Alternative Regulatory Options based on Risk
6.2.1.1 Characterization of Industry Emissions and Potential Baseline Health Effects
For the automobile and light-duty truck surface coating source category, seven HAP
account for over 95 percent of the total HAP emitted. Those seven HAP are toluene, xylene,
glycol ethers (including ethylene glycol monobutyl ether (EGBE)), MEK, MBK, ethylbenzene, and
methanol. Additional HAP which may be emitted by some automobile and light-duty truck surface
coating operations are: ethylene glycol, hexane, formaldehyde, chromium compounds,
diisocyanates, manganese compounds, methyl methacrylate, methylene chloride, and nickel
compounds.
Of the seven HAP emitted in the largest quantities by this source category, all can cause
toxic effects following sufficient exposure. The potential toxic effects of these seven HAP include
effects to the central nervous system, such as fatigue, nausea, tremors, and loss of motor
coordination; adverse effects on the liver, kidneys, and blood; respiratory effects; and,
developmental effects. In addition, one of the seven predominant HAP, EGBE, is a possible
carcinogen, although information on this compound is not currently sufficient to allow us to quantify
its potency.
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In accordance with section 112(k), EPA developed a list of 33 HAP which present the
greatest threat to public health in the largest number of urban areas. None of the predominant
seven HAP is included on this list for the EPA's Urban Air Toxics Program, although three of the
other emitted HAP (formaldehyde, manganese compounds, and nickel compounds) appear on the
list. In November 1998, EPA published "A Multimedia Strategy for Priority Persistent,
Bioaccumulative, and Toxic (PBT) Pollutants." None of the predominant seven HAP emitted by
automobile and light-duty truck surface coating operations appears on the published list of
compounds referred to in the EPA's PBT strategy.
To estimate the potential baseline risks posed by the source category and the potential
impact of applicability cutoffs, EPA performed a "rough" risk assessment for 56 of the
approximately 60 facilities in the source category by using a model plant placed at the actual
location of each plant and simulating impacts using air emissions data from the 1999 EPA Toxics
Release Inventory (TRI). In addition to the seven predominant HAP, the following additional HAP
were included in this rough risk assessment because they were reported in TRI as being emitted by
facilities in the source category: ethylene glycol, hexane, formaldehyde, diisocyanates, manganese
compounds, nickel compounds and benzene. The benzene emissions and some of the nickel
emissions are from non-surface coating activities which are not part of the source category. Of the
HAP reported in TRI which are emitted from automobile and light-duty truck surface coating
operations, three (formaldehyde, nickel compounds, and EGBE) are carcinogens that, at present,
are not considered to have thresholds for cancer effects. Ethylene glycol monobutyl ether,
however, may be a threshold carcinogen, as suggested by some recent evidence from animal
studies, though the EPA, at present, considers it to be a non-threshold carcinogen without sufficient
information to quantify its cancer potency. Likewise, formaldehyde is a potential threshold
carcinogen, and EPA is currently revising the dose-response assessment for formaldehyde. Most
facilities in this source category emit some small quantity of formaldehyde. In the 1999 TRI,
however, only two facilities in this source category reported formaldehyde emissions. No other
facilities exceeded the TRI reporting threshold for formaldehyde in 1999.
The baseline cancer risk and subsequent cancer risk reductions were estimated to be
minimal for this source category. Of the three carcinogens included in the assessment, emission
reductions attributable to the proposed standards could be estimated for only EGBE. However,
since EGBE risks cannot currently be quantified, the cancer risk reductions associated with this
proposed rule are estimated by this rough assessment to be minimal. However, noncancer risks are
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projected to be significantly reduced by the proposed rule. (Details of this assessment are available
in the docket.)
6.2.1.2 Results of Rough Risk Assessments of Alternative Control Options Under CAA
Sections 112 (d)4 and 112(c)(9)
The results of the human health risk assessments described below are based on approaches
for quantifying exposure, risk, and cancer incidence that carry significant assumptions, uncertainties,
and limitations. For example, in conducting these types of analyses, there are typically many
uncertainties regarding dose-response functions, levels of exposure, exposed populations, air
quality modeling applications, emission levels, and control effectiveness. Because the estimates
derived from the various scoping approaches are necessarily rough, we are concerned that they not
convey a false sense of precision. Any point estimates of risk reduction or benefits generated by
these approaches should be considered as part of a range of potential estimates.
