ECONOMIC IMPACT AND REGULATORY FLEXIBILITY ANALYSIS
                       OF PROPOSED
            EFFLUENT GUIDELINES AND NESHAP
     FOR THE PULP, PAPER, AND PAPERBOARD INDUSTRY
                       FINAL REPORT
               Engineering and Analysis Division
               Office of Science and Technology
                       Office of Water
             U.S. Environmental Protection Agency
                    Washington, DC 20460
                            and
                 Emission Standards Division
          Office of Air Quality Planning and Standards
                 Office of Air and Radiation
             U.S. Environmental Protection Agency
              Research Triangle Park, NC 27711
                      November 1993
                    Recycled/Recyclable
                    Printed with Soy/Canola Ink on paperthat
                    contains at least 50% recycled fiber

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                             ACKNOWLEDGEMENTS
       This report was prepared under the direction and review of the Economic and Statistical
Analysis Branch of the Office of Water, and the Standards Development Branch of the Office of
Air and Radiation. Economic analysis support was provided by Eastern Research Group, Inc.
and Research Triangle Institute under Contract Numbers 68-C8-0084, 68-C8-0302, and 68-D1-
0142 with special thanks to Maureen F. Kaplan, Tayler H. Bingham, and Tyler Fox.

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                                 TABLE OF CONTENTS
ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY	ES-1

      ES.l   Background  	ES-1
      ES.2   Industry Profile  	ES-2
      ES.3   Methodology  	ES-2
      ES.4   Regulatory Alternatives and Compliance Costs  ...	ES-4
      ES.5   Impacts	ES-10
      ES.6   Regulatory Flexibility Analysis	ES-11


SECTION ONE     INTRODUCTION  	1-1

      1.1     Scope and Purpose	1-1
      1.2     Integrated Rulemaking Effort by the Office of Air and the
             Office of'Water	1-2
      1.3     Data Sources	1-3
      1.4     Organization  of the Rest of the Report  	1-4


SECTION TWO     INDUSTRY PROFILE	  	2-1

    ,  2.1     Overview of Industry Processes	2-2

             2.1.1. Fiber Sources and Preparation	• • • •	2-2
             2.1.2  Pulping and Bleaching	2-4
             2.1.3  Papermaking Operations	2-11
             2.1.4  Pollution and Pollution Control	2-14
             2.1.5  Related Chemical Supplier Industries  	2-17

      2.2     Environmental Protection Issues  	2-18

             2.2.1  Recycling		. .		...	2-18
             2.2.2  Chlorine-Free Products  . . . ;	 .,	2-27
             2.2.3  Pollution Prevention  	2-29
             2.2.4  Air Pollution Issues	2-33

      2.3     Products and  Markets	,	2-33

             2.3.1  Market Pulp .	2-34
             2.3.2  Paper Products			2-38
             2.3.3  Paperboard Products  	'.	2-47
             2.3.4  Product Prices  	2-56

                                          -i-

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                             TABLE OF CONTENTS (cqnt)
      2.4
                                                                              Page
Facility-Level Information  	2-56
             2.4.1  Geographic Distribution of Facilities	2-56
             2.4.2  Facility Size	2-63
             2.43  Facility Age	2-75
             2.4.4  Capital Investment	2-78
             2.45  Level of Integration	2-82
             2.4.6  Length of Ownership	2-84

      2.5     Subcategories	2-86

      2.6     Company-Level Information	,	2-86

             2.6.1  Number of Companies	2-86
             2.6.2  Number of Facilities by Company  	2-88
             2.63'  Types of Company Ownership	2-88
             2.6.4  Concentration Ratios	2-92
             2.65  Employment	2-96
             2.6.6  Observations  	2-98

      2.7     Financial Patterns for the Industry	2-98

      2.8     International Competitiveness of the Pulp and Paper Industry	2-101

             2.8.1  Foreign Trade Statistics	2-103
             2.8.2  Global  Competitiveness of U.S. Paper Industry	2-104
             2.83  Environmental Regulations and Considerations .............  2-105
             2.8.4  Environmental Regulations Affecting Foreign Competitors  ....  2-107

      2.9     References	2-113


SECTION THREE  ECONOMIC IMPACT AND REGULATORY FLEXIBILITY
                   ANALYSIS METHODOLOGY	 3-1

      3.1     Compliance Cost Model	3-2

             3.1.1  Input Data Sources	3-4
             3.1.2  Financial Assumptions	3-9
             3.13  Sample Cost Annualizatiqn Spreadsheet	3-15
             3.1.4  Cost Annualization Model and Total Cost Assessment	 3-18
                                         -11-

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                             TABLE OF CONTENTS (cent)
      3.2
 Financial Impact Analysis Methodology	3-19
             3.2.1  Closure Model	3-20
             3.2.2  Ratio Analysis 	3.43
             3.2.3  Associated Impacts  	3^56

      3.3    Market Impact Analysis Methodology  	3-59

             3.3.1  Market Impact Model Concepts	3.59
             3.3.2  Operationalizing the Market Impact Model	3-69
             3.3.3  Determining Market Equilibria  	3-84
             3.3.4  Postregulatory Impact Estimates  	3-85

      3.4    Relationship Between Financial and Market Impact
             Analysis Methodologies  	3_86

      3.5    Regulatory Flexibility Analysis Methodology	3-87

             3.5.1  Definition of Small Entity 	3-87
             3.5.2  Alternate Definitions of Small Entity	3-87
             3.53  Financial Impact Analysis of Small Entities	3-89
             3.5.4  Market Impact Analysis of Small Entities  	3-96

      3.6    References	,	3-122


SECTION FOUR    REGULATORY ALTERNATIVES AND COMPLIANCE COSTS .. 4-1

      4.1     Compliance Options and Regulatory Alternatives  	4-1

             4.1.1  Description of Compliance Components	4.3
             4.1.2  Integrated Regulatory Alternatives	...	4.9

      4.2     Compliance Costs	4,9

             4.2 J  Industry Compliance Costs	,	4-15
             4.2.2  Approximations of Social Cost	4-21
     4.3
References	4.26
                                        -in-

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                            TABLE OF CONTENTS (cont.)
                                                                             bge
SECTION FIVE
      ECONOMIC IMPACTS	5-1
      5.1
Financial Impact Analysis Results  	5-1
             5.1.1  Closure Analysis 	5-1
             5.1.2  Additional Economic Impacts  	5-3

      5.2     Market Model Impact Results  	5-16

             5.2.1  Changes in Facility Costs	5-18
             5.2.2  Market Price and Quantity Impacts	5-18
             5.23  Facility and Product Line Closures	,	5-40
             5.2.4  Employment Impacts	5-40
             5.2.5  Consumer and Producer Surplus Changes  	5-44

      5.3     Relationship Between Financial Model and
             Market Model Results	5-51

      5.4     References	5-51


SECTION SIX      SMALL BUSINESS  IMPACTS	6-1

      6.1     Financial Impact Analysis Results   	6-1

             6.1.1  Impacts from BPT Costs 	6-2
             6.1.2  Impacts from BAT/PSES Costs  .		6-2
             6.1.3  Impacts from Regulatory Alternative Costs 	6-10

      6.2     Market Impact Analysis Results	6-24

             6.2.1  Facility-Level Results	6-24
             6.2.2  Company-Level Results 	6-27

      6.3     Summary and Conclusions  	6-39


APPENDIX A       MARKET IMPACT  METHODOLOGY AND MODEL	  A-l

      A.1    Introduction and Overview of Approach  	  A-l
                                         -IV-

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                       TABLE OF CONTENTS (cont)
A.2
Features of the Pulp and Paper Industry	  A-4
       A.2.1 Pulp Production Processes	  A-4
       A.2.2 Paper Production Processes	  A-10
       A.2.3 Producers	  A-ll
       A.2.4 Products and Markets  	  A-12
       A.2.5 Foreign Trade  	  A-20

A.3    Modeling Market Adjustments	  A-28

       A.3.1 Facility-Level Effects  	  A-29
       A.3.2 Market-Level Effects	  A-35

       A.3.3 Facility-Level Response to Control
             Costs and New Market Prices  	  A-40

A.4    Operationalizing the Model  	  A-44

       A.4.1 Model Dimensions	  A-45
       A.4.2 Domestic Supply of Pulp and Paper
             Products	  A-54
       A.4.3 Domestic Demand for Pulp and Paper
             Products	  A-84
       A.4.4 Foreign Sector	  A-94
       A.4.5 Calibration of the Economic Model	  A-105
       A.4.6 Model Baseline Values  	A-113
       A.4.7 Market Equilibria   	A-124
       A.4.8 Post-regulatory Impact Estimates	A-132
A.5
References	A-144
                                     -v-

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LIST OF TABLES

Table ES-1
Table ES-2
Table ES-3

Table 2-1

Table 2-2

Table 2-3

Table 2-4

Table 2-5

Table 2-6
Table 2-7
Table 2-8

Table 2-9

Table 2-10

Table 2-11

Table 2-12
Table 2-13
Table 2-14


Subcategories and Regulatory Coverage 	 	
Description of Regulatory Alternatives 	
Summary of Pollution Control Costs Associated with
Regulatory Alternatives 	 	 	
New U.S. Mills Involved in Recycling Start-ups or Under
Construction— 1992 	 	 	
1990 National Census, Product Category Cross-References,
U.S. Pulp, Paper, and Paperboard Industry— Pulp and Molded Pulp
Pulp Shipment Tonnage Statistics from EPA Survey, Current
Industrial Reports, and AFPA 	 	 	
Value of Pulp Shipments from EPA Survey, Current
Industrial Reports, and AFPA 	
Value of Pulp Exports from EPA Survey, Current
Industrial Reports, and AFPA 	 	 	 	 	
Pulp Import Tonnage Statistics from AFPA 	
Value of Pulp Imports from AFPA 	 	
1990 National Census, Product Category Cross-References,
U.S. Pulp, Paper, and Paperboard Industry— Paper 	
Paper Shipment Tonnage from EPA Survey, Current
Industrial Reports, and AFPA 	 	 	 	
Value of Paper Shipments from EPA Survey, Current
Industrial Reports, and AFPA 	 	
Value of Paper Exports from EPA Survey, Current
Industrial Reports, and AFPA 	
Paper Import Tonnage Statistics from AFPA 	 	
Value of Paper Imports from AFPA 	 	
1990 National Census, Product Category Cross-References,
U.S. Pulp, Paper, and Paperboard Industry — Paperboard 	 ......
Page
. . , ES-5
. . . ES-6

. . . ES-9

2-23

. . . 2-35

. . . 2-36

2-37

. , 2-39
, , 2-40
2-41

, , , 2-42

2-45

2-46

... 2-48
. . , 2-49
	 2-50

, . 2-51

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                                LIST OF TABLES (cent)
                                                                               Page
Table 2-15    Paperboard Shipment Tonnage Statistics from EPA Survey, Current
              Industrial Reports, and AFPA	2-53

Table 2-16    Value of Paperboard Shipments from EPA Survey, Current
              Industrial Reports, and AFPA	2-54

Table 2-17    Value of Paperboard Exports from EPA Survey, Current
              Industrial Reports, and AFPA	2-55

Table 2-18    Paperboard Import Tonnage Statistics from AFPA 	2-57

Table 2-19    Value of Paperboard Imports from AFPA	2-58

Table 2-20    Number of Mills by State	2-61

Table 2-21    Number of Mills by EPA Region  	2-64

Table 2-22    Number of Mills by EPA Region, State, and Independent Status	2-66

Table 2-23    Facility Assets	'.... i'...............".	2-67

Table 2-24    Pulp, Paper, and Paperboard Value of Shipments,
              1985, 1988, and 1989	...........	2-69

Table 2-25    Number of Employees, 1989 Data	 .	2-72

Table 2-26    1989 Capital Investments Before and After Depreciation,
              EPA Survey Data	;		2-80

Table 2-27    Expenditures on New Plant and Equipment,  1980-1990  ...'.,	2-81

Table 2-28    Level of Production Integration at U.S. Pulp and Paper Mills  	. 2-83

Table 2-29    Captive Mills, 1985, 1988, and 1989  /". . . .	.......'..	2-85

Table 2-30    Subcategories and Regulatory Coverage ...'.....	 2-87

Table 2-31    List of Business Entities in Survey  . ..,	2-89

Table 2-32    Number of Mills Owned by Each Business Entity	2-91,

Table 2-33    Concentration Ratios for Market Pulp	2-93
                                         -VH-

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                                 LIST OF TABLES (cont)

                                                                                 Page


Table 2-34    Concentration Ratios for Paper  	..	2-94

Table 2-35    Concentration Ratios for Paperboard	2-95

Table 2-36    Baseline Facility-Level Ratio Analysis, All Mills	2-100

Table 2-37    Baseline Business Entity-Level Ratio Analysis, All Companies	2-102

Table 2-38    Jurisdictions Regulating AOX as a Wastewater Pollutant	2-110

Table 3-1     Sample Spreadsheet for Annualizing Costs	3-5

Table 3-2     Inflation Rate, 1981-1991	3-7

Table 3-3     State Corporate Income Tax Rates	3-8

Table 3-4     Depreciation Methods 	3-11

Table 3-5     Spreadsheet for Annualizing Costs Using Section 169 Provision	3-12

Table 3-6     Calculation of MACRS Depreciation Rates	3-14

Table 3-7     Spreadsheet for Annualizing Costs with Interest Payments	3-16

Table 3-8     Summary of Techniques for Determining Salvage Value  	3-28

Table 3-9     Summary of Techniques for Determining Forecasted Earnings	3-35

Table 3-10    Components Used in the Closure Analysis	3-37

Table 3-11    Financial Ratios Included in the Paper, Pulp, and Paperboard
              Economic Impact Analysis  	3-48

Table 3-12    Components Needed for Financial Ratios, Facility-Level Analysis 	3-51

Table 3-13    Components Needed for Financial Ratios, Business-Entity
              Level Analysis	 3-52

Table 3-14    Baseline Facility-Level Ratio Analysis, All Mills	3-54

Table 3-15    Baseline Business Entity-Level Ratio Analysis, All Companies	3-55

Table 3-16    RIMS II Multipliers for the Pulp, Paper, and Paperboard Industries  . . . 3-58

                                          -viii-

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                                 LIST OF TABLES (cont.)
Table 3-17

Table 3-18

Table 3-19


Table 3-20

Table 3-21


Table 3-22


Table 3-23

Table 3-24


Table 3-25

Table 3-26


Table 3-27


Table 3-28

Table 3-29

Table 3-30


Table 3-31

Table 3-32

Table 3-33

Table 3-34
Pulp, Paper, and Paperboard Products	3-74

Pulp Products, Product Codes, and Process Codes	3-78

Counts of Independent and Multi-Facility Mills by
Regulatory Flexibility Category—Facility Definition	3-90

Regulatory Flexibility Categories—Facility Definition	3-91

Baseline Facility-Level Ratio Analysis
Regulatory Flexibility Categories—Facility Definition	3-92

Counts of Independent and Multi-Facility Mills by
Regulatory Flexibility Category—Business Definition	3-94

Regulatory Flexibility Categories—Business Definition	3-95

Baseline Business Entity-Level Ratio Analysis
Regulatory Flexibility Categories—Business Definition	3-97

Independent and Multifacility Mills by Size:   1989 Baseline Values ... 3-100

Employment of Independent and MultiFacility Mills by Size:
1989 Baseline  Values	3-101

Legal Form of Organization of Firms in the Pulp and Paper
Industry: 1987	3-105

Average Size of Facility by Firm Size Category:  1989 	3-107

Distribution of Firms by Number of Facilities Owned: 1989 	3-107
SIC Listings for Firms Owning Pulp and Paper Manufacturing
Facilities    	
3-109
Key Measures of Firm Profitability	3-114

Upper Quartile Benchmark Ratios	3-115

Median Benchmark Ratios	3-115

Lower Quartile Benchmark Ratios	3-115
                                           -IX-

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                                LIST OF TABLES (cont.)
Table 3-35    Percentage of Firms Below Industry Benchmark Ratios in Baseline:
              Return on Sales 	3-117

Table 3-36    Percentage of Firms Below Industry Benchmark Ratios in Baseline:
              Return on Assets	3-117

Table 3-37    Percentage of Firms Below Industry Benchmark Ratios in Baseline:
              Return on Equity	3-118

Table 3-38    Baseline Bankruptcy Prediction by Firm Size	3-121

Table 4-1      Subcategories and Regulatory Coverage	4-2

Table 4-2      Air Control Options	4-6

Table 4-3      Process Change Options for the Dissolving Kraft Subcategory	4-7

Table 4-4      Process Change Options for the Bleached Papergrade Kraft and
              Soda Subcategory	4-8

Table 4-5      Process Change Options for the Dissolving Sulfite Subcategory	4-10

Table 4-6      Process Change Options for the Papergrade Sulfite Subcategories	4-11