If this proposal is implemented at all automobile and light-duty truck surface coating
facilities, the number of people exposed to HI values equal to, or greater than, 1 was estimated to
be reduced from about 100 to about 10. The number of people exposed to HI values of 0.2 or
greater was predicted to decrease from about 3500 to about 1200. (Details of these analyses are
available in the docket.)
Based on the results of this rough assessment, if the §112(d)(4) approach is applied only to
threshold pollutants, EPA estimates that none of the facilities in this source category could obtain an
exemption from regulation, since all, or nearly all, facilities emit some amount of one or more non-
threshold pollutants. This application of the §112(d)(4) approach is estimated to produce minimal
potential cost savings. If formaldehyde and EGBE are determined to be threshold carcinogens,
these estimates could change.
The second scenario under the §112(d)(4) provision would apply to both threshold and
non-threshold pollutants. If this scenario is selected, EPA estimates, using a HI limit of 1 and
treating 10" 6 as a cancer risk threshold, that as many as 54 of the facilities in the source category
may be exempt from the proposed regulation. The EPA estimates in this case that the cost of the
rule would be about $9 million per year, resulting in an annual cost savings of about $145 million
per year (as compared to establishing a MACT standard for all plants in the industry). Using a HI
limit of 0.2 and treating 10'6 as a cancer risk threshold, EPA estimates that as many as 41 facilities
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may be exempt from the proposed regulation. The EPA estimates that the cost of the rule would be
about $66 million per year, resulting in an annual cost savings of about $88 million per year (as
compared to establishing a MACT standard for all plants in the industry).
The EPA does not expect the third scenario, which would allow emission point exemptions,
to be applicable for the automobile and light-duty truck surface coating source category because
mixtures of threshold and non-threshold pollutants are co-emitted, and the same emission controls
would apply to both.
The risk estimates from this rough assessment are based on typical facility configurations
(i.e., model plants) and, as such, they are subject to significant uncertainties, such that the actual
risks at any one facility could be significantly higher or lower. Therefore, while these risk estimates
assist in providing a broad picture of impacts across the source category, they should not be the
basis for an exemption from the requirements of the regulation. Rather, any such exemption should
be based on an estimate of the facility-specific risks which would require site-specific data and a
more refined analysis.
For either of the first two approaches described above, the actual number of facilities that
would qualify for an exemption would depend upon site-specific risk assessments and the specified
HI limit (see earlier discussion of HI limit).
If the §112(d)(4) approach were adopted, the requirements of the rule would not apply to
any source that demonstrates, based on a tiered analysis that includes EPA-approved modeling of
the affected source's emissions, that the anticipated HAP exposures do not exceed the specified HI
limit.
Based on the results of this rough assessment, if the §112(c)(9) approach is selected the
EPA estimates that the maximum potential of utilizing this approach would be the same as that of
applying the §112(d)(4) approach for threshold and non-threshold pollutants, though the actual
impact is likely to be less. For example, with a HI value limit of 1 and treating 10'6 as a cancer
risk threshold, as many as 54 of the facilities may be exempted under this approach. Alternatively,
with a HI limit of 0.2 and treating 10'6 as a cancer risk threshold, as many as 41 facilities may be
exempted under this approach.
If a §112(c)(9) approach were adopted, the requirements of the rule would not apply to
any source that demonstrates that it belongs in a subcategory which has been delisted under
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§112(c)(9). Facilities seeking to be included in the delisted subcategory would be responsible for
providing all data required to determine whether they are eligible for inclusion. Facilities that could
not demonstrate that they are eligible to be included in the low-risk subcategory would be subject
to MACT and possible future residual risk standards.
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Appendix A
Economic Model for Automobile and LOT Market
Under Imperfect Competition
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The proposed regulation will increase the cost of production for existing vehicle assembly
plants. The regulated facilities may alter their current levels of production or even close the facility
in response to the increased costs. These responses will in turn determine the impact of the
regulation on total market supply and ultimately on the equilibrium price and quantity. The
economic analysis described below employs standard concepts of microeconomics to model these
impacts.