Table 4-7      Description  of Regulatory Alternatives	4-12

Table 4-8      Summary of BPT Costs  	4-16

Table 4-9      Summary.of Costs  by Subcategory:  Dissolving Kraft  	4-18

Table 4-10    Summary of Costs  by Subcategory:  Dissolving Sulfite 	4-18

Table 4-11    Summary of Costs  by Subcategory:  Bleached Papergrade Kraft	4-19

Table 4-12    Summary of Costs  by Subcategory:  Papergrade Sulfite 	4-19

Table 4-13    Summary of Costs  for Three Subcategories: Unbleached Kraft,
              SemichemicaJ, and Nonwood Chemical	4-20

Table 4-14    Summary of Pollution Control  Costs Associated with Regulatory
              Alternatives	4-22
                                           -x-

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                                 LIST OF TABLES (cont)
Table 4-15    Process Change and BPT Costs as a Percent of Regulatory
              Alternatives 	4-23

Table 4-16    Annual Social Cost Estimates:  Market Model	4-25

Table 4-17    Annual Social Cost Estimates:  Engineering Cost	4-27

Table 5-1     Impacts Associated with BPT Costs	5-5

Table 5-2     Impacts Associated with BAT/PSES Costs: Dissolving Sulfite	5-6

Table 5-3     Impacts Associated with BAT/PSES Costs: Papergrade Kraft
              and Soda   	5-7

Table 5-4     Impacts Associated with BAT/PSES Costs: Papergrade Sulfite  	5-9

Table 5-5     Impacts Associated with Integrated Alternative Costs  	5-10

Table 5-6     Total Output Impacts of Loss of Shipments in Pulp, Paper, and
              Paperboard Industry Based on Closures from Alternative 26	5-12

Table 5-7     Loss in Federal and State Revenues from Regulatory Alternatives	5-14

Table 5-8     Facility-Level Financial Ratio Analysis: All Mills  	5-15

Table 5-9     Company-Level Financial  Ratio Analysis: All Companies	  5-17

Table 5-10    Production-Weighted Average Pulp Input Variable
              Cost Increase	5-19

Table 5-11    Nationwide Total Pre-Tax Annualized Capital
              Cost Increase	5-20

Table 5-12    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 3	5-22

Table 5-13    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 16	5-23

Table 5-14    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 23	5-24
                                           -XI-

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                                 LIST OF TABLES (cont)
Table 5-15    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 24	5-25

Table 5-16    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 25	5-26

Table 5-17    Price and Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 26	5-27
                       I
Table 5-18    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 3	5-28

Table 5-19    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 16	5-29

Table 5-20    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 23	5-30

Table 5-21    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 24	5-31

Table 5-22    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 25	5-32

Table 5-23    Foreign Trade Value Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 26	5-33

Table 5-24    Foreign Trade Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 3	5-34

Table 5-25    Foreign Trade Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 16	5-35

Table 5-26    Foreign Trade Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 23	5-36

Table 5-27    Foreign Trade Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 24	5-37

Table 5-28    Foreign Trade Quantity Adjustments (1989):  Selected
              Product Categories, Regulatory Alternative 25	5-38
                                           -Xll-

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                                LIST OF TABLES (cont.)
                                                                                Page
Table 5-29   Foreign Trade Quantity Adjustments (1989): Selected
             Product Categories, Regulatory Alternative 26	5-39

Table 5-30   Estimated Facility and Product Line Closures (1989)	5-41

Table 5-31   Employment Impacts: Potential Job Losses (1989)  	5-42

Table 5-32   Employment Impacts: Potential Job Creation	5-43

Table 5-33   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 3	5-45

Table 5-34   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 16	5-46

Table 5-35   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 23 	5-47

Table 5-36   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 24	5-48

Table 5-37   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 25 	5-49

Table 5-38   Welfare Impacts: Consumer and Producer Surplus
             Changes, Regulatory Alternative 26	5-50

Table 6-1     Regulatory Flexibility Analysis, BPT Costs—
             Facility-Level 1989 Data	6-3

Table 6-2     Regulatory Flexibility Analysis, BPT Costs—
             Company-Level 1989 Data	6-4

Table 6-3     Regulatory Flexibility Analysis, BAT/PSES Process Change
             Costs: Dissolving Sulfite, Facility-Level 1989 Data  	6-6

Table 6-4     Regulatory Flexibility Analysis, BAT/PSES Process Change
             Costs: Dissolving Sulfite, Company-Level 1989 Data	6-7

Table 6-5     Regulatory Flexibility Analysis, BAT/PSES Process Change
             Costs: Papergrade Kraft and Soda, Facility-Level 1989 Data	6-8
                                          -XIll-

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                                 LIST OF TABLES (cont)
Table 6-6     Regulatory Flexibility Analysis, BAT/PSES Process Change
              Costs:  Papergrade Kraft and Soda, Company-Level 1989 Data	6-9

Table 6-7     Regulatory Flexibility Analysis, BAT/PSES Process Change
              Costs:  Papergrade Sulfite, Facility-Level 1989 Data	6-11

Table 6-8     Regulatory Flexibility Analysis, BAT/PSES Process Change
              Costs:  Papergrade Sulfite, Company-Level 1989 Data	6-12

Table 6-9     Regulatory Flexibility Analysis, Integrated Alternatives,
              Facility-Level 1989 Data	6-13

Table 6-10    Regulatory Flexibility Analysis, Integrated Alternatives,
              Company-Level 1989 Data	6-14

Table 6-11    Facility-Level Financial Ratio Analysis, All Mills	6-16

Table 6-12    Facility-Level Financial Ratio Analysis, Very Small Mills	6-17

Table 6-13    Facility-Level Financial Ratio Analysis, Small Mills	6-18

Table 6-14    Facility-Level Financial Ratio Analysis, Large Mills	6-19

Table 6-15    Company-Level Financial Ratio Analysis, All Companies	6-20

Table 6-16    Company-Level Financial Ratio Analysis, Very Small Companies  	6-21

Table 6-17    Company-Level Financial Ratio Analysis, Small Companies	6-22

Table 6-18    Company-Level Financial Ratio Analysis, Large Companies	6-23

Table 6-19    Closures of Independent and Multifacility Mills by Size:
              Values with Regulatory Alternative 26	6-25

Table 6-20    Changes in Employment of Independent and Multifacility
              Mills by Size: Values with Regulatory Alternative 26  	6-26

Table 6-21    Changes in Facility-Level Revenues, Costs, and EBIDT by Size:
              Values with Regulatory Alternative 26	6-28

Table 6-22    Ratio of Facility-Level Annual Compliance Costs to Total Revenues,
              Total Costs, and EBIDT by Size:  Values with Regulatory
              Alternative 26	6-29

                                           -xiv-

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                                 LIST OF TABLES (cont)
Table 6-23    Facility Closures by Firm Size Category: Regulatory
              Alternative 26	6-30

Table 6-24    Change in Employment by Firm Size Category:  Regulatory
              Alternative 26	6-32

Table 6-25    Percentage of Firms Below Industry Benchmark Ratios in Baseline
              and with Regulation: Return on Sales, Regulatory Alternative 26	6-33

Table 6-26    Percentage of Firms Below Industry Benchmark Ratios in Baseline
              and with Regulation: Return on Assets, Regulatory
              Alternative 26	6-34

Table 6-27    Percentage of Firms Below Industry Benchmark Ratios in Baseline
              and with Regulation: Return on Equity, Regulatory
              Alternative 26	6-35

Table 6-28    Summary Statistics for Key Measures of Profitability in Baseline
              and with Regulation by Firm Size Category:  Regulatory
              Alternative 26	6-37

Table 6-29    With-Regulation Bankruptcy Prediction by Firm Size: Regulatory
              Alternative 26	6-38

Table A-l     U.S. Production of Pulp: 1981-1989	  A-13

Table A-2     U.S. Production of Paper Products:  1981-1989	  A-17

Table A-3     U.S. Production of Paperboard  Products: 1981-1989	  A-19

Table A-4     Foreign Trade of Market Pulp:  1981-1989	  A-

Table A-5     Foreign Trade of Paper Products: 1981-1989	  A-23

Table A-6     Foreign Trade of Paperboard Products:  1981-1989 	  A-26

Table A-7     Pulp, Paper, and Paperboard Products	  A-48

Table A-8     Pulp Products, Product Codes, and Process Codes	  A-52

Table A-9     Cost-Shares of Variable Production Factors for Pulp, Paper,
              and Paperboard Products	  A-59
                                           -xv-

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                                LIST OF TABLES (cont)
                                                                                Page
Table A-10   Cost-Share Weighted Index of Variable Production Costs
             by Product Region and Year	  A-60

Table A-ll   Regression Analysis of Supply Function Parameters	  A-63

Table A-12   Product-Specific Beta Coefficients and Supply Elasticities 	  A-68

Table A-13   Domestic Demand Elasticities—Paper and Paperboard Products	  A-95

Table A-14   Foreign Trade Elasticities—Pulp and Paper Products	 A-103

Table A-15   Foreign Trade Elasticities Used in Economic Model  	A-106

Table A-16   Pulp and Paper Product Markets:  Baseline Values, 1989	A-114

Table A-17   Pulp and Paper Product Foreign Trade: Baseline Values, 1989	A-118

Table A-18   Operating Facilities, Product Lines, and Output:
             Baseline Values, 1989	 A-122

Table A-19   Facility-Level Revenues and Costs:  Baseline Values,  1989	A-123

Table A-20   Facility-Level Employment: Baseline Values, 1989  	A-125

Table A-21   Pulp and Paper Model  Summary  	.	A-126

Table AA-1   National Census Process Code Definitions	A-151
                                                                         »
Table AA-2   Product Category Cross-References:  U.S. Pulp, Paper, and
             Paperboard Industry	A-152
                                         -xvi-

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                                   LIST OF FIGURES

                                                                                Page

Figure 2-1     Chemical Pulping and Bleaching Operations  	2-6

Figure 2-2     Management of Municipal Solid Waste (MSW) in U.S.,
              1985 and 1990	2-20

Figure 2-3     Overall Recovery Rates of Some Municipal Solid Waste Components .. 2-21

Figure 2-4     Current and Potential Recovery Tonnage of Different Categories
              of Waste Paper	 2-25

Figure 2-5     Pollution Prevention and Control Measures	2-30

Figure 2-6     Laspeyres Price Indices for Pulp, Paper, and Paperboard	2-59

Figure 2-7     Pulp, Paper, and Paperboard Mills by State	2-60

Figure 2-8     Distribution of Mills by State	2-62

Figure 2-9     Distribution of Mills by EPA Region	2-65

Figure 2-10    Histogram of Total Value of Shipments, 1989			2-70

Figure 2-11    Histogram of Employment by Facility	 2-74

Figure 2-12    Histogram of Facility Age	2-76

Figure 2-13    Histogram of Age of Pulp and Paper Operations	2-77

Figure 2-14    Histogram of Expansion and Renovation Years	 2-79

Figure 2-15    Histogram of Employment by Company	2-97

Figure 3-1     Overview of Compliance Cost Methodology	3-3

Figure 3-2     Overview of Financial Model Methodology 	3-21

Figure 3-3     Overview of Closure Analysis Methodology 	, 3-23

Figure 3-4     Forecasting Methods  	3-33

Figure 3-5a    Closure Analysis Model—Inputs and Salvage Value
              Using Hypothetical Data	3-38
                                         -xvn-

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                                LIST OF FIGURES (cont)

Figure 3-5b    Forecasted Earnings and Closure Score
              Using Hypothetical Data  	3-39

Figure 3-6     Facility Cost Curves	3-61

Figure 3-7     Effect of Compliance Costs on Facility Supply Function	3-62

Figure 3-8     Effect of Compliance Costs on Derived Demand for
              Market Pulp at Regulated Facility  	3-64

Figure 3-9     Market Equilibria With and Without Compliance Costs ....-.'	3-65

Figure 3-10    Market Adjustments for Market Pulp, Paper, and
              Paperboard Products 	3-67

Figure 3-11    Movement Along the Product Supply Function	3-70

Figure 3-12    Interactions Between Commodities and Producers	3-72

Figure 3-13    Chain of Ownership	3-104

Figure 3-14    Total Receipts from Business Activities Other Than Pulp and
              Paper Manufacturing	3-110

Figure A-l    Paper production process	 A-5

Figure A-2    U.S. quantities shipped of pulp, paper, and.paperboard products:
              1981-1989   	  A-14

Figure A-3    U.S. value of shipments of pulp, paper, and paperboard products:
              1981-1989	1		  A-15

Figure A-4    Price per ton for U.S. pulp, paper, and paperboard products:
              1981-1989   	  A-16

Figure A-5    U.S. foreign trade of market pulp:  1981-1989 	  A-22

Figure A-6    U.S. foreign trade of paper products: 1981-1989  	  A-25

Figure A-7    U.S. foreign trade of paperboard products: 1981-1989	  A-27

Figure A-8    Product supply function at facility	  A-30

Figure A-9    Effect of compliance costs on product supply function at facility  	  A-33
                                         -xvm-

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                               LIST OF FIGURES (cont)

Figure A-10  Effect of compliance costs on derived demand for market pulp at
             regulated.facility	  A-34

Figure A-ll  Market equilibria with and without compliance costs	  A-36

Figure A-12  Market adjustments for market pulp, paper and paperboard products  .  A-38

Figure A-13  Market equilibria with and without compliance costs: cost savings
             attributed to regulation	  A-39

Figure A-14  Movement along the product supply function	  A-42

Figure A-15  Shift downward in the product supply function	  A-43

Figure A-16  Interactions between commodities and producers	  A-46

Figure A-17  Econometrically estimated supply function at facility	  A-70

Figure A-18  Comparison of total variable cost measures  	  A-74

Figure A-19  Production Revenue	  A-82

Figure A-20  Total Variable Costs	  A-83

Figure A-21  Total Revenue	  A-85

Figure A-22  Total Costs	  A-86

Figure A-23  Change in consumer surplus with regulation	A-134

Figure A-24  Change in producer surplus with regulation	A-135

Figure A-25  Change in economic welfare with regulation	A-136

Figure A-26  Variable post-compliance costs	A-140

Figure A-27  Production cost changes due to regulation 	A-142
                                          -XIX-

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                              EXECUTIVE SUMMARY
ES.1   BACKGROUND

       The proposed rulemaking for the pulp, paper, and paperboard industry includes
requirements for both air and water pollution control. A consent decree with the Environmental
Defense Fund and the National Wildlife Federation requires the Agency to propose effluent
regulations for diorin by October 1993. The Clean Air Act Amendments of 1990 require the
Agency to set maximum achievable control technology (MACT) standards for the pulp, paper,
and paperboard industry by 1997.  The Agency integrated the water and air rulemaking efforts
for several reasons:
              Pollution prevention approaches that reduce the formation of pollutants can be
              applied.
              The possibility of cross-media pollutant transfers is reduced.
              The Agency can consider controls that achieve the most total pollutant reduction
              for the least cost.
Industry benefits from the integrated rulemaking via cost savings in compliance planning by
knowing the requirements for all rules at the beginning of the planning effort. Industry also can
select the best combination of controls to meet all rules, thus potentially reducing capital
equipment costs.

       The control technologies considered by the Agency emphasize pollution prevention. They
include process changes that reduce the formation of pollutants and control technologies to
remove pollutants before their release to air or water.  For example, a process change that
prevents chloroform formation might also prevent or minimize the formation of dioxin and
chlorinated organics.  The same  process change, however, could affect the amount and type of
volatile contaminants sent to the air pollution control equipment. The engineering analysis
evaluates the interactions among process  changes, the amount and type of contaminants sent to
                                         ES-1

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water and air pollution control treatment, and the final releases. This systems analysis evaluates
the many interactions of pulping and papermaking operations.
ES.2  INDUSTRY PROFILE

       Where possible, the Agency made use of publicly available data.  Facility- and company-
specific data not available through public sources were collected by the 1990 National Census of
Pulp, Paper, and Paperboard Manufacturing Facilities.  There are approximately 565 facilities in 42
states and 200 companies in the industry. In 1989, the industry shipped about 12 million tons of
pulp, 38 million tons of paper, and 37 million tons of paperboard for a combined value of $59
billion.  Nearly $6 billion of these shipments were exports.  About 220,000 people are employed
in the manufacturing of pulp, paper, and paperboard.

       The industry is cyclical, with a recent low point in 1985 and peak years in 1988 and 1989.
It is a capital-intensive industry. In 1989, the industry invested about $8  billion, or $47,000 per
employee in new plants and equipment.  About 14 percent of these expenditures were for
environmental protection. The U.S. industry holds a dominant position in the global
marketplace. In 1991, the U.S. produced 30 percent  of the world's paper and paperboard and 35
percent of the world's wood pulp. U.S. production levels exceeded the total pulp and paper
output of the next four largest pulp- and paper-producing nations combined—Japan, Canada,
Germany, and China.
ES3   METHODOLOGY
       The cost of incremental pollution control can be expressed in several different ways.  One
way is to estimate what a business would actually pay to purchase, install, and operate new
pollution control equipment. The components considered in the calculation include the capital
investment, annual cost of operation and maintenance, annual general and administrative cost,
cost of money, and tax savings through depreciation and reduced taxes because of higher costs.
This cost estimate is called the industry compliance cost or the private cost of the regulation.

                                          ES-2

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The social cost of the regulation uses microeconomic concepts to model the changes in aggregate
economic welfare by measuring the changes in consumer and producer surpluses. The social cost
includes consideration of the value society places on the use of these resources for pollution
control, and is generally larger than the industry compliance cost.

       The industry compliance cost is used with both a financial impact analysis (which focuses
on individual facilities) and a market impact analysis  (which examines interactions among all
facilities) to evaluate the economic impacts of environmental regulation.  Mill closure projections
are based on quantitative estimates of several economic factors, but the decision to close an
industrial facility depends on many judgements outside the scope of the Agency's analysis.  Thus,
the Agency's projections of potential closures is interpreted as an indication of the extent of
plant impact rather than as a prediction of certain closure.

       The financial impact analysis estimates the incidence of mill closures, the potential
employment, output, and export impacts associated with mill closures, and the change in key
financial ratios attributable to the incremental compliance costs.  To estimate mill closure, the
analysis compares estimates  of the discounted present value of future earnings to estimates of
mill salvage value. The comparison is made to determine whether, after  imposing regulatory
compliance costs, the mill would be more valuable to the current owner if it were shut down and
liquidated rather than in continued operation. The analysis also estimates the changes in key
financial ratios after imposing regulatory compliance costs, and compares the changes to
fluctuations that have historically occurred in the business cycle.

       The market impact analysis estimates mill supply responses and end-use demand
responses to regulatory compliance costs for all  market factors in 31 product markets. This
analysis estimates the potential  changes in pulp, paper, and paperboard product prices; individual
and overall mill production and employment levels; foreign imports and domestic exports;  and
mill production costs and revenues! The analysis evaluates the potential  for mill closure by
estimating the post-regulatory earnings before interest, depreciation and taxes (EBIDT).
Negative earnings indicate potential closure.
                                           ES-3

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ES.4  REGULATORY ALTERNATIVES AND COMPLIANCE COSTS

       Effluent guidelines and MACT standards are technology-based regulations.  While the
source of discharge or emission need not install any specific pollution control technology, the
regulatory requirements must be based on a technology that can achieve the regulatory
requirements. The Development Document and Background Information Document detail the
technology basis for effluent guidelines and MACT standards.

       For the purpose of establishing effluent limitations guidelines and emission standards for
hazardous air pollutants, an industry may be subcategorized based on manufacturing process
and/or other distinguishing characteristics. The pulp, paper, and paperboard industry is divided
into 12 subcategories that incur additional pollution control requirements under the proposed
rulemaking.  Table ES-1 lists the subcategories and references the regulatory requirements for
each of them.
       The Agency analyzed many combinations of technologies as the basis for the proposed
regulations.  A subset of. these combinations, or regulatory alternatives, are analyzed in this
report.  There are seven components of an integrated regulatory alternative:

       •      Process change for the dissolving kraft subcategory (BAT/PSES).
       •      Process change for the bleached papergrade kraft and soda subcategory
              (BAT/PSES).
       •      Process change for the dissolving sulfite subcategory (BAT/PSES).
       •      Process change for the papergrade sulfite subcategory (BAT/PSES).
       »      Air controls for all subcategories (MACT).
       •      Best management practices for all subcategories (BMP).
       •      Wastewater treatment improvements for all subcategories (BPT).

Table ES-2 summarizes a subset of the regulatory alternatives to which the Agency devoted most
of its analysis.  Table ES-3 summarizes the capital, annual, and annualized costs associated with
                                         ES-4

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              TABLE ES-1




SUBCATEGORIES AND REGULATORY COVERAGE
Effluent Subcategory
Dissolving Kraft
Bleached Papergrade Kraft
and Soda
Unbleached Kraft
Semichemical
Dissolving Sulfite
Papergrade Sulfite
Mechanical Pulp
Non-wood Chemical
Secondary Fiber, Deink
Secondary Fiber,
Non-deink
Fine and Lightweight Papers
from Purchased Pulp
Tissue, Filter, Nonwoven, and
Paperboard from Purchased
Pulp
Number of Mills
Number of
Mills in this
Subcategory
3
88
58
21
5
11
57
12
43
342
115
169

Clean
Air Act
MACT
X
X
X
X
X
X






161
Clean Water Act
BAT&
PSES
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X
X
X
X
X






160
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X
X
X
X
X
X
X
X
X
X
X
X
325
BMP
X
X
X
X
X
X

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                 ES-5

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TABLE ES-3

SUMMARY OF POLLUTION CONTROL COSTS ASSOCIATED WITH
REGULATORY ALTERNATIVES
(THOUSANDS OF 1991 DOLLARS)
Regulatory
Alternative
2
3
4
5
11
16
17
18
22
23
24
25
26
Capital Cost
$775,481
$779,559
$884,787
$1,161,872
$3.708,235
$3,742,111
$3,847,339
$4,126,487
$3,846,775
$3,880,651
$3,985,879
$4,265,027
$3,903,850
O&M Expense Annualized Cost
$174,370
$174,618
$186,972
$208,907
$322,353
$324,414
$336,767
$358,417
$413,723
$415,784
$428,137
$449,787
$395,708
$173,494
$173.960
$190,842
$229,365
$531,706
$536.092
$552,974
$591,619
$597,078
$601.465
$618,346
$656,991
$591,580
About 350 mills were analyzed to calculate pollution control costs of regulatory alternatives.
                                     ES-9

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 each of the alternatives.  The annualized industry compliance cost for Regulatory Alternative 26
 is about $592 million (1991 dollars). The social cost for the same alternative is estimated at
 nearly $920 million (1991 dollars).  The economic impacts for Regulatory Alternative 26 are
 summarized in Section ES.5. The results of a regulatory flexibility analysis (for small entities)
 are summarized in Section ES.6.

       The economic impact analysis also investigated the costs and impacts for several ,
 individual components of the regulatory alternatives:  two options for wastewater treatment
 improvements (BPT), and from two to five options for process changes for the dissolving kraft,
 dissolving sulfite, bleached papergrade kraft and soda, and papergrade sulfite subcategories.
ES.S  IMPACTS

       The Agency estimates that the proposed regulations will apply to nearly 350 pulp, paper,
and paperboard mills.  The Agency estimates that between 11 and 13 mills will face the
possibility of closure as-a result of the change in production costs due to the integrated
regulatory alternative, and  from 2,800 to 10,700 jobs could be lost.  The range of these estimates
is created by differences in the assumptions used in estimating them. The upper end of the
ranges reflects more conservative assumptions.

       Market prices for pulp, paper, and paperboard products are not expected to be
significantly affected, with the largest price increase being 2.7 percent for uncoated free sheet
(used to make copy paper,  writing tablets, etc.). The estimated overall impact of the  integrated
regulatory alternative on the total value and quantity of foreign imports of pulp, paper, and
paperboard products is minor; an increase of less than 1 percent. The most significant estimated
increases in imports  for individual  product groups are 1.4 percent increase for clay-coated
printing paper, 1.5 percent  for recycled paperboard, and 6.1 percent for folding carton board.
The estimated overall impact on the total value and quantity of exports is also minor.  Individual
product groups, however, might experience significant declines in export value.  The most
significant estimated declines in exports for individual product groups are 23 percent for
                                          ES-10

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uncoated free sheet, 8.5 percent for recycled paperboard, 6.7 percent for newsprint, and 3.9
percent for bleached sulfite pulp.
ES.6  REGULATORY FLEXIBILITY ANALYSIS

       Part of the Agency's task of complying with the Regulatory Flexibility Act (5 U.S.C. 601
et seq., Pub. L.96-354) is to examine the potential economic impact of regulatory actions on
small entities. The Agency has estimated the economic impact of the integrated regulatory
alternative on small mills and small companies involved in pulp, paper, and paperboard
manufacturing, and has attempted to illustrate the potential disparate impacts between the
groups of large and small manufacturers.

       For purposes of this proposed rule, the Agency has considered  several alternative
definitions for small entities to capture the unique size and structural characteristics of this
industry. Among the definitions considered in the analysis, the Agency has considered small
entities to be:

       •     .Individual mills  employing  fewer than750 workers
       •      Individual mills  employing  fewer than 125 workers
       •      Independently owned and operated companies employing fewer than 750 workers

Under the last definition, small companies can be independently-owned single-facility entities, or
multifacility companies that own more than one pulp and paper mill, or own multiple businesses
in two or more SIC categories. The Agency used each of these definitions to characterize  the
impacts of the proposed standards on small entities.

       The Agency estimates that 35 percent of the mills  in the industry employ less than  125
workers and 85 percent employ less than 750 workers.  Of the approximately 200 companies, 75
percent meet the definition of small. The analyses indicate that between one and six estimated
mill closures are mills employing less than 125 workers, and between nine and ten are mills
                                         ES-11

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employing less than 750 workers.  This indicates that a small majority of the facility closures are
small mills but that the proportion is less than the percentage of small mills in the entire
population.  While small companies form about 75 percent of the population, about 40 to 45
percent of all estimated closures are mills owned by small companies.

       The Agency examined the impact of the proposed rules on relevant financial ratios of
both large and small facilities.  The median results show that facilities employing less than 125
workers experience less deterioration in financial health than larger facilities. The results were
similar for facilities employing less than 750 employees.  The company-level ratio analysis
generally indicates less deterioration in financial health for small companies as well.

       The Agency also examined potential changes in facility earnings before interest, taxes,
and depreciation (EBTTD). The results  indicate the facilities employing less than 125 workers
had a smaller decline in EBITD than large facilities. The same is true for facilities employing
less than 750 workers.

       The Agency also employed the Altman Z-score method to estimate the likelihood of
bankruptcy for companies to assess potential differences between large and small company
impacts of the proposed standards.  This analysis indicates that small companies are not  any
more likely to face bankruptcy after regulation than large companies.

       In general, there is no consistent pattern of disproportionate impacts on small entities.
The results indicate the regulatory alternatives do not cause a significant impact on a substantial
number of small entities. This conclusion is reached for all definitions of small entity used in
both analytical models.
                                          ES-12

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                                   SECTION ONE
                                  INTRODUCTION
1.1    SCOPE AND PURPOSE


       This report evaluates the economic impacts of additional pollution control requirements for

the pulp, paper, and paperboard industry. The regulatory options examined evaluate controls on

releases to both air and water.


       The Federal Water Pollution Control Act  (commonly known as the Clean Water Act)

established a comprehensive program to "restore and maintain the chemical, physical, and biological

integrity of the Nation's waters" (Section 101(a)). The U.S. Environmental Protection Agency (EPA)

is required under Sections 301, 304, 306, and 307  of the Clean Water Act to establish effluent

limitations guidelines and standards of performance for industrial dischargers.  In particular, EPA

establishes:
             Best Practicable Control Technology Currently Available (BPT). These rules apply
             to existing industrial direct dischargers, and generally cover control of conventional
             pollutant discharge, such as biochemical oxygen demand (BOD), total suspended
             solids (TSS), pH, and oil and grease.

             Best Conventional Pollutant Control Technology (BCT).  These rules apply to
             existing industrial point sources that discharge conventional pollutants.  Section
             304(b)(4)(B) adds the requirement that BCT effluent guidelines costs must be
             "reasonable" in relation to effluent reductions. If BCT effluent limitations guidelines
             fail the cost-reasonableness tests, the BPT limitations form the floor below which
             BCT guidelines cannot be established.

             Best Available Technology Economically Achievable (BAT). Required under Section
             304(b)(2), these rules control  the discharge of priority  and non-conventional
             pollutants and apply to existing industrial direct dischargers.

             Pretreatment Standards for Existing Sources (PSES). Analogous to BAT controls,
             these rules apply to existing indirect dischargers (whose discharges flow to publicly
             owned treatment works, or POTWs).
                                          1-1

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              New Source Performance Standards (NSPS). Required under Section 306(b), these
              rules control the discharge of priority and non-conventional pollutants and apply to
              new source industrial direct dischargers.

              Pretreatment Standards for New Sources (PSNS).  Analogous to NSPS controls,
              these rules apply to new source indirect dischargers (whose  discharges flow to
              publicly owned treatment works, or POTWs).
       The Clean Air Act's purpose is "to protect and enhance the quality of the Nation's air

resources" (Section 101(b)). Section 112 of the Clean Air Act as amended in 1990 establishes the
authority to set national emission standards for 189 hazardous air pollutants (NESHAP). NESHAPs

are industry-specific.  For air pollutants, EPA establishes:
              MACT: Maximum Achievable Control Technology. MACT standards are set by the
              NESHAP. The term "MACT floor" refers to minimum control technology on which
              MACT can be based. For existing sources, the MACT floor is the average emissions
              limitation achieved by the best performing 12 percent of sources (if there are 30 or
              more sources in the category or subcategory), or best performing 5 sources (if there
              are fewer than 30 sources in the category or subcategory).  MACT can be more
              stringent than the floor considering costs, non-air quality health and environmental
              impacts, and energy requirements.
1.2    INTEGRATED RULEMAKING EFFORT BY THE OFFICE OF AIR AND THE OFFICE
       OF WATER
       The rulemaking  for the pulp, paper,  and paperboard industry is an integrated effort
coordinated by the Office of Air and Radiation and the Office of Water.  Both Offices are required
by law to set pollution control requirements for this industry. A lawsuit filed by the Environmental
Defense Fund and the  National  Wildlife Federation requires the Agency to propose water
regulations for dioxin by  1993. The Clean Air Act Amendments of 1990 require the Agency to set
MACT standards  for the pulp, paper, and paperboard industry by 1997. The Agency decided to
integrate the rulemaking efforts for several reasons:
             Pollution prevention approaches that reduce the formation of pollutants can be
             applied.
                                           1-2

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       •      The possibility of cross-media pollutant transfers is reduced.
       •      The Agency can select controls that get the most total pollutant reduction for the
              least cost.

Industry benefits from the integrated rulemaking via cost savings in compliance planning by knowing
the requirements for all rules at the beginning of the planning effort.  Industry also can select the
best combination of controls to meet all rules, thus potentially reducing capital equipment costs.

       This rulemaking is distinguished from previous rulemakings by its emphasis on pollution
prevention.  The control technologies considered by the Agency include process changes that avoid
or minimize the formation of pollutants, as well as control technologies to remove pollutants before
their release to air or water.  For example, a process change that prevents chloroform formation
might also prevent or minimize the formation of dioxin and chlorinated organics. The same process
change, however, could affect the amount and type of volatile contaminants sent to the air pollution
control equipment.  The engineering analysis evaluates the interactions among process changes, the
amount and type of contaminants sent to water and air pollution control treatment, and the final
releases.  This systems analysis  evaluates the many  interactions of pulping and papermaking
operations.                                            •
1.3    DATA SOURCES
       Where possible, the Agency made use of publicly available data. These informatiort sources
included U.S. Bureau of the Census documents, such as Current Industrial Reports and Annual
Survey of Manufactures, and industry data, such as the American Forest and Paper Association
(formerly American Paper Institute) annual compilation of statistics  for the pulp,  paper,  and
paperboard industry. In addition, conference proceedings, journal articles, and industry experts all
provided information for the analysis.

       General industry-wide  information from such publicly available sources provided a solid
technical base for evaluating processes and control technologies.  Then, the engineering analysis
addressed the question of what equipment and costs would be  necessary for a facility to meet a

                                            1-3

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 particular set of pollution requirements. The answer depends, in part, on the facility's pulping or
 papermaking processes, the equipment already in place, and the new requirements. While detailed
 information at the facility level is not publicly available, the Agency is authorized by Section 308 of
 the Clean  Water Act and Section 114 of the Clean Air Act to collect  such information  for
 rulemaking purposes.  Because facilities  in  this industry vary  greatly in size, processes, and
 production, the Agency determined that a census, rather than a sample, was necessary to gather the
 needed data. Facility- and company-specific data were collected  by the 1990 National Census of
 Pulp, Paper, and Paperboard Manufacturing Facilities which was divided into two parts—Part A
 collected technical information and Part B collected financial  and economic information. The
 economic impact analysis relies heavily on the information gathered in this  survey.
 1.4     ORGANIZATION OF THE REST OF THE REPORT
        Section Two presents the industry profile. Based primarily on the Part B survey data and
 on publicly available information, the section begins with an overview of the industry, its processes,
 and the environmental issues that affect the rulemaking.  Data are presented on industry products,
 the  industry's production  facilities (including  how  those facilities correspond  to  the  effluent
 guidelines subcategories), the companies that own and operate the facilities, industry-wide financial
 characteristics, and international issues.