A.I U.S. Demand for Domestic Vehicles
The Agency has modeled separate markets for eight domestic vehicle categories:
subcompacts, compacts, intermediate/standard, luxury, sports, pickups, vans, and other. Domestic
demand for each vehicle category i can be expressed by the following constant elasticity demand
function:
where p; is the average price of vehicle category i, • ;d is the own-price demand elasticity for vehicle
category i, and A; is a multiplicative demand parameter that calibrates the demand equation given
data on price and the demand elasticity to replicate the observed baseline year (1999) level of
domestic consumption of vehicles of class i.
Estimates of average retail prices and own-price elasticities by vehicle class are presented
in Table A-l. The average retail price for each of the eight vehicle classes is derived from the
Automotive New Market Data Book, as described previously in Section 2.4.3. The own-price
elasticity of demand for each vehicle class is taken from Goldberg (1995) who estimates them using
micro data on transaction prices and make/models from the Consumer Expenditure Survey and the
Automotive News Market Data Book. Note that these demand elasticity estimates are all greater
than one in absolute value but vary across vehicle classes in an intuitive manner. For example, the
demand for intermediate and standard automobiles is highly elastic, while that for sports and luxury
cars is the least price elastic.
A.2 U.S. Supply of Domestic Vehicles
A-l
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Table A-l. Retail Prices and Own-Price Elasticities of Demand by Vehicle Class
Vehicle Class Average Retail Price3 Elasticity1"
Subcompact $15,522 -3.286
Compact $16,487 -3.419
Intermediate $21,155 -4.179
Standard -4.712
Luxury $33,587 -1.912
Sports $25,797 -1.065
Pick-up $22,126 -3.526
SUV $27,694
Van $22,910 -4.363
Other -4.088
a Includes the MSRP and destination price reported by the Automotive News Market Data Book (Grain, 2000; p: 75).
Prices current as of April 2000 and were considered representative of 1999 prices.
b Goldberg, Pinelopi K. 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S.
Automobile Industry." Econometrica 63(4):891-951, Table II.
Given the capital in place, each facility is assumed to face an upward sloping curve for a
particular vehicle class. The Generalized Leontief profit function is used to characterize the facility
supply function under perfect competition. Under this assumption, the supply function for facility j
for producing vehicles of class i would take the form:
(A.2)
^ '
where p; is the average price for vehicle class i, and • y- and • y are model parameters. The
theoretical restrictions on the model parameters that ensure upward-sloping supply curves are • y- • •
0 and • ij < 0. Figure A-l illustrates the theoretical supply function represented by Eq. (A.2). As
shown, the upward-sloping supply curve is specified over a productive range with a lower bound of
A-2
-------
$
p*
M
q
Figure A-l. Facility-Level Marginal Cost Function
B
zero that corresponds with a shutdown price equal to and an upper bound given by the
production capacity of qM that is approximated by the supply parameter • y-. The curvature of the
supply function is determined by the • y parameter.
The • parameter is related to the facility's supply elasticity which can be expressed as:
Pi
(A3)
Taking the derivative of the facility supply function (equation A-2) with respect to price and
multiplying this expression by Pi/q^ results in the following expression for the supply elasticity:
A-3
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(A.4)
By rearranging terms, • can be expressed as follows:
ft (A.5)
Under perfect competition,3 EPA estimated the • parameter by substituting an assumed supply
elasticity for the vehicle class ('y), the baseline production level by facility] of vehicle class i (q;j),
and the average market price for the vehicle class (p;). EPA assumed that a facility's ability to
respond to small price changes depends on its current capacity utilization rate, as outlined in Table
A-2. The remaining supply function parameter, • y-, does not influence the facility's production
responsiveness to price changes as does the • parameter. Thus, the parameter • j is used to
calibrate the model so that each facility's supply equation replicates the baseline production data.
Table A-2. Supply Elasticity Assumptions
Capacity Utilization Rate (R) Supply Elasticity (•)
R>1 0.10
0.9
-------
where Q; is the total number of vehicles of class i available in the market, and P(Q;) is the average
price in this vehicle category. In the short-run, a facility owner will be willing to supply vehicles at a
markup over marginal cost as long as the market price is high enough to cover average variable
costs. If revenue falls below average variable costs, then the facility's best response is to shut
down production because total revenue does not cover total variable costs of production. In this
scenario, producers lose money on operations as well as capital. By shutting down, the facility
avoids additional losses from operations. The sufficient condition for production at facility j is non-
negative profits (• j):
• j = TRj - TCj • 0 (A. 7)
where TRj is the total revenue earned from the sale of all vehicles assembled at facility] and TCj is
the sum of the variable production costs (production and compliance) and total avoidable fixed
costs (annualized expenditure for compliance capital) incurred by facility j for all vehicles that it
produces. The underlying assumption is that if a facility produces multiple models, these models
share some fixed costs that cannot be separated. Thus the facility need not shut down if one
product line is unprofitable. It will only shut down if the aggregate profits from all models are
negative on balance.