        Section Three reviews the economic impact and regulatory flexibility methodologies.  Two
 methodologies are used to evaluate the economic impacts of the regulatory options. The first is a
 financial model that focuses on individual facilities, and the second is a market model that examines
 interactions among all facilities. Section Three also contains a discussion of the various categories
 used in a regulatory flexibility analysis to  evaluate the small business impacts of the regulation.

       Pollution  control components  examined in  the rulemaking  include process changes,
wastewater treatment, best  management practices, and emission controls to reduce air pollution.
Section Four describes these components, the subcategories to which they relate, and how the
components are  combined  to  create regulatory alternatives.   The costs associated with  the
alternatives also are presented.

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       Section Five describes the economic impacts of the additional pollution control costs.  Small
business entity impacts are discussed in Section Six.
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                                   SECTION TWO
                                INDUSTRY PROFILE
       Paper has become an ubiquitous element of American society. Nearly every activity of
daily life—whether cleaning or shopping, writing or reading—involves at least one of the
thousands of diverse paper products manufactured today. Scholars credit several cultures with
the invention of some form of paper.  The conceptual foundation of modern papermaking,
however, is attributed to a Chinese Minister of Agriculture who, in 105 A.D., used fibers from
silk and mulberry bark to form sheets of paper. The multibillion-dollar pulp and paper industry
thriving today is based on this same 2,000-year-old idea of reducing fiber to its individual strands,
and reforming the strands into a flat sheet. When dry, the sheet can be converted into one of
the many paper products we use in everyday life (Kline, 1982).

       This process of liberating individual strands of fiber from raw material sources is called
pulping, and the  end  product is called pulp.  Paper is a broad term for the thin sheets of
hydrogen-bound  fibers made from pulp. Paperboard is manufactured the same way as paper but
is often thicker and used for packaging, while paper grades are used primarily for
communications.

       The pulp and paper industry ranks eighth among all U.S. manufacturing industries and
third among the  nondurables sector in value of shipments—$126 billion in 1992 (ITA, 1993). In
addition, the industry currently enjoys a dominant position in the international paper,
paperboard, and pulp markets because of its low unit labor costs, high-quality production, and
favorable exchange rates. Historically, the pulp and paper industry has represented one of the
nation's most heavily capitalized economic sectors. Capital expenditures in 1992 were
approximately $11.3 billion (ITA, 1993).

       This section provides a simplified introduction to the diverse pulp and paper industry.
The intent is to give the reader a general understanding of the technical, economic, and
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 environmental issues faced by pulp and paper manufacturers and to identify topics that affect the
 economic impact analysis.  Section 2.1 briefly describes the raw materials and industrial processes
 of the pulp and paper industry. More detailed information on these subjects is located in the
 Office of Water's Development Document and the Office of Air's Background Information
 Document accompanying the proposed rule.  Section 2.2 discusses environmental protection
 issues relevant to this rulemaking.  Section 2.3 presents product information from the U.S.
 Environmental Protection Agency's (EPA's) survey and compares EPA's 1989 data to similar
 compilations by the American Forest and Paper Association (formerly American Paper Institute)
 and by the U.S. Bureau of the Census from that year. Section 2.4 summarizes the number of
 facilities by location, production, and other parameters.  Section 2.5 briefly describes the effluent
 subcategories for the pulp and paper industry and how they relate to individual facilities.
 General information on companies and employment levels is given in Section 2.6. Financial
 patterns for the industry are examined in Section 2.7, and Section 2.8 summarizes international
 trade and competition issues facing the pulp and paper industry.
2.1    OVERVIEW OF INDUSTRY PROCESSES

       To meet the constantly increasing demand for their products and to maintain market
competitiveness, pulp and paper manufacturers traditionally have followed a policy of installing
the latest production technology at their mills.  This section will discuss the most common types
of equipment and industrial processes employed at pulp and paper mills. The discussion is
divided into three general categories: fiber sources and their preparation; pulping and bleaching;
and papermaking.  In addition, the effluents and emissions resulting from these processes are
examined.
       2.1.1 Fiber Sources and Preparation

       All paper and paperboard have two common characteristics. First, each consists of fibers
that are capable of bonding together through chemical reactions.  Second, these fibers have been
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formed into a layered structure where each fiber has random orientation (Kline, 1982).  Paper
can be made from almost any substance containing fiber as long as technology exists to liberate
the individual fiber strands for further manipulation. Tree wood is the primary fiber source used
by today's pulp and paper manufacturers because of its renewability and the favorable physical
characteristics of its cellulose fiber.1 In the past, however, cotton, straw, sugar cane, rice, and
rags all have been used as primary fiber sources in paper production and in some cases continue
to be added today to certain grades of paper to achieve special product attributes.  For instance,
cotton is blended with wood fibers to enhance the strength and permanence of some high-quality
paper grades.

       Trees typically are divided into two general categories: hardwoods and softwoods.
Hardwoods are the broad-leafed trees, such as maple, oak, birch, and gum, which have fibers that
are characteristically  small.  Softwood fibers are derived primarily from evergreens, including
pine, spruce, and fir,  and are larger than hardwood fibers. Larger fibers result in a stronger, but
coarser, internal bond. Although fibers do vary among different tree species within a category,
this variation is usually too small to affect final product properties.

       Most paper and paperboard is produced by blending fibers from the hardwood and
softwood categories until the desired properties are achieved. In these blends, softwood fiber
provides strength, while hardwood fiber is used to fill in the gaps between large softwood fibers
to create a smoother, more opaque grade of paper (Kline, 1982).  Hardwood and softwood fibers
are obtained from two sources: pulp wood, where entire logs are used solely for pulping and
papermaking; and wood wastes and forest and sawmill residues generated from logging and
timber production.

       The growing environmental awareness among consumers and industry has prompted an
increase in the use of wastepaper as a fiber source for pulping and papermaking.  In 1992,
wastepaper (also called secondary fiber) accounted for 29 percent of the fiber used at pulp and
paper mills (ITA, 1993). About one-third of the paper and paperboard mills  in operation in
1992 used wastepaper as their principal fiber component, while another 50 percent used waste
   'Bark and leaves are unsuitable for pulping.
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materials for up to half of their fiber mix.  Other mills continue to update and install technology
to recover secondary fiber.  Old corrugated containers (OCC) and old newsprint (ONP)
accounted for the bulk of the total recovered paper and paperboard in 1992 (ITA, 1993).

       As is the case with virgin hardwood and softwood fiber sources, the type of final product
made from secondary paper is determined largely by the quality and purity of the fiber. ONP,
for example, is recycled primarily into newsprint and paperboard and cannot be used in printing
and writing paper. Fibers generally sustain some quality degradation during recovery;
consequently, virgin fiber frequently is used in conjunction with secondary fiber to maintain
marketability of paper grades. Section 2.2.1 gives a more detailed discussion of recycling in the
pulp and paper industry.
       2.1.2  Pulping and Bleaching

       2.12.1 Wood Pulping

       Pulping is the liberation of individual fibers from the wood structure by breaking down
lignin, an adhesive substance that impairs the formation of sturdy bonds in paper. Lignin is also
responsible for the coloration visible in unbleached paper  such as paper bags; and, after reacting
with sunlight, lignin causes the yellowing often detectable in old newspapers and books. Pulping
operations fall into three broad categories: mechanical, chemical, and semichemical. The  type of
pulping process used depends on the desired properties of the end product, and on the costs for
raw materials, for energy requirements, and, increasingly, for effluent and emissions treatment
and control (EPA, 1991a). This discussion will focus on the processes and equipment employed
during log pulping; wastepaper fiber sources will be mentioned briefly at the end of this section
and in more detail in Section 2.2.1. For each pulping process,'logs undergo a  debarking stage
prior to pulping to remove undesirable fibers from the  tree's outer shell.
       Mechanical Pulping.  In mechanical pulping,  physical force is applied to reduce logs to
their component fibers.  The oldest form of mechanical pulping is groundwood pulping, where a
log is pressed against a grooved cylindrical grinding stone, which tears fibers from the log. The

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fibers are washed into a slurry using jets of water.  Modern groundwood processes employ
hydraulic presses to push logs against the grinding stone.
       Wood chips also can be pulped mechanically with a refiner mechanical pulping (RMP)
process.  This method grinds or shreds the chips between two cylindrical disks, one or both of
which are rotating. Chips are fed into the center of the disks and forced outward into smaller
and smaller pieces.

       Because mechanical processes do not remove lignin from the fibers, the resultant pulp
does not bleach well and yellows quickly.  Consequently, the use of mechanical pulp is limited to
unbleached paper and paperboard, or grades of paper that are discarded prior to yellowing, such
as newsprint and advertising circulars.  Methods  exist to increase the brightness, finish, and
printability of mechanical pulp during the papermaking process, thus rendering high-quality
mechanical pulp competitive with its low-grade chemical counterparts. As a result, mechanical
pulping is still widely employed in North America (EPA, 1991a). Mechanical pulping currently
accounts for approximately 10 percent of total U.S. pulp production (AFPA, 1992a).

       Chemical  Pulping. In chemical pulping, cellulose fibers are liberated from the wood
structure with chemicals. Pulping chemicals, though designed to eliminate lignin, also can
dissolve cellulose if left in contact long enough with fiber sources.  Therefore, to ensure full and
even penetration  of pulping chemicals and to minimize damage to cellulose, wood is first chipped
into pieces of uniform size and thickness through a process called chip control. This process
avoids both underpulping some chips (which lowers  the yield of the pulping process) and
excessively damaging cellulose in other pieces. Figure 2-1 illustrates the steps involved in a
chemical pulping  operation.

       Kraft and sulfite pulping are the two most prevalent methods of chemical pulping used
today. Of these two processes, kraft (or sulfate)  pulping is far more common, accounting for
approximately 77  percent of U.S. pulpmaking capacity in 1991 (AFPA, 1992a).  Its success is due
to several factors. First, kraft chemicals are selective in their attack on wood constituents,
minimizing damage to cellulose and resulting in a stronger product. In addition, the kraft
process is applicable to a variety of wood types and can tolerate contaminants such as high resin

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FIGURE 2-1
CHEMICAL PULPING AND BLEACHING OPERATIONS
Virgin Fiber
      Wood
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Prebleach? *T
Pre-Bleaching
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ng Stages
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Market Pulp or
Paper Making
1 Product ^



^
Wastewater *•
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     Sludge
                   Treatment
                                                                         Legend
                                                                 A Primary Hazardous Air
                                                                     Pollutant Emission Pt.
                                                                 *  Duct Vent to Incinerator
                                                                 HI Recovery
                                                                 
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content. Kraft chemicals can be recovered and reused, which reduces expenditures for chemical
supplies.  Finally, the kraft process benefits from a high degree of heat recovery for process use
(EPA, 1991a).

       In the kraft process, wood chips are immersed in a mixture of caustic soda (sodium
hydroxide, or NaOH) and sodium sulfide (Na^) at roughly a 10-percent concentration in a
reaction vessel  called the digester. This chemical mixture, called white liquor or cooking liquor,
attacks the lignin in the fiber, breaking it into smaller, soluble segments.  Temperature and
pressure in the digester are controlled for optimal cooking conditions.  As delignification
proceeds, the reaction chemicals begin to attack the cellulose.  Under extreme time and
temperature  conditions, the cellulose degrades, which reduces process yield.  Lignin removal
therefore must be balanced to prevent yield losses. The output of kraft pulping consists of the
separated wood fibers and a black liquor, the spent cooking liquor, which contains the dissolved
lignin solids in  a solution of reacted and unreacted pulping chemicals.                   ,.

       Unlike the kraft process, sulfite pulping employs acid to break down lignin. The acids are
formed by dissolving sulfur dioxide (SO2) in water. After contact with chips, the resultant
lignosulfonic acids are tempered with a base chemical to prevent degradation of cellulose. Until
recently, calcium was used as the base compound in sulfite processing.  Calcium, however, can
produce scale that clogs pipes and tanks. Sulfite cooking liquor is not recoverable, making the
process less economical than kraft pulping (Kline, 1982). Recently, sodium, magnesium, and
ammonia have been used as base chemicals in the sulfite process with fairly good results.
Another problem associated with sulfite process is the use of sulfur dioxide, a toxic gas that must
be handled with great care.
       The sulfite process tends to produce pulp with favorable properties. Upon exit from the
digester, sulfite pulp is considerably whiter than kraft pulp. Unless high brightness is required,
sulfite pulp can be used directly in paper or board applications without bleaching. Sulfite pulp
fibers also can make paper that is softer or smoother than kraft pulp fibers. Sulfite pulps
therefore are used in tissue, in high-quality bond and writing papers, and in fluff pulp (used in
hygiene products). In addition, fibers in sulfite pulp tend to contain more cellulose, resulting in
brighter, more permanent paper after bleaching (Kline, 1982).

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       Several factors have limited the use of the sulfite pulping process, however. First, most
manufacturers lack a recovery system for sulfite pulping chemicals, and disposal costs are rising
with increased environmental regulation. Second, paper produced from sulfite pulp tends to be
weaker than its kraft counterpart.  Finally, the sulfite process is not compatible with the fiber
characteristics of many trees, seriously limiting its applicability. As a result, sulfite pulp currently
comprises only slightly over 2 percent of total U.S. pulp production.

       Chemical pulping can be performed in one of two ways: batch or continuous mode. In
batch operations, the digester is filled with chips and chemicals, temperature and pressure are
adjusted to optimize cooking conditions, and the cooking liquor is circulated throughout the
digester until pulping is complete.  Pulp and black liquor are discharged from the bottom of the
digester through a blow valve and then screened to remove rejects (i.e., unreacted chips and
bundles of fiber).  These rejects can be either sent back into the digester or consumed as fuel to
power the chemical recovery furnace. From the  digester, spent liquor is sent to recovery
operations.  The recovery boiler's capacity is an important parameter considered in estimating
costs for process changes.

       Separated pulp then proceeds to washing equipment where it is cleansed of spent cooking
liquor. Washing is critical for removing any excess lignin and unreacted chemicals from the pulp.
Poor washing means more chemicals are needed to bleach the pulp to needed brightness. If
lignin is carried over to the bleaching stage, chlorinated organic pollutants can be formed at
chlorine bleaching kraft plants. Most mills employ a countercurrent series of washers, where
filtrate from each wash stage is used to clean pulp in previous stages. Freshwater is used to wash
pulp in the last washing stage. The resulting liquid mix of liquor and water is sent to  the central
stages where it gathers more liquor.  The concentrated wash filtrate from the earliest  wash stage
is sent to the recovery boiler for evaporation and chemical recovery. After washing, pulp may be
thickened and blended with other pulps before it either goes to the bleach plant or papermaking
machine, or is dried and shipped to market.

       To operate efficiently, both bleaching and papermaking equipment must function
continuously with a constant stream of pulp. To  achieve this constant flow, mills using batch
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pulping normally install a series of digesters alongside one another. Batch digesters range in size
from 6,000 to 8,000 cubic feet and are several stories high (EPA, 1991a).

       In continuous pulping, wood chips are fed through tubes where they are steamed and
then injected with cooking liquor.  The pretreated chips are deposited into the top of the
continuous reaction vessel.  The chip mass travels down through the vessel's top portion, called
the cooking zone, while lignin normally travels up in ever-increasing amounts.  The fiber is
exposed to cooking liquor in controlled temperature and pressure conditions (EPA, 1991a). At
the end of cooking zone, spent liquor is strained from the pulp and routed to the liquor recovery
system.

       The pulp then enters the digester's washing zone.  Here, water is forced up to wash
progressively dirtier masses of pulp, using the same countercurrent washing concept employed in
batch pulp washers. Washed pulp is then screened and sent to papermaking machines, or is
dried and sold. To supply the enormous volume of pulp needed for papermaking machines,
continuous digesters can be as large 20 feet in diameter and 200 feet tall (Kline, 1982).

       Semichemical Pulping. In chemical processes, spent liquor often is burned to produce
steam for the pulping operations, whereas groundwood pulping requires constant energy input.
On the other hand, mechanical processes yield more pulp per unit of raw material as a result of
the absence of chemicals  that inevitably destroy some fiber. Semichemical pulping is an attempt
to find a middle ground between these two pulping categories and to capitalize on their
respective advantages. Most Semichemical  pulping operations employ some form of thermal or
chemical pretreatment prior to mechanical  refining.  Pulps from these processes are frequently
used to produce corrugated board and constitute about 7 percent of the wood pulp produced
(AFPA, 1992a).

       Secondary Fiber Pulping. For some wastepaper pulps, the recycled furnish need only be
mixed with water, repulped, and screened prior to reuse.  For other grades of products, however,
the pulp  must be deinked—treated to remove  coatings, inks, adhesives, and fillers in the original
paper. Flotation and washing are  two processes to remove these contaminants. Deinking
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 chemicals include caustic, sodium silicate, hydrogen peroxide, calcium chloride, and soap
 (Broeren, 1990).
       2.1.2.2 Bleaching

       While pulp created by the pulping process is suitable as is for products such as grocery
 sacks and cardboard boxes, the pulp must be bleached for products requiring lighter, brighter
 fibers. Bleaching plants typically use either an oxidative or reductive chemical process that
 increases the solubility of the pulp's color bodies, thereby whitening the fiber and enhancing the
 permanence of the whiteness.

       For kraft pulping mills, the bleaching process,  or sequence, involves a variety of chemicals
 and process conditions in several stages. These stages and their abbreviations are listed below.
       •     Chlorination and washing (C)
       •     Chlorine dioxide addition and washing (D)
       •     Alkaline extraction and washing (E)
       •     Hypochlorite addition (H)
       •     Hydrosulfite addition (HS)
       •     Oxygen addition (O)
       •     Peroxide addition (P)

Successive stages in the bleaching sequence can be implemented to achieve one of three
purposes: lignin removal, lignin decolorization (brightening), or extraction of dissolved lignin.  In
the recent past, the two most widely used bleaching sequences in U.S. and Canadian mills were
C-E-D-E-D and C-E-D-H or C-E-H-E-D, where  the chlorine (C) removes lignin, the alkaline (E)
extracts lignin, and the chlorine dioxide  (D)  and  hypochlorite (H) brighten lignin. Because lignin
concentrations are so high in the initial bleaching stages, chemicals such as chlorine can be used
without significantly damaging cellulose  fibers. Chlorine is an aggressive oxidant that dissolves
lignin effectively.  After the first removal and extraction stage, 80 to 90 percent of the lignin in
the pulp is removed (EPA, 1991a).  More recently, mills have been shortening bleaching

                                          2-10

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sequences and have been substituting different bleaching chemicals to reduce the formation of
chlorinated organics. Bleaching sequences that substitute chlorine dioxide (C1O2) for chlorine
(C12) are elemental chlorine free, or ECF; bleaching sequences that eliminate all usage of
chlorine, be it Clj or C1O2, are totally chlorine free, or TCP.
       Bleaching is performed in tanks in which pulp is mixed with bleaching chemicals and
water. Enough liquid is present to cany the pulp suspension throughout the operations.  Rotary
drums serve as between-stage washing devices for the pulp. More recently, mills have added an
oxygen-based prebleaching stage called oxygen delignification, which lowers the lignin content of
pulp prior to its exposure to bleaching chemicals (see Figure 2-1). Changes in the bleaching
process itself, such as split chlorine addition and chlorine dioxide substitution, are aimed at
lowering the amount of chlorinated organics and other pollutants formed in the bleaching
process.

       Groundwood and secondary pulps frequently undergo only one stage of bleaching, with
either hypochlorite or peroxide.  Secondary fibers are usually pure enough not to need
chlorination and extraction, and groundwood pulps contain too much lignin to be subjected to a
comprehensive bleaching sequence.  Hydrogen peroxide is the preferred bleaching chemical for
sulfite pulps, which  enter the. bleaching plant considerably brighter than kraft pulps.
       2.1.3  Papermaking Operations

       After pulping and (optionally) bleaching, fibers often are not ready to be sent directly to
the papermaking machine.  Instead, they sometimes undergo stock preparation, designed to
enhance the fiber's bonding properties.  Stock preparation, also called "refining" or "beating," can
involve fiber cutting, crushing, or rolling, which reduces the strength of paper but improves
uniformity and results in increased hydrogen bonding among fibrils, the tiny strands surrounding
each individual fiber.  Stock preparation also  might involve the blending of different pulps, such
as virgin and secondary fibers, to produce a sheet with a certain percentage of recycled content
or with certain physical properties.
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        The oldest and most established piece of papermaking equipment is called the fourdrinier
 machine, named after the two brothers who invented the process around 1800.  The fourdrinier
 machine forms a sheet of paper by depositing pulp and water stock onto a thin wire mesh
 through which excess water drains.  The remaining sheet of wet, thick pulp stock spools onto a
 press that gently squeezes out more water and consolidates the web of paper by bringing fibers
 together for bonding. The web leaves the press section and is passed around a series of steam-
 filled drums, called dryer cans, where additional water is removed by evaporation.  In this stage,
 the web is held to the cylindrical dryer cans by a thin cloth or plastic felts that allow evaporated
 water to pass through. The dryer section also might include a size press, which can apply
 chemical solutions to the sheet's surface to improve water resistance.  The sheet might also
 receive additional coatings to create the needed paper grade. Finally, the web is wound into a
 roll by a series of calendars, reels, and rewinders, which also controls thickness. From the
 rewinder, the roll of paper is removed and prepared for shipping or converting to final products
 (Kline,  1982).

       The fourdrinier machine primarily produces lightweight paper.  A multicylinder machine
 is employed to manufacture heavier stocks of paper and paperboard. With this machine, a series
 of cylinders are submerged into vats of fiber suspension. Water from the suspension passes
 through the wire on the cylinder leaving a fiber web on the outer surface of the cylinder.  A wool
 felt is then passed over the succession of cylinders, one at a time, collecting more and more web
 from each cylinder.  In this manner, a thick sheet of web is formed, which subsequently proceeds
 to a series of dryers where the large amount of water is removed. The multicylinder machine
 also effectively produces  combination boxboard, in which two different stocks  of paperboard are
 pressed together to create the grey-interior, white-exterior paperboard used in cereal cartons and
 some pizza boxes.

       Papermaking requires enormous quantities of water to operate. A normal concentration
of the fiber suspension sent to  the wire or cylinder is 0.5 percent.  In other words, every 250 tons
of stock sent to a papermaking machine, for example, consists of 1.25 tons of fiber and 248.75
tons of water.  As the fiber suspension passes over the wire, the consistency rises to anywhere
from 10 to 16 percent, depending on the type of water removal devices  used.  After passing
through presses,  the web  contains 36 percent fiber.  Dryers  remove the remaining excess water

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until a standard 5-percent moisture content is attained.  Nearly all water passing through the wire
is recovered, along with any escaped fibers, by a device known as the save-all and remixed with
stock to achieve the needed 0.5 percent fiber concentration (Kline, 1982).

       Although pulp and papermaking mills  have significantly reduced their water requirements
by recovering and reusing water within their industrial operations, an average of 16,000 to 17,000
gallons of water is still expended for each ton of paper produced. A 600-ton-per-day
papermaking facility, for example, would need 10 million gallons of influent water to operate.
Because such huge volumes of water are needed, pulping and integrated pulping and
papermaking mills must be near bodies of water.

       Pulpmaking and papermaking machines are highly individualized devices designed to
produce a specific product 24 hours a day, 365 days a year.  Their operating parameters may be
varied to produce different grades within a product category, but major shifts between categories
are not feasible. According to a survey conducted by Pulp & Paper, U.S. companies plan to
spend $13.4 billion on projects for completion during the 1992-1994 period. Expenditures on
new pulp and paper machines account for $3.1 billion in capital outlays (Espe, 1993). These
figures indicate the industry's capital-intensive nature, which affects the ability for new companies
to enter the industry. Increased pollution control costs can be  put into perspective when
compared to the industry's annual capital expenditures.  Capital expenditures are discussed
further in Section 2.4.4.

        Converting Operations. Paper and paperboard are shipped to  converting operations
where they are cut, trimmed, and formed into final products such as envelopes, boxes, and reams
of paper. Cuttings and other wastes from these operations  are a major source of high-quality
pulp substitutes also known as preconsumer secondary fiber. Converting operations are not
covered by the rulemaking and are not discussed further in this report.
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        2.1.4 Pollution and Pollution Control

        2.1.4.1  Affluent Discharges

        The tremendous daily intakes of water at pulp and papermaking mflls translate into
 equally large quantities of effluent water that mills must recycle, treat, or discharge. The four
 main categories of aquatic pollutants found in pulp and paper mill effluent are total suspended
 solids (TSS), biochemical oxygen demand (BOD), color, and toxics. Conventional pollution
 abatement in the U.S. paper industry has concentrated on reducing solids and oxygen demand.
 Recent investigations, however, have found toxic contaminants, including dioxin, in bleach mill
 effluents, and effluent color is becoming a concern in some areas of the country (EPA, 1991a).

       Suspended solids include dirt, grit, and fiber from wood preparation; fiber and dissolved
 lignin solids from the pulp bleaching stages; and fiber and additives washed from the early stages
 of papermaking.  Solids have the potential to coat the bottom of receiving water bodies and
 could destroy or impair the habitat of bottom-living organisms.  As the blanket of solids
 decomposes, anoxic conditions could develop, releasing methane, hydrogen sulfide,  and other
 noxious and/or toxic gases.  To control solids, most North American mills have installed primary
 and secondary effluent treatment equipment that removes solids from the effluent prior to
 discharge into receiving waters. Suspended solids are extracted primarily through settling or
 flotation processes.

       Biochemical oxygen demand (BODS)2  measures the tendency of an effluent to consume
oxygen from receiving waters during  biological degradation.  High levels of BOD5 can deprive
fish, fungi, bacteria, and other nonplant matter of needed oxygen.  BODS, which is comprised
primarily of organic material, is produced during several pulping and bleach stages.  For
example, effluents from debarking contain wood particles, and spent cooking liquor  has high
concentrations of lignin and other organics. Mills usually retain wastewater  in an oxidated or
aerated lagoon that allows 85 to 90 percent of BODS to degrade.
   2The abbreviation BOD5 represents oxygen demand as measured by the standard 5-day test.
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       Chlorinated organic compounds represent the major toxic constituents in pulp mill
effluent. They are generated almost exclusively at bleach plant operations that use elemental
chlorine or chlorine-containing bleaching chemicals.  Minuscule quantities of these toxics also are
produced at paper mills (or papermaking operations at integrated pulp and paper mills) that use
chlorine-bleached pulps (EPA, 1991a).  Many individual chlorinated organic compounds have
been identified in bleach plant effluents; the reader is directed to the Development Document
for more details.  Among these compounds are various dioxins and furans, chloroform, and
chlorinated phenolics.

       Dioxin and furans are a byproduct of the complex reactions occurring during bleaching.
The concentrations of these toxics are usually in the parts per billion or parts per quadrillion
even in uncontrolled effluents,  but because of their high toxicity and capacity to bioaccumulate,
dioxins and furans have become a prime concern (EPA, 1991a). Secondary wastewater treatment
is moderately effective in transferring dioxins and furans from effluents to treatment sludges.
Therefore, much scientific and regulatory attention concentrates on preventing the formation of
dioxins and furans during bleaching, rather than  on biological or chemical effluent treatment.
Pollution prevention is further  investigated in the Development Document and in Section 2.2.4
of this report.

       Chloroform is a byproduct primarily of the hypochlorite bleaching stage, where used.
Because of this compound's volatility, most chloroform escapes the pulp mill as fugitive
emissions, with more vaporizing from secondary  wastewater treatment systems. While an
important consideration in air pollution control,  chloroform in pulp and paper water effluents is
not considered as significant an environmental hazard because its aquatic toxicity and
bioaccumulation potential are low.  Chlorates are a potential concern because some compounds
harm plant life.  At concentrations present in pulp and paper effluent, chlorate damage to
marine algae populations has been documented in Scandinavia.  Secondary wastewater treatment,
however, normally is effective in removing chlorates from effluents (EPA, 1991a).
                                         2-15

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       2.1.4.2 Air Emissions

       The major air pollutants from pulp operations include reduced sulfur compounds,
participates, volatile organic compounds (VOCs), and various hazardous air pollutants (HAPs).
According to baseline emission estimates, noncombustion processes in the pulp and paper
industry emit approximately 170,000 Mg of hazardous air pollutants annually.  Air emissions of
1-butanone  (MEK), 2-propanone, chloroform, hexane, methanol, and toluene comprise the
majority of HAP emissions.  Some of these pollutants, including chloroform, are known or
probable human carcinogens while others have been linked to causing respiratory and other
health problems in humans, or causing cancer in animals.

       Reduced sulfur compounds are associated with the kraft pulping process, and are
generated from chemical reactions of sodium sulfide that occur during the initial kraft cook. The
presence of reduced sulfur compounds causes the rotten egg or rotten cabbage odor in areas
near pulp mills.  In addition to odor problems, reduced sulfur compounds have been linked to
causing shortness of breath, nasal irritation, and headaches.

       VOCs include a broad class of organic gases such as vapors from solvents and gasoline.
In the pulp and paper industry, VOCs are generated from the complex reactions of lignin,
carbohydrates, and extractives in the pulp furnish.  VOC emissions are a concern because they
chemically react with nitrogen oxide in the atmosphere to form ground-level ozone, or smog.
Studies of the effects of ozone have shown that it is responsible for health problems such as
respiratory problems and premature aging of the lungs. Ozone has also been linked with
contributing to damage of crops and other plants.

       The major source of particulates are fly ash and bottom ash from power boilers and
chemical recovery furnaces. Fine particulates are a particular concern because they tend to settle
from the atmosphere and might be associated with more significant health impacts than large
particulates. The major effects of concern include breathing and respiratory symptoms, damage
to lung tissue, and aggravation of existing respiratory and cardiovascular disease. Paniculate
matter also causes material soiling and can substantially impair visibility.
                                         2-16

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       2.1.5  Related Chemical Supplier Industries

       As quality demands of paper consumers have increased, the pulp and paper industry has
relied more and more on chemicals to achieve improved product properties. Historically, the
pulp and paper industry has consumed large amounts of chlorine for bleaching operations.
Chlorine is produced by the chlor-alkali production process, which electrically induces reactions
of water with table salt (NaCl) to generate elemental chlorine (C12) and caustic soda (NaOH) in
a fixed ratio.  The pulp and paper industry is a major consumer of both chlor-alkali products.
Chlor-alkali production occurs at approximately 50 plants in the United States  and 12 plants  in
Canada. Because of high capital costs of production, chlor-alkali manufacturers tend to be large,
diversified chemical companies that produce numerous chemical products. Two large companies
are responsible for half the U.S. chlor-alkali capacity.
       Facing regulations and demand for dioxin-free products, pulp and paper manufacturers
are shifting away from chlorine usage in their bleaching sequence. As chlorine demand decreases
and demand for caustic soda remains relatively stable, chlor-alkali producers are searching for
methods to manufacture caustic soda independently of chlorine.

       In recent years, pulp and paper manufacturers have investigated and experimented with
alternative bleaching chemicals, technologies, and processes.  Perhaps the most widespread
current alternative is chlorine dioxide substitution, which reduces dioxin and furan concentrations
in pulp and paper effluents. Chlorine dioxide usually is produced from sodium chlorate in onsite
reactors located at pulp and paper, mills.  As of 1988, sodium chlorate was produced at 11
locations in the United States, as well as several  facilities in Canada. Although the use of
chlorine dioxide substitution in the first stage is increasing, the overall use of chlorine dioxide in
U.S. mills may not be increasing because mills are being careful not to overchlorinate in all
bleaching stages (Falatko, 1993).

       Another process change to reduce chlorine usage in the bleaching sequence is oxygen
delignification.  Oxygen gas (O2) used in a prebleaching stage effectively  removes residual lignin
content in brownstock pulp by up to 50 percent.  This removal  rate can lead to proportional
reductions in first-stage chlorine usage  and chlorinated organic formation.  Oxygen usage in

                                          2-17

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 bleaching extraction stages is increasing; 72 of the U.S. mills that chemically pulp and bleach
 wood were using oxygen-reinforced extraction as of December 1992 (Falatko, 1993). Ozone
 bleaching (O3), a process that has been commercialized just recently, has the potential to
 eliminate entirely the need for chlorine compounds in the bleaching sequence.  Oxygen
 traditionally has been supplied in liquid form by large chemical producers; with increased
 consumption due to oxygen enhanced delignification and bleaching, however, a rising number of
 mills are installing onsite oxygen production units (Ducey, 1989).
       In recent years, hydrogen peroxide (YLP2) also has been used bleaching agent at an
                                                                                /
 increasing number of kraft mills. HjOj has traditionally been used to brighten mechanical pulps,
 but kraft mills increasingly use it in the alkaline extraction stage, for the final brightening stage,
 and to prevent brightness reversion.  While not requiring major capital outlays to introduce,
 peroxide is considerably more expensive than most bleaching chemicals. The pulp and paper
 industry accounts for over 25 percent of domestic demand  for peroxide (Young, 1991).  Most
 peroxide suppliers are large, diversified chemical companies.
2.2    ENVIRONMENTAL PROTECTION ISSUES

       As with most other major U.S. industries, the pulp and paper industry has come under
increasing governmental, public, and market pressure in the last quarter century to minimize the
environmental impacts of its operations. The first section of this industry profile introduced
several pollution and pollution control issues faced by pulp and paper manufacturers.  This
section will focus on further efforts by U.S. paper companies and researchers to protect the
nation's air, land, and waterways. In addition, the possible influence these efforts have on the
impact analysis of effluent guidelines and emission  standards will be examined.
       2.2.1  Recycling
       The history of recycling in the U.S. pulp and paper industry dates back almost 300 years,
when small recycling mills thrashed cotton rags into fiber strands for paper production. Since

                                          2-18

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then, recycling has continued in some form among many pulp and paper mills, primarily for
economic reasons: for mills located near urban areas, repulping secondary fiber was often more
profitable than transporting virgin raw materials from the country's rural sectors (Congreve,
1992).