To model each vehicle category as a concentrated market, we have used a Cournot model
in which facilities exercise some control over the wholesale price of the vehicle. In these
noncompetitive models, each supplier recognizes its influence over the market price and chooses a
level of output that maximizes its profits, given the output decisions of the others. Employing a
Cournot model assumes that suppliers do not cooperate. Instead, each supplier evaluates the effect
of its output choice on price and does the best it can given the output decision of its competitors.
Thus, given any output level chosen by other suppliers there will be a unique optimal output choice
for a particular supplier.
The basic oligopoly model we consider is the "Many Firm Cournot Equilibrium" described
in Varian (1993, page 290). As is the case in all imperfectly competitive models of profit-
maximizing behavior, each oligopolist chooses an output level where marginal revenue equals
marginal cost. In the Cournot model, marginal revenue is a fraction, Z^, of the market price: Z^ =
(1 + s; jA;), where s;,j = q^/Q;. If we optimize Eq. (A.7)with respect to c^ j we can derive the
following first-order condition:
A-5
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(A.8)
If facility j's market share of vehicle category i (Sy) is 1, the demand curve facing it is the market
demand curve. In that case, Eq. (A.8) reduces to the profit maximization condition facing a
monopolist where marginal revenue equals marginal cost, and the marginal revenue is only a
function of the demand elasticity. On the other extreme, if the producer is a very small part of a
large market, its market share is near zero, and Eq. (A.8) reduces to the profit maximization
condition under perfect competition: price equals marginal cost.
Using data on the approximated market price of vehicle by type (P(Q;)), total quantity
produced for the domestic market (Q;), the amount produced by each affected facility (q;j), and the
price elasticity of demand (•;) for vehicle class i, the baseline equilibrium can be established as
depicted in Figure A-2. For each of the affected facilities, the baseline automobile production
quantities are provided in Tables 2-11 and 2-12 of Section 2. Some facilities produce vehicles in
more than one market segment. In these cases, the Agency treated each market segment for a
facility as a separate product line thus, a facility may have multiple product lines for the purposes of
the economic impacts model.
MCo
MR
Qo
Figure A-2. Baseline Equilibrium
A-6
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A.4 With-Regulation Market EquUibrium
The production decision at assembly facility] is affected by the variable compliance costs,
c; j, which are expressed in dollars per vehicle.4 Each marginal cost equation is directly affected by
the regulatory control costs. Dropping subscripts henceforth for convenience, the profit maximizing
solution for each existing facility becomes:
(A.9)
Incorporating the regulatory control costs (c) will involve shifting the marginal cost curve
upward for each regulated facility by the per-unit variable compliance cost, as shown in Figure A-3.
The marginal cost of the affected facilities shifts upward, causing the market cost curve to shift
upward to MCj. At the new with-regulation equilibrium, the market price increases from P0 to Pj
and market output (as determined from the market demand curve, D^) declines from Q0 to Qj.
Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased production costs due to compliance, which causes
facility-specific production responses (i.e., output reduction). The cumulative effect of these
responses leads to an increase in the market price that all producers and consumers face. This
increase leads to further responses by all producers and consumers and, thus, new market prices.
The new with-regulation equilibrium is the result of a series of these iterations between producer
and consumer responses and market adjustments until a stable market price equilibrium is reached
where total market supply equals total market demand. A spreadsheet nonlinear solution algorithm
was used to compute the with-regulation equilibrium price and quantities in each market.
A.5 Impact on Foreign Trade
The variable compliance costs per vehicle were calculated given the annual production per facility and the variable cost
component of the total compliance cost estimate for each facility. These latter cost estimates were provided by the
engineering analysis and include annual operating and maintenance costs and monitoring and record keeping costs.