       Hie recent surge in paper recycling has been guided not only by economic forces, but by
public interest as well.  Inspired by the solid waste crisis of the mid-1980s, private citizens have
become more aware of what they throw away and where. With capacity decreasing at many U.S.
landfills and costs of safe disposal rising steadily, many communities, businesses, and
governments  have started recycling programs as less expensive alternatives to old waste disposal
options.  The supply side of the recycling equation has thus been growing consistently.  In 1990,
Americans recovered 17 percent of the 195.7 million tons in the total municipal solid waste
stream for recycling and composting, an almost 73-percent increase over 1985 rates (see Figure
2-2).  In that  same year paper and paperboard garnered the highest recovery rate among all
major components of the waste stream: 28.6 percent of the 73.3 million tons of postconsumer
wastepaper generated3  (EPA, 1992a) (see Figure 2-3).

       In 1990, the American Forest and Paper Association (formerly the American Paper
Institute), announced a goal of achieving a 40-percent recovery rate of both pre- and post-
consumer paper by 1995. According to AFPA statistics, 35 percent of the paper consumed in the
United States in 1992 was recovered for reuse and export.  To attain the 40-percent recovery
goal, different recovery targets  have been established for various paper grades.  The Paper
Standards Institute of America has established more than 70 grades of wastepaper which are
generally divided into five categories: news, corrugated, mixed, pulp substitutes, and high-grade
deinking.  The AFPA asserts that nearly 90 percent of the  increased recycled paper needed over
the next several years will have to come from the postconsumer stream (AFPA, 1992a).
       3EPA defines postconsumer recycling as the reuse of materials generated from residential
and commercial waste. In contrast, preconsumer recycling is the reuse of materials from industrial
processes that have not reached the consumer such as broke, paper that has broken as it is formed
and wound on the paper machine but is reprocessed into paper.
                                         2-19

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       At present, wastepaper, both pre- and postconsumer, constitutes over 28 percent of the
fiber sources for the U.S. paper industry. AFPA reports that over 75 percent of the more than
500 domestic paper mills recycle some pre- and/or post-consumer paper, and that 200 mills rely
solely on wastepaper for fiber (AFPA, 1992a).  In addition, several billion dollars in capital
outlays have been earmarked to expand the industry's recycling capacity with either new mills or
additions to existing mills. Table 2-1 lists new recycling-related mills and similar mills under
construction (Espe, 1993). Consequently, demand for wastepaper as a source material for
recycled-content products should rise in the future.

       Paper recycling involves  a complex series of operations, including collection, transport,
sorting, baling, and marketing.  After delivery to pulp and paper mills, secondary paper must
undergo repulping and, in some cases,  deinking prior to being mixed with other pulps and sent to
the paper machine. Secondary fiber repulping is generally simpler  than wood pulping. The most
common process entails loading a device called the pulper with water, and feeding wastepaper
into the water with conveyor belts until a solids concentration of 5 to 6 percent is reached. A
high-speed rotor at the bottom of the pulper agitates the wastepaper-water mixture, causing
fibers to break free and pass through a screen onto either the paper machine or the deinking
equipment.  Some repulping employs chemicals  and/or thermal energy to break down coated or
chemically treated papers, or paper printed with ink that is difficult to remove (Kline, 1982).

       Most repulped secondary fiber  is clean enough to proceed to paper machines for the
production of newsprint, tissue paper, and paperboard grades. Wastepaper designated for reuse
in white-paper manufacture must be deinked, however.  Deinking operations usually commence
in the repulper, where  chemicals are added to the wastepaper-water suspension.  Repulped paper
then passes through washers designed to remove dispersed ink. The washers are often drum
washers,  screens, or slotted plates, or, most recently, flotation chambers, where ink latches onto
foam or gas bubbles floating through the slurry and is carried to the chamber top and removed
(Kline, 1982).

       Secondary fiber typically does not undergo bleaching prior to the papermaking stage.
Where bleaching is practiced, chemical concentrations are typically smaller and conditions less
severe than required to bleach virgin pulps. Bleaching sequences of only one or two stages are

                                          2-22

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                                TABLE 2-1

                  NEW U.S. MILLS INVOLVED IN RECYCLING
                  START-UPS OR UNDER CONSTRUCTION-1992
STARTED IN 1992
NAME
EcoFibre
Fox River Fiber
Inland Container
LinPac
LOCATION
De Pere, Wisconsin
t)e Pere, Wisconsin
Maysville, Kentucky
Gaffhey, South Carolina
TYPE OF MILL
Market deinked pulp mill
200-tpd market deinked pulp plant
600-tpd recycled containerboard
250-tpd "mini-miir to produce recycled
containerboard
APPROVED OR UNDER CONSTRUCTION AS OF 1992
NAME
Southern Container
Amcor
American Power
Recyclers
Ponderosa Fibres
Solar International
Muskogee Linerboard
LOCATION
Syracuse, New York
Prewitt, New Mexico
Barrackville, West
Virginia
Northhampton,
Pennsylvania
Morrisville Pennsylvania
Muskogee, Oklahoma
TYPE OF MILL
100,000-tpy recycled containerboard mill
130,000-tpy recycled linerboard mill
400-tpd market deinked pulp mill
400-tpd market deinked pulp mill
100,000-tpy market deinked pulp mill
272-500 tpy recycled linerboard mill
Note:  tpd = tons per day
      tpy = tons per year
Source: Espe, 1993.
                                   2-23

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 common. Hydrogen peroxide is the dominant bleaching chemical for secondary fiber, although
 other chemicals are used, including chlorine, chlorine dioxide, sodium hypochlorite, and others.
 While most secondary fiber is used in products that do not require bleached pulp, the degree to
 which recycled high-grade paper replaces chlorine-bleached virgin fibers to produce white-paper
 grades will affect the amount chlorinated organics contained in mill effluent (EPA, 1991b).

       A brief description and overview of the market  for each of the five major categories of
 wastepaper is provided below.  Figure 2-4 shows current and potential recycling rates for these
 categories of paper.
       2.2.1,1 News

       The news category of wastepaper consists predominantly of old newspaper (ONP).  ONP
is supplied by private residences through curbside and dropoff collection programs, as well as
newspaper drives.  In addition, unprinted and excess newspapers from publishers and newsstands
contribute about 5 percent of overall news supply (EPA, 1991b). This source is called new
newspapers (NNP). ONP recovery is increasing because of the rising number of municipal
recycling programs being implemented across the nation.  Some areas of the nation have even
experienced a glut of recovered newspaper, attributable to lagging  demand for this category of
wastepaper. Demand for ONP is slated to increase in the near future as new newsprint mills
come on line across the nation (AFPA, 1992a).  According to the American Forest and Paper
Association (AFPA), in 1991 more than 4.2 million tons of news wastepaper were used to
produce newsprint, tissue products, recycled paperboard, and other paper products at U.S. mills.
An additional 1.28 million tons were exported (AFPA, 1993).
       2.2.1.2  Corrugated

       Corrugated is the common trade term for corrugated boxes and boxplant cuttings.  The
old corrugated container (OCC) grade of wastepaper is considered postconsumer, since the boxes
have been used, generally to ship goods to a factory, retail business, warehouse, or other
                                         2-24

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 commercial establishment. OCC is collected mainly by commercial haulers, although a portion is
 recovered from households in dropoff and curbside collection programs.  In 1991,13.9 million of
 the 24.7 million tons of used corrugated were recovered for recycling or export, representing a
 56.5-percent recovery rate (AFPA, 1993). The supply network for OCC is already well
 established among American commercial institutions, and should continue to provide increasing
 amounts of OCC in the future.

       Used corrugated is reprocessed into unbleached kraft paperboard, recycled linerboard,
 and other recycled paperboard products.  Like supply, demand for used corrugated has been
 increasing in recent years and should continue this trend in the future.
       2.2.7.5 Mixed Paper

       Mixed paper is a term the paper industry uses to refer to a wide range of wastepaper that
has been combined without regard to grade.  Mixed paper is often collected from homes and
offices or is left at paper recovery plants after higher grades have been sorted out.  Mixed paper
might contain magazines, groundwood papers, and colored papers that are not extremely
valuable on the recyclables market. Mixed office papers might contain large amounts of high-
grade white paper, which is sometimes sorted by a paper dealer to obtain a more valuable
commodity (EPA, 1991b). Mixed paper generally is used to produce recycled construction board
and other building products. About 3.7 million tons of mixed paper was recovered in 1991
(AFPA, 1992b).
       2.2.1.4 Pulp Substitutes

       Pulp substitutes are a very high grade of wastepaper that can be used directly in
papermaking to substitute for virgin pulp. They are almost always recovered from paper mills,
converting operations, and printers, and as such are considered preconsumer waste. Some of the
most common sources are bleached kraft paperboard cuttings from carton plants, envelope
cuttings, grocery sack trim and misprints, and shavings from cut paper converting.  Because of
                                         2-26

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their favorable properties, pulp substitutes are recovered at about a 100-percent rate (EPA,
1991b).
       2.2.JL5  High-Grade Deinking

       Bleached papers that have gone through a printing operation and been discarded from
data-processing centers, printing and converting operations, and source-separating office recycling
programs fall into the high-grade deinking category. Thus, this category consists of both pre- and
postconsumer wastes.  The most significant end products made from deinking grade wastepaper
are printing and writing papers, tissue papers, and other paper and paperboard products.
Demand for high-grade deinking papers has increased rapidly in recent years and should
continue to do so because of several factors, such as the federal guideline on the procurement of
recycled paper products and new production capacity coming on line (EPA, 1991b). AFPA
asserts that 50 percent of this grade of wastepaper can be recovered.  In 1991, the United States
recovered more than 3.2 million tons of high-grade deinking paper (AFPA, 1992b).
       2.2.2 Chlorine-Free Products

       Since the detection in 1985 of dioxins, furans, and other toxics in pulp and paper mill
wastewater effluents, paper companies, environmental groups, and the government have debated
the necessity and economic viability of mills adopting chlorine-free technologies. Many mills,
sensing new environmental  quality demands from customers and racing possible new regulations,
have already begun to switch from traditional chlorine bleaching methods to chlorine-dioxide
substitution and other technologies that significantly reduce chlorinated organics in wastewater
effluents.

       Two terms have gained currency in the dialogue on chlorine-free pulp and paper
production: elemental chlorine free (ECF) and totally chlorine free (TCP). ECF manufacturing
is the use of a bleaching sequence in which no elemental chlorine is used; TCP manufacturing is
the use of a bleaching sequence in which no chlorine or chlorine-containing compounds are used,
                                         2-27

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 thus preventing the generation of potentially toxic chlorinated organics.  In recent years, many
 mills in North America (where kraft pulping predominates) have investigated and changed
 conventional bleaching sequences where chlorine is used toward ECF sequences, e.g., sequences
 using more chlorine dioxide substitution. In recent years, many mills in Europe (where sulfite
 pulping predominates) have begun using TCP processes. From an economic standpoint,
 comparing the ECF and TCF processes should involve an examination of the cost of increasing
 existing chlorine dioxide generating capacity versus the cost of using other bleaching chemicals
 such as ozone or hydrogen peroxide, and should consider the compatibility of new bleaching
 chemicals with existing equipment.  It is still uncertain if the full range of kraft and sulfite pulp
 grades currently produced can be manufactured using TCF processes while providing equivalent
 chemical and physical characteristics of pulps produced today.

       As discussed in Section 2.1, capital improvements in the pulp and paper industry can cost
 millions of dollars.  Implementing oxygen bleaching at one mill, for example, can cost
 approximately $30 million and take  up to 3 years from concept, approval, and design to
 installation and startup (Erickson, 1993). Cost factors have prompted paper companies to
 examine the immediate market validity of chlorine-free products.  Although environmental
 groups report that European demand for pulp and paper is shifting to chlorine-free pulp and
 paper grades, some paper companies have failed to meet European chlorine-free demand
 requirements.  Other companies and environmental organizations claim that perception and lack
 of education are the only barriers to converting the customers to chlorine-free products (Sproull,
 1993).  These groups point to widely published studies to support their theory that most
 consumers have begun considering environmental issues when buying goods and services. With
 continuing negative media coverage  of dioxin, private citizens and businesses across the country
 have expressed a desire to purchase chlorine-free paper products. Many paper companies,
 however, point to the international competitiveness of the U.S. pulp and paper industry, asserting
 that compelling mills to adopt expensive  processes could hinder their sales abroad (Erickson,
 1993).

       Chlorine-free bleaching sequences represent an ultimate goal for many pulp and paper
manufacturers, since  removing  all chlorine from the bleaching process would further the
industry's progress toward a no-effect, closed mill  where bleaching chemicals can be recovered
                                        2-28

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and reused. This, in addition to environmental concerns, has led experts to predict a long-term
dropoff in chlorine usage (Erickson, 1993).  As chlorine-free technologies continue to come on
line and the market for chlorine-free paper products expands, an increasing number of pulp and
paper companies might recapitalize existing mills to introduce a chlorine-free process.
       2.23 Pollution Prevention

       Historically, U.S. industry and regulatory agencies have taken an end-of-the-pipe
approach to pollution control, striving to limit the impact of existing pollutants through the
treatment of sludges, effluents, and emissions.  In recent years, however, EPA and many
businesses and organizations have shifted toward preventing the generation of pollutants  in the
first place.

       Pollution prevention has gained validity as companies discover that some process  changes
can result in considerable economic savings.  These savings  are manifested in many forms,
including reduced waste disposal costs, increased productivity, and diminished liability. Barriers
to broader consideration of pollution prevention possibilities still exist, however. A methodology
for analyzing benefits of pollution prevention schemes has not been well-refined or widely
adopted by U.S. companies (Becker and White, 1993). Implementation of pollution prevention
programs can require significant  capital expenditures.  As such, pollution prevention capital
outlays must compete with  other capital outlays with respect to rate of return. Savings from
pollution prevention often are imbedded in overhead expenses, a lump expenditure that
frequently is not broken down by U.S. companies to analyze its separate sources.  In addition,
benefits from pollution prevention might materialize over a longer time period than benefits of
other capital outlays (Becker  and White, 1993). The economic analysis contained in this  report
incorporates many of the features discussed in the total cost assessment approach of Becker and
White (see Sections 3.1 and 3.2).

       With the current emphasis on pollution prevention, EPA and the pulp and paper  industry
are examining potential process changes aimed at reducing toxins in mill effluents.  Figure 2-5
repeats the process diagram for pulping and bleaching operations with the addition of possible
                                          2-29

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FIGURE 2-5
POLLUTION PREVENTION AND CONTROL MEASURES
Virgin Fiber

      Wood"1
     Sludge
Wood Handling
               Pulping
               Washing
                                 Chemical Return
                                Evaporation &
                                Recovery
                        Prebleach?
                                  A
                Pre-Bleaching
                     \
                        v
 Bleaching Stages
                 Market Pulp or
                 Paper Making
                  | Product
                  Wastewater
                  Treatment
                     Effluent
                                                Chip Control
                                                               Extended Damnification
                                                Black Liquor Spill
                                                Prevention & Control
                                                               Improved Pulp Washing
                                                               Oxygen Delignification
                                                               Chlorine Dioxide Substitution
                                                               Split Chlorine Addition
                                                               Improved Mixing
                                                               Elimination of Hypochlorite
                                                               Enhanced Extraction
                                       2-30

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pollution prevention and control measures at each stage.  Most of these process changes aim to

reduce chloroform generation and lignin concentrations in pulp before it enters the bleaching

sequence. Once lignin is successfully decreased, fewer chemicals such as chlorine are needed to

brighten the pulp, to produce a high-quality product, and to reduce the  potential for the

formation of chlorinated organics.  Some of the process changes that EPA considered during

regulatory development include:


       a      Chip control. The purpose of chipping is to reduce logs  to a chip size suitable for
              pulping.  Since chip uniformity is extremely important for pulping chemicals'
              proper circulation and penetration, considerable attention is paid to operational
              control and maintenance of the chipper. Both absolute chip thickness and
              thickness uniformity affect delignification, since the kraft cooking liquor can
              penetrate the chip only to a certain thickness. Thin chips are easier to cook to
              lower lignin levels. Thick chips, in contrast, could have a core of lignin unaffected
              by the pulping chemicals. Without treatment, this lignin  is  passed to the
              bleaching process.  To improve thickness uniformity, many  mills are now adopting
              screening equipment that separates chips according to thickness. Chips that
              exceed the maximum acceptable thickness are diverted to a chip slicer that cuts
              them radially and reintroduces them to the screening system.