A-7
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MCr
Figure A-3. With-Regulation Equilibrium
The proposed coating regulation will only be binding on facilities that assemble vehicles in
the United States. The consequent change in relative prices of domestic versus foreign vehicles has
two impacts on foreign trade. Foreign imports become more attractive to U.S. consumers and
U.S. exports become less attractive to foreign consumers. The Agency has used available data to
estimate the magnitude of these impacts as described below.
A.5.1 U.S. Imports
The proposed regulation may lead to an increase in the price of domestic vehicles, which, in
turn, could potentially trigger an increase in demand by U.S. consumers for substitutes such as
unregulated, imported vehicles. To estimate this spillover effect, EPA assumed domestic and
foreign vehicles are imperfect substitutes that are differentiated by their country of origin (commonly
referred to as the Armington assumption). The conceptual approach for estimating spillover effects
using Armington elasticities is described in Gallaway, McDaniel, and Rivera (2000). From an
economy-wide perspective, a representative consumer maximizes his utility for "composite"
vehicles (V) by allocating expenditures between domestic (D) and imported vehicles (M), taking
A-8
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relative prices as given.5 The Armington specification assumes a constant elasticity of substitution
(CES) utility function of the form:
where • is the Armington elasticity of substitution between domestic and imported vehicles, and • •
and • are calibrated parameters of the demand function. Utility maximization subject to the budget
constraint leads to the following first order condition:
M/D = [(•/(!-• ))*(PD/PM)]" (A. 11)
Thus, the ratio between imported and domestic vehicles is a function of their relative prices and the
elasticity of substitution. Gallaway, McDaniel, and Rivera (2000) use monthly data from 1989
through 1997 to estimate Armington elasticities for several manufacturing industries. For SIC
3714, motor vehicle parts and accessories, they estimate a value of 2.07. Additional substitution
elasticity estimates for motor vehicles are reported in Ho and Jorgenson (1998) and range from
1.52 to 3.59. The Agency has used all three estimates to compute low and high end estimates of
the change in import-to-domestic vehicles ratio for a given change in the price of domestic cars.
A.5.2 U.S. Exports
Exports of U.S.-made vehicles can also fall if their own-price increases due to the
proposed regulation. While U.S. exports of passenger cars in this industry are only one-fourth the
level of imports, they still represent about 18 percent of domestic production in 1997 and are
growing (AAMA, 1998). Unfortunately, data were lacking connecting specific facilities to specific
markets. Thus, foreign demand for U.S.-made vehicles is modeled by one representative foreign
consumer using the following constant elasticity demand function:
qx = Bx[p]-* (A. 12)
where p is the average price of exported U.S. vehicles, «x is the export demand elasticity, and B,, is
a multiplicative demand parameter that calibrates the foreign demand equation, given data on price
and foreign demand elasticity to replicate the observed baseline year 1999 level of exports. Ho
Vehicle classes are aggregated in the foreign trade section because of data limitations.
A-9
-------
and Jorgenson (1998) report export demand elasticities for motor vehicles. These estimates range
from -0.9 to -1.55. These export demand elasticity estimates are used along with our estimates of
change in the average price of U.S. vehicles to forecast the corresponding change in quantity
demanded by foreign consumers.
A-10
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Appendix B
Estimating Social Costs Under Imperfect
Competition
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B.I Social Cost Effects Under Imperfect Competition6
The conceptual framework for evaluating social costs and distributive impacts in an
imperfectly competitive market model is illustrated in Figure B-l. The baseline equilibrium is given
by the price, P0, and the quantity, Q0. In a pure monopoly situation, the baseline equilibrium is
determined by the intersection of the marginal revenue curve (MR) and the MC curve. In imperfect
competition, such as in the Cournot model used in this analysis, the baseline equilibrium is
determined by the intersection of MC with some fraction of MR. Without the regulation, the total
benefits of consuming automobiles is given by the area under the demand curve up to Q0. This
equals the area filled by the letters ABCDEFGHU. The total variable cost to society of producing
Qo equals the area under the original MC function, given by U. Thus, the total social surplus to
society from the production and consumption of output level Q0 equals the total benefits minus the
total costs, or the area filled by the letters ABCDEFGH.
The total social surplus value can be divided into producer surplus and consumer surplus.