       •      Extended delignification. Over the past decade, pulp equipment manufacturers
              and pulping mills have been devising ways to extend the cooking process  to
              remove more lignin without damaging cellulose. Extended delignification has
              been achieved with better controls over the pulping process conditions (namely,
              temperature, pressure, chemical composition of the cooking liquor,  and mixing).

       •      Black liquor spill prevention and control.  Black liquor could be spilled
              occasionally because of equipment failure, design flaws, or human error.  Losses
              can result from overflows or leaks from process equipment (spills),  or from
              deliberate operator action (diversions) taken to avoid much more serious
              consequences.  Black liquor spills can release volatile pollutants to the air, and
              spill cleanup could send an effluent with a very high oxygen demand to the
              wastewater treatment system.  Several design, engineering, and training measures
              can limit the number of spills, mitigate spill impacts, or prevent spills  in general.
              These measures include physical isolation of individual pieces of equipment  so
              that spills can be collected and recovered; modifications to  the  floor drainage
              system so that spills are collected and returned to the recovery  system; provision
              of additional backup storage capacity; sensors and other systems that immediately
              warn of potential or actual spill conditions; and replacement of open washing
              and/or screening  equipment with closed equipment.

       •      Improved pulp washing. In recent years, the efficiency of brownstock  pulp
              washing systems has been improved substantially. These  advances have been
              aimed at reducing effluent flows, improving  energy efficiency, and achieving better
              removal of dissolved lignin solids and spent  liquor from the pulp. Improved pulp
                                         2-31

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washing can lower the consumption of bleaching chemicals and hence the
formation of chlorinated organics.  Washing improvements include belt washers,
diffusion system washers, and computer control systems for better washer
operation.

Oxygen delignification.  Oxygen delignification is another way to extend the pulp
cooking process, thereby lowering the bleaching chemical demands and the
amount of pollution associated with chlorine-based bleaching stages. The
technique involves integrating an oxygen reaction tower between the kraft pulping
stages and the bleach plant. The brownstock pulp from the digester is first
washed and then mixed with oxygen and sodium hydroxide as it enters the
pressurized reactor.  There, the pulp undergoes oxidative delignification and is
washed again to removed dissolved lignin. Oxygen delignification can reduce
lignin content by up to 50 percent.

Chlorine dioxide substitution. Chlorine dioxide (C1O2), while it has been used for
about 30 years as a bleaching agent for later stages in the bleaching sequence, has
only recently been considered as a primary bleaching agent. Replacing up to 50
to 70 percent of the elemental chlorine in the first bleaching stage with chlorine
dioxide is now an accepted practice for environmental  improvement  and has been
widely adopted within the North American pulp and paper industry.  C1O2 acts
effectively on lignin because of the presence of oxygen in the molecule, which
increases the proportion of oxidative reactions and reduces the formation of
chlorinated organic compounds. C1O2 is produced on site at the mill, because its
chemical instability makes shipping dangerous.

Split chlorine addition/improved pH control. The split chlorine technique is
predicated on the notion that more control of the chlorine concentration in the
chlorination stage reduces the formation of chlorinated organics.  Mills employing
split chlorine technique divide the addition of chlorine to pulp into several
charges. By splitting the chlorine addition, oxidation reactions between lignin and
chlorine will be favored over so-called substitution reactions, which could form
chlorinated organics.  The pulp's pH is maintained  at a high level to increase the
formation of hypochlorous acid  (HOC1), a powerful agent for the needed
oxidation reactions.

Improved chemical mixing.  The equipment used to mix chemicals with pulp is an
important factor in controlling formation  of chlorinated organics. The high-shear
mixer offers greater consistency of chemical mixing, resulting in reduced potential
for pockets of excess chlorine or chlorine dioxide within the reactor vessel.  The
formation of  dioxins and furans, therefore, is reduced.

Elimination of hypochlorite. The substitution pf hypochlorite with C1O2 in
secondary bleaching stages further reduces the formation of chlorinated organics
in the bleaching effluent. A majority of U.S. bleached  pulp and paper  mills
already have  eliminated the use of hypochlorite.
                            2-32

-------
              Enhanced extraction. In a conventional bleaching sequence, the extraction stage
              follows chlorination, completes the solubilization, and facilitates the removal of
              chlorinated and oxidized lignin molecules. Adding gaseous oxygen or peroxide to
              the alkaline extraction stage can enhance the removal of lignin and provide
              additional bleaching power, thereby reducing the requirements for chlorine and
              chlorine dioxide (EPA, 1993).
       2.2.4  Air Pollution Issues

       The move toward reduced-chlorine or chlorine-free production processes offers, in
addition to water quality benefits, some air pollution benefits.  Most prominent is the reduction
in chloroform emissions. However, chlorinated compounds are not the only HAPs of concern,
and technologies that reduce or eliminate chlorine in the production process do not reduce all
HAPs.  In fact, some process change components may actually increase certain HAP emissions.
For instance, oxygen delignification units and extended cooking techniques may increase
emissions of formaldehyde and methanol, even though they reduce the need for chlorine
bleaching.  Therefore, the industry must be conscious of the total environmental impact of their
decisions in light of overall environmental risks and future regulations.
2.3    PRODUCTS AND MARKETS

       The 1990 National Census of Pulp, Paper, and Paperboard Manufacturing Facilities, Part
B: Financial and Economic Information collected information from every pulp, paper, and
paperboard manufacturing facility in the United States. Thus, the census provides a view of the
industry at the end of 1989. At that time, EPA estimated the mill population to be 566. The
market model uses this number of mills and their production characteristics (see Section 3.3).
The exact number of mills has changed since the 1990 Census, and EPA attempted to correct
mill population estimates by modifying the census data to exclude facilities that closed prior to
February 1993  and include mills that began operations after 1989. The more current estimate of
mill population is 565 facilities  (Rovansek, 1993). The data base comprising the economic
portion of the survey responses (also known as QFIN Version 2 or Part B Data) contains
                                         2-33

-------
information for 537 mills.  The information presented in this industry profile is based on QFIN
Version 2.

       The survey used four general categories to classify the products produced by this
industry—pulp, paper, paperboard, and molded pulp. Section 2.3 presents the information on
these categories, and how they compare with categories used by the U.S. Bureau of the Census
(DOC, 1989) and the American Forest and Paper Association (AFPA, 1992b).
       23.1 Market Pulp

       Once pulp has been generated by one of the mechanical and chemical methods described
in Section 2.1, the pulp can be used within the facility or company to produce paper and/or
paperboard products.  When sold to other papermaking operations, pulp is called market pulp,
and it follows its own supply  and demand dynamic. Only market pulp appears in the Part B
data.4 Table 2-2 cross-references the pulp categories used by the survey, the U.S. Bureau of the
Census, and AFPA. Note that a separate category appears for secondary fiber as a market
product in the survey, but not in the other two sources.

       Table 2-3 lists pulp shipments in tons for 1985, 1988, and 1989.  The amount shipped in
1989 was more than 25 percent higher than in 1985. Table 2-3 also compares the 1989 shipment
data with U.S. Bureau of Census and AFPA data.  Census and AFPA estimates vary
substantially; the survey data is very similar to the Census data. A few surveys have not been
included in the data base; hence, the survey data might be slightly lower than the other estimates.
The survey also includes mechanical pulp production that is not broken out in the other data; the
total estimates of market pulp produced are very similar.

       Table 2-4 lists the value of pulp shipments  for 1985, 1988, and 1989, as well as the 1989
values from Census and AFPA data. The value of shipments doubled within that period.  The
   4Pulp that is generated and used within an integrated facility does not appear in the Part B data
because it is not sold as a separate product. The Part B information contains shipment and revenue
information on final paper products, but not the pulp consumed in final product manufacture.
                                         2-34

-------
               TABLE 2-2
          1990 NATIONAL CENSUS
  PRODUCT CATEGORY CROSS-REFERENCES
U.S. PULP, PAPER, AND PAPERBOARD INDUSTRY

         PULP AND MOLDED PULP
1990 National Census of Pulp,
Paper, and Paperboard
Manufacturing Facilities
EPA
Survey
Code
10
11
12
13
14
15
16
17
18
19
70
Product
Category
Special alpha and
dissolving wood
pulp
Sulfate-bleached
Sulfate-unbleached
Sulfite-bleached
Sulfite-unbleached
Groundwood
Thermomechanical
Semi-chemical
Defibrated or
exploded
Secondary fiber
Molded pulp
products including
fruit and vegetable
packs and egg
cartons
Current Industrial Report
(Form MA 26A-1)
Product
Code
2611
2611335
2611343
2611416
2611426
2611465
2611467
2611472
2611478

2646
1987 on,
26794
Product
Category
Dissolving and special
alpha grades
Sulfate-bleached and
semi-bleached,
including soda
Sulfate-unbleached
Sulfite-bleached
Sulfite-unbleached
Groundwood
Thermomechanical
Semi-chemical
Defibrated or exploded

Pressed and molded
pulp goods; 1987 on,
molded pulp goods
Import/Export Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp
Exports
Dissolving and special
alpha
Sulfate-bleached (semi-
bleached not included)
Sulfate-unbleached
Sulfite-bleached
Sulfite-unbleached
Groundwood
Thermomechanical
Semi-chemical
Defibrated or exploded

2567140; pressed or
molded pulp goods
including trays, dishes,
cups, egg cartons; 1989
on, 4823700000, molded
or pressed articles of
paper pulp
Imports
Dissolving and special
alpha
Sulfate-bleached (semi-
bleached not included)
Sulfate-unbleached
Sulfite-bleached
Sulfite-unbleached
Groundwood
Thermomechanical
Semi-chemical
Defibrated or exploded

2567000; pulp articles
exc. paper and
paperboard, NSPF; 1989
on, 4823700000, molded
or pressed articles of
paper pulp
               2-35

-------
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                            2-37

-------
 price for market pulp averaged about $360/ton in 1985, and $630/ton in 1989.  There is veiy good
 agreement among the survey, Census, and AFPA data.

       Table 2-5 presents the value of pulp exports for 1985,1988, and 1989.  Exports nearly
 tripled within this period. Between 1988 and 1989, there was a 25 percent growth in pulp
 exports.  In 1989, market pulp exports contributed nearly $3.4 billion to the U.S. balance of
 trade.  The EPA survey data for pulp exports agrees well with the Census and AFPA statistics.

       The Census did not gather data on product imports, since this data is market rather than
 facility related.  Table 2-6 presents AFPA statistics Oh pulp imports for 1985,1988, and 1989.
 The quantity of pulp imports increased by about 10 percent from 1985 to 1989. Table 2-7
 presents AFPA statistics on the value of pulp imports for the three years.  Not unlike the value
 of pulp shipments, the value of pulp imports nearly doubled from 1985 to  1989.
       2.3.2  Paper Products

       Table 2-8 cross-references the paper-product categories used by the survey, the Census,
and AFPA. Note that detailed information oh some paper products is not available within the
AFPA statistics.
       Table 2-9 lists paper shipments in tons for 1985,1988, and 1989, as well as the 1989
shipment data with U.S. Bureau of Census and AFPA. The tons shipped increased by 20 percent
from 1985 to 1989. In general, there is good agreement among all sources for the major product
categories (e.g., newsprint, uncoated groundwood, clay-coated printed and converted, uncoated
freesheet, and tissue). The discrepancies occur with the smaller, less well-defined categories. In
several cases, there is more variation between the Census and AFPA estimates than with the
survey data.

       Table 2-10 lists the value of paper shipments for 1985,1988, and 1989.  The value of
shipments increased nearly 50 percent within the period. The survey data correspond well with
the Census and AFPA data.

                                         248

-------
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2-41

-------
               TABLE 2-8

          1990 NATIONAL CENSUS
  PRODUCT CATEGORY CROSS-REFERENCES
U.S. PULP, PAPER, AND PAPERBOARD INDUSTRY

                PAPER
1990 National Census of Pulp,
Paper, and Paperfooard
Manufacturing Facilities
EPA
Survey
Code
20
21
22
23
24
25
26
27
28
Product
Category
Newsprint
Uncoated
groundwood paper
(uncoated papers
containing more
than 10%
mechanical fiber)
Gay-coated
printing and
converted paper
Uncoated free
sheet (containing
not more than
10% mechanical
fiber)
Bleached bristols,
excluding cotton
fiber index and
bogus
Cotton fiber
writing paper and
thin paper
Unbleached kraft
packaging and
industrial
converting paper
Special industrial
paper, except
specialty packaging
Tissue
Current Industrial Report
(Form MA 26A-1)
Product
Code
2611
26212
26213
26214
26215
26216
26217
26219
26210
Product
Category
Newsprint
Uncoated groundwood
paper (uncoated
papers containing more
than 10% mechanical
fiber)
Clay-coated printing
and converted paper
Uncoated free sheet
(containing not more
than 10% mechanical
fiber)
Bleached bristols,
excluding cotton fiber
index and bogus
Cotton fiber writing
paper and thin paper
Unbleached kraft
packaging and
industrial converting
paper
Special industrial
paper, except specialty
packaging
Tissue
Import/Export Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp
Exports
Newsprint
Printing and writing
paper, uncoated
groundwood
Clay-coated printing and
converted paper
Uncoated book; 1978
on, uncoated free sheet
Bristols
Writing and related
papers; 1978 on,
printing and writing
paper — thin and cotton
fiber
Unbleached kraft (exc.
shipping sack)
Special industrial paper
Tissue paper
Imports |
• 	 	
Newsprint |
Printing and writing
paper, uncoated
groundwood
	
1978 on, printing and
writing paper, coated and
impregnated paper j
Printing and writing
paper, uncoated book
Bristols
Writing and related
papers; 1978 on, writing
papers, other fine paper,
thin paper
Unbleached kraft
packaging and industrial
converting paper
Special industrial paper
Tissue paper
               2-42

-------
TABLE 2-8 (coat)



    PAPER
1990 National Census of Pulp,
Paper, and Paperboard
Manufacturing Facilities
EPA
Survey
Code
30
31
32
33
34
35
36
37
Product
Category
Wrapping
Shipping sack,
unbleached and
bleached sulfite,
semi-bleached and
bleached kraft, and
mixtures of both
Other shipping
sack, including
rope and
combination kraft
and rope shipping
sack paper
Other bag and
sack, unbleached
and bleached
sulfite, semi-
bleached and
bleached kraft, and
mixtures of both,
grocers and sack
paper
Other bag and
sack paper for
conversion in
liquor, millinery,
notion, or other
variety bags
Waxing stock
Other, such as
asphalting and
creping stocks,
coating and
laminating,
gummed, twisting,
and spinning stocks
Specialty packaging
Current Industrial Report
(Form MA 26A-1)
Product
Code
2621812
2621332
2621834
2621851
2621859
2621864
2621868
2621872
Product
Category
Wrapping
Shipping sack,
unbleached and
bleached sulfite, semi-
bleached and bleached
kraft, and mixtures of
both
Other shipping sack
paper
Other bag and sack,
unbleached and
bleached sulfite, semi-
bleached and bleached
kraft, and mixtures of
both, grocers and sack
paper
Other bag and sack
paper for conversion in
liquor, millinery,
notion, or other variety
bags
Waxing stock
Other, such as
asphalting and creping
stocks, coating and
laminating, gummed,
twisting, and spinning
stocks
Specialty packaging
Import/Export Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp
Exports
30 & 32-37 Other
packaging and industrial
converting papers
Shipping sack,
unbleached






Imports
30-37 Other packaging
and industrial converting
papers







   2-43

-------
TABLE 2-8 (cont)




    PAPER
1990 National Census of Pulp,
Popcr, and Paperboard
Manufacturing Facilities
EPA
Survey
Code
38
Product
Category
Glassine,
greaseproof, and
vegetable
parchment
Current Industrial Report
(Form MA 26A-1)
Product
Code
2621883
Product
Category
Glassine, greaseproof,
and vegetable
parchment
Import/Export Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp
Exports
Glassine, greaseproof,
and vegetable
parchment
Imports
Glassine, greaseproof,
and vegetable parchment
(added)
    2-44

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-------
       Table 2-11 presents the information on the value of paper exports for 198?, 1988, and
1989; the value of paper exports nearly doubled in this time period.  Although paper exports in
1989 were only about 30 percent of pulp exports, they still contributed nearly $1 billion to the
U.S. balance of trade.  The survey data are similar to the Census data for paper exports, but are
lower than the AFPA value.