Producer surplus accrues to the suppliers of the product and reflects the value they receive in the
market for the Q0 units of output less what it costs to produce this amount. The market value of the
product is given by the area DEFGHU in Figure B-l. Since production costs U, producer surplus
is given by area DEFGH. Consumer surplus accrues to the consumers of the product and reflects
the value they place on consumption (the total benefits of consumption) less what they must pay on
the market. Consumer surplus is thereby given by the area ABC.
The with-regulation equilibrium is Pb Ch. Total benefits of consumption are ABDFI and
the total variable costs of production are FI, yielding a with-regulation social surplus of ABD.7
Area BD represents the new producer surplus and A is the new consumer surplus. The social cost
of the regulation equals the total change in social surplus caused by the regulation. Thus, the social
cost is represented by the area FGHEC in Figure B-l.
* D
The Agency has developed this conceptual approach in a previous economic analysis of regulations affecting the pharmaceutical
industry (EPA, 1996). For simplicity, this appendix assumes constant marginal costs. The marginal cost curves developed
for the economic model are upward sloping curves
Fixed control costs are ignored in this example but are included in the analysis.
B-l
-------
MC + Control Costs
MC
Q, Qn
Output
Figure B-l. Economic Welfare Changes with Regulation: Imperfect Competition
The distributive effects are estimated by separating the social cost into producer surplus and
consumer surplus losses. First, the change in producer surplus is given by
PS = B-F-(G+H+E)
(B.I)
Producers gain B from the increase in price, but lose F from the increase in production costs due to
regulatory control costs. Furthermore, the contraction of output leads to foregone baseline profits
ofG+H+E.
The change in consumer surplus is
CS = - (B + C)
(B.2)
This reflects the fact that consumer surplus shrinks from the without-regulation value of ABC to the
with-regulation value of A.
The social cost or total change in social surplus shown earlier can then be derived simply by
adding the changes in producer and consumer surplus together
B-2
-------
•SC = 'PS + 'CS = -(F+G + H + E + C) (B.3)
B.3 Comparison of Social Cost with Control Cost
It is important to compare this estimate of social costs to the initial estimate of baseline
control costs and explain the difference between the two numbers. The baseline control cost
estimate is given by the area FGH, which is simply the constant cost per unit times the baseline
output level. In the case of imperfect competition, the social cost estimate exceeds the baseline
control cost estimate by the area EC. In other words, the baseline control cost estimate understates
the social costs of the regulation. A comparison with the outcome under perfect competition helps
illustrate the relationship between control cost and total social cost.
Suppose that the MR curve in Figure B-l were the demand function for a competitive
market, rather than the marginal revenue function for a monopolistic producer. Similarly, let the
MC function be the aggregate supply function for all producers in the market. The market
equilibrium is still determined at the intersection of MC and MR, but given our revised interpretation
of MR as the competitive demand function, the without-regulation (competitive) market price, P0C,
equals MC and Q0 is now interpreted as the competitive level of product demand. In this type of
market structure, all social surplus goes to the consumer. This is because producers receive a price
that just covers their costs of production.
In the with-regulation perfectly competitive equilibrium, price would rise by the per-unit
control cost amount to Pjc. Now the social cost of the regulation is given entirely by the loss in
consumer surplus, area FG. As this is compared to the initial estimate of regulatory control costs,
FGH, the control cost estimate overstates the social cost of the regulation. The overstatement is
due to the fact that the baseline control cost estimates are calibrated to baseline output levels. With
regulation, output is projected at Qb so that control costs are given by area F. Area G represents a
monetary value from lost consumer utility due to the reduced consumption, also referred to as
deadweight loss (analogous to area C under the monopolistic competition scenario).
Social cost effects are larger with monopolistic market structures because the regulation
already exacerbates a social inefficiency (Baumol and Gates, 1988). The inefficiency relates to the
fact that the market produces too little output from a social welfare perspective. In the monopolistic
equilibrium, the marginal value society (consumers) places on the product, the market price,
exceeds the marginal cost to society (producers) of producing the product. Thus, social welfare
B-3
-------
would be improved by increasing the quantity of the good provided. However, the producer has
no incentive to do this because the marginal revenue effects of lowering the price and increasing
quantity demanded is lower than the marginal cost of the extra units. OMB explicitly mentions the
need to consider these market power-related welfare costs in evaluating regulations under
Executive Order 12866 (OMB, 1996).
B-4
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