       Table 2-12 presents AFPA statistics on paper imports for 1985,1988, and 1989.  The
quantity of paper imports increased every year after 1982 before declining in 1989.  Printing and
writing papers made up the bulk of paper imports, comprising nearly 96 percent of total paper
imports in 1989.  Table 2-13 presents AFPA statistics on the value of paper imports for the 3
years. The value of paper imports did not rise as much as the value of pulp imports, but
managed a 41-percent increase from 1985 to 1989.
       2.3.3 Paperboard Products

       Table 2-14 cross-references the paperboard categories used by the survey, the Census,
and AFPA.  Table 2-15 lists the paperboard shipments in tons for 1985,1988, and 1989 as well
as the 1989 shipment data from U.S. Bureau of Census and AFPA.  There was nearly a 30-
percent increase in the tonnage shipped from 1985 to 1989. The value of shipments in 1989 were
nearly 50 percent higher than in 1985. In general, there is good agreement among all sources for
the major product categories (e.g., unbleached kraft packaging and industrial, semichemical, and
recycled paperboard). The discrepancies occur with the small, less well-defined categories (e.g.,
                                       s                                        - -
insulating board and other bleached board).  In several cases, there is more variation between
the Census and AFPA estimates than with the survey data (e.g., linerboard).

       Table 2-16 lists the value of paperboard shipments for 1985,1988, and 1989, as well as
1989 Census and AFPA data. The value of shipments increases by nearly 50 percent within the
period. There is very good agreement among the three data sources.

       Table 2-17 presents the value of paperboard exports for 1985,1988, and 1989.
Paperboard exports more than  doubled during this period.  The value of paperboard exports

                                         2-47

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              TABLE 2-14

         1990 NATIONAL CENSUS
  PRODUCT CATEGORY CROSS-REFERENCES
U.S. PULP, PAPER, AND PAPERBOARD INDUSTRY

             PAPERBOARD
1990 National Census of Pulp,
Paper, and Paperboard
Manufacturing Facilities
EPA
Survey
Code
40
41
42
43
50
51
52
60
61
62
Product
Category
Unbleached kraft
packaging and
industrial
converting
paperboard
Semi-chemical
paperboard,
including
corrugated
medium and other
uses
Recycled
paperboard
Wet machine
board, including
binder's board and
shoe board
Construction paper
Hardboard
Insulating board
Linerboard
Folding carton-
type board
Milk carton board
Current Industrial Report
(Form MA 26A-1)
Product
Code
26311
26313
26314
26318
2621B
24934
24934
2631210
2631110
1631261
Product
Category
Unbleached kraft
packaging and
industrial converting
paperboard
Semi-chemical
paperboard, including
corrugated medium
and other uses
Recycled paperboard
Wet machine board,
including binder's
board arid shoe board
Construction paper
Hardboard
Insulating board
Linerboard
Folding carton -type
board
Milk carton board
Import/Export Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp
Exports
1978 on, other kraft
paperboard — unbleached
Corrugating medium
semi-chemical
Recycled furnish
paperboard
Wet machine board
Construction paper and
board, building paper
1978-1983, hard pressed
board
Insulating and hard
pressed board; 1978 on,
insulating and other
building board
Kraft linerboard
61-66 Bleached
packaging paperboard;
1984 on, folding boxboard
1984 on, milk carton
Imports
40&42 Other
paperboard
1978 on, semi-chemical
corrugating

Wet machine board
Building paper
1967-1983, hard pressed
board
Insulating board and
other building board
60-66 Test or container
board


               2-51

-------
TABLE 2-14 (cont)



  PAPERBOARD
1990 National Census of Pulp,
Paper, and Papetboard
Manufacturing Facilities
EPA
Survey
Code
63
64
65
66
Product
Category
Heavyweight cup
and round, nested
food container
Plate, disk, and
tray stock
Bleached
paperboard for
miscellaneous
packaging
Other solid
bleached board
including bleached
paperboard for
moist, oily, and
liquid foods
Current Industrial Report
(Form MA 26A-1)
Product
Code
2631262
2631263
2631283
2631286
Product
Category
Heavyweight cup and
round, nested food
container
Plate, dish, and tray
stock
Bleached paperboard
for miscellaneous
packaging
Other solid bleached
board including
bleached paperboard
for moist, oily, and
liquid foods
ImporfyExport Product Category
from AFPA's Statistics of Paper,
Paperboard, and Wood Pulp |
Exports
1984 on, 63 & 64, plate,
dish, tray, and cup
•
1984 on, 65 & 66 Other
bleached packaging
paperboard

Imports 1




    2-52

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 consistently exceeded that of paper exports during the survey period. In 1989, paperboard
 exports contributed $1.4 billion toward the balance of trade.

       Table 2-18 presents AFPA statistics on paperboard imports for 1985, 1988, and 1989.
 The quantity of paperboard imports increased 22 percent from 1985 to 1989.  Table 2-19
 presents AFPA statistics on the value of paperboard imports for the 3 years.  The value of
 paperboard imports increased steadily throughout the 1980s. The 1989 value was nearly double
 the 1985 value.
       2.3.4  Product Prices

       Average product price data are available from both the Bureau of Census and the AFPA.
Figure 2-6 shows the trend of price indices constructed for the market pulp, paper and
paperboard product categories from 1981 to 1989. The price trend somewhat mirrors the
industry's business cycle, with low prices prevailing in the early and mid-1980s, and higher prices
coinciding with the more prosperous late 1980s. The price of market pulp products is the most
cyclical, and the price of paper products is the least cyclical of the three product categories.
2.4    FACILITY-LEVEL INFORMATION

       2.4.1  Geographic Distribution of Facilities

       Figure 2-7 and Table 2-20 provide a count of facilities by state for 1989 based on the
QFIN2 data base.  The pulp, paper, and paperboard industry has facilities in 42 states.  Most of
these facilities are  located in the country's eastern portion.  Figure 2-8 ranks these states by
number of facilities.  The bars show the relative proportion of independent facilities.5 New
   sAn independent facility is a single facility with no other facilities under the same ownership and
no other components in the corporate hierarchy. For example, a single U.S. mill that is part of a
foreign company or holding company is considered  a single mill, but not independent. About 10
percent of the mill population met the definition of an independent  facility.
                                         2-56

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2-58

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                                             2-60

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TABLE 2-20




NUMBER OF MILLS BY STATE
State
AK
AL
AR
AZ
CA
CO
CT
DE
FL
GA
IA
ID
IL
IN
KS
KY
LA
MA
MD
ME
Ml
MN
MO
MS
MT
NC
NH
NJ
NM
NY
OH
OK
OR
PA
SC
TN
TX
VA
VT
WA
Wl
WV
Number of Mills
2
18
8
2
30
1
9
2
11
24
2
1
9
11
1
5
13
29
3
18
31
9
2
10
1
15
12
14
1
49
30
6
12
31
8
12
10
12
5
20
46
2
                                       Total
                                                         537
 S:\ECON\PULP2\EIA\SEC_2\TABL\STATE. WK4
                                                       2-61

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                                                  2-62

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York has the most faculties, followed closely by Wisconsin.  Pennsylvania, Michigan, Ohio,
California, and Massachusetts each have approximately 30 mills.  Georgia and Washington have
20 or more mills each. The remaining states have fewer than 20 mills each.  New Hampshire
ranks near the middle in terms of the number of mills, but half of them are independent
facilities.

       Table 2-21 and Figure 2-9 summarize facility distribution by EPA region.  Region 4
(Southeast) and Region 5 (Great Lakes) dominate the group with more than 100 mills in each.
Figure 2-9 also indicates the relative predominance of independent facilities in the middle and
northeastern part of the country. Table 2-22 provides a data summary-^>y EPA region, by state,
and by independent facilities.
       2.4.2 Facility Size

       Assets.  There are approximately 516 facilities in EPA's data base with 1989 facility-level
asset information.6  Table 2-23 summarizes the minimum, maximum, mean, and total facility-
level assets for 1985,1988, and 1989. These assets are the total of current and noncurrent assets
and are listed in thousands of current dollars (i.e., data for 1985 are in terms of 1985 dollars
while data for 1989 are in terms  of 1989 dollars).  The population size changes for each year;
there is asset information for 447 mills in 1985, 508 mills in 1988, and 516 mills in 1989.  In most
cases, if a mill was sold to a new owner, the new owner had technical information, but not
financial information, for earlier years. Table 2-23 indicates that 1985 data were not available for
about 13 percent of the facility population, while 1988 data was not available for less than 2
percent of the population. In other words, there is a fair amount of fluidity in mill ownership; a
mill might have been operating for decades, but have had several owners during that time.

       The data are stratified by whether a mill is part of a multifacility organization.  There are
several examples of single facilities that are part of a larger corporate hierarchy. According to
   6No 1989 data were available for mills that changed ownership after 1989, began operations after
1989, or whose financial information was combined with that of another facility.
                                          2-63

-------
 TABIE 2-21



 NUMBER OF MILLS BY EPA REGION
Region
Region 1
Region 2
Region 3
Region 4
Region 5
Region 6
Region 7
Region 8
Region 9
Region 10
Number of Mills
73
63
50
103
136
38
5
2
32
35
                                    Total
                                                       537
S:\ECON\PULP2\EIA\SEC 2\TABL\STATE.WK4
                                                    2-64

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                                            2-65

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 TABLE 2-22



 NUMBER OF MILLS BY EPA REGION, STATE, AND INDEPENDENT STATUS
EPA Region

Region 1





Region 2



Region 3






Region 4









Region 5







Region 6






Region 7




Region 8



Region 9



Region 10





Total
'State
CT
MA
ME
NH
VT
Region Total

NJ
NY
Region Total

DE
MO
PA
VA
WV
Region Total

AL
FL
GA
KY
MS
NC
SC
TN
Region Total

IL
IN
Ml
MN
OH
Wl
Region Total

AR
LA
NM
OK
TX
Region Total

IA
KS
MO
Region Total

CO
MT
Region Total

AZ
CA
Region Total

AK
ID
OR
WA
Region Total

Independent
No
8
23
17
6
5
59

12
42
54

2
2
25
9
1
39

17
10
22
5
10
12
8
12
96

8
11
27
9
27
44
126

8
13
1
6
9
37

2
1
1
4

1
1
2

2
28
30

2
1
12
20
35
482
Yes
1
6
1
6
0
14

2
7
9

0
1
6
3
1
11

1
1
2
0
0
3
0
0
7

1
0
4
0
3
2
10

0
0
0
0
1
1

0
0
1
1

0
0
0

0
2
2

0
O
0
0
0
55
State Total
9
29
18
12
5
73

14
49
63

2
3
31
12
2
50

18
11
24
5
10
15
8
12
103

9
11
31
9
3O
46
136

8
13
1
6
10
38

2
1
2
5

1
1
2

2
30
32

2
1
12
20
35
537
S:\ECON\PULP2\EIA\SEC 2\TABL\STATE.WK4
                                                    2-66

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survey data, an intercompany account frequently is kept as a current asset for facilities that are
part of a multifacility organization.  This intercompany account can have a negative value if, for
example, the books close after the payroll has been written but the check from corporate
headquarters to cover the payroll has not been received. In other words, negative current assets
are a legitimate survey response at the facility level.  The negative value for multifacilities in 1985
can be attributed to this intercompany account issue.  Several facilities had no assets kept at the
facility level, which explains the zeros seen as minimum values for 1988 and 1989.

       The average facility had assets of $81 million in 1985, $97 million in 1988, and $107 in
1989. Assets for the population totaled $36 billion in 1985, $49 billion in 1988, and $55 billion in
1989. The average single facility has about one-third to one-half the assets of a multifacility
organization's facility. The median assets for a single facility in 1985 were $11 million.  While
the difference between the median and mean assets for  any comparable group indicate that the
distribution is skewed by a smaller number of large facilities, even the median values indicate a
large asset base per facility. The asset numbers reflect the industry's capital-intensive nature.
They may also indicate that assets might not be the best parameter by which to define a small
business entity in this analysis.

       Shipments.  Section 2.3 outlines industrywide summaries of pulp, paper, and paperboard
shipments and comparisons with publicly available information. The value of shipments for 1985,
1988, and 1989 are listed in Table 2-24 by whether the mill is independent. Independents
account for only 5 percent of the value of pulp shipments and 3 percent of the paper and
paperboard shipments. Figure 2-10 is a histogram of the total value of pulp, paper, and
paperboard shipments, which peak at about $10 million to $20 million and drop off sharply at
higher revenues, but include sporadic occurrences of very high revenues.  Figure 2-10 indicates a
possible dividing point for identifying small businesses. A mill with a highly-specialized product,
however, could have few employees and small production, but large revenues. The possible
inverse relationship between product specialization and revenues suggests that the value of
shipments (or revenues) is not a logical  choice for categorizing small and large business entities.
                                          2-68

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       Employees.  The survey requested the average number of employees engaged in:

       •      Pulp, paper, or paperboard operations
       •      Other production operations
       •      Nonproduction operations

The data were provided for 1989 and are summarized in Table 2-25. The average independent
facility has about one-third the production employees as a multifacility organization's mill.  In
one independent facility, whose workers are all contracted from another company, the facility's
books show zero employees.7 Zero entries for other production workers imply that the facility
makes only pulp, paper, and paperboard. For a few facilities in the survey, papermaking
operations form only a small part of the overall business.  For example, if a facility makes
shingles or wallpaper, papermaking might engage only a small part of the work force.
Comparing the number of nonproduction employees to the total number of employees indicates
that nearly one in five facility employees is not engaged in production.

       The data base shows a total of 220,000 employees in the relevant segments of the
industry for 1989. This figure is slightly higher than the 200,000 employees listed for SIC codes
261, 262, and 263 in the 1989 County Business Patterns (DOC, 1991). Employment numbers in
the Census data, however, do not include proprietors  and partners of unincorporated businesses.
AFPA lists 197,000 employees in 1989, of which 153,000 are in production (AFPA, 1992b, Table
xxxi, taken from the 1989  Annual Survey of Manufactures).  The AFPA value for production
workers (153,000) might reflect only those production employees affiliated with non-independent
mills. The survey value of 153,711 non-independent production workers agrees with this
interpretation of the AFPA value.
   7Zero employees for a nonindependent mill can occur when the mill (1) started operations after
1989, (2) changed ownership after 1989, or (3) has information combined with that of another mill.
In the last case, both mills are kept in the count, but the number of employees for one mill is set
to zero.
                                         2-71

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       There may be another reason that the survey data indicate a larger number of employees
in the pulp, paper, and paperboard industry than shown in AFP A or Census data.  The number
of employees in SIC code 2661 (building paper and board mills) is included in the survey, but
not in the Census or AFPA values.

       Figure 2-11 is a histogram of the number of mills by number of employees. The
distribution levels off at 750 employees.  The Small Business Administration definition of "small"
business for this industry is confirmed as a useful distinction in the analysis (discussed below in
Section 2.4.2.1).  The graph changes also at the 125-employee mark. This cutoff might be useful
for distinguishing "very small" business entities.
       2.42.1 Definition of Small Business Entity Used in this Analysis

       The Regulatory Flexibility Act came into effect on January 1,1981 (EPA, 1992b).  A goal
of the Act is to establish a mechanism to provide policymakers with information about how
regulatory options affect small entities. The intent is to ensure, if possible, that the chosen
regulatory alternative does not have undue or disproportionate impacts on small entities.  The
U.S. Small Business Administration issues definitions of "small businesses" in Code of Federal
Regulations, Title 13, Part 121. For pulp, paper, and paperboard companies (SIC codes 2611,
2621, and 2631, respectively), the size standard is 750 employees, which is one category that will
be used in the regulatory flexibility analysis.

       The Act recognizes several  definitions of "small" entities:  a small business is any business
that is independently owned and operated and not dominant in its field (EPA, 1992b).  For this
analysis, the definition of "small business entity" focuses on both the facility and the company.
Independent pulp and paper operations  are both single facilities and businesses, so a facility-
based definition is appropriate for  them. While a multifacility company could have more than
750 employees, those employees could be spread among numerous smaller facilities, some
engaged in pulp and paper production and some not.  By using a facility-based definition  for
"small entity," the regulatory flexibility analysis can identify smaller and more localized impacts.
The analysis  also will examine impacts on companies with 750 or fewer employees.

                                          2-73

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       In addition to the number of employees, other possible bases for identifying small entities
include assets and value of shipments.  A large asset base is needed for any pulp, paper, and
paperboard facility, while the importance of the value or number of shipments could vary
inversely with product specialization. Since jobs and potential employment loss due to increased
pollution control requirements is one focus of this analysis, small entities are defined by the total
number of employees at a facility.  (If a mill closes,  both the production and nonproduction
employees will lose their jobs; hence, the definition  is based on the facility's total employees.)
Based on the sharp break in the histogram in Figure 2-11,125 employees is a useful cutoff for
identifying a subset of small entities:

       •      Very small business entity:  A facility with 0 to 125 employees
       •      Small business entity: A facility with 126 to 750 employees
       •      Large business entity: A facility with more than 750 employees

Analyzing the first two categories on a combined basis is consistent with the Small  Business
Administration definition of a small business entity  in the pulp, paper, and paperboard industry.
Subdividing the data into 'Very small" and "small"  business entities allows for a closer
examination of whether the regulation's impacts fall disproportionately on smaller  entities.  More
discussion of small business entities and companies  is included in Section 3.4.
       2.4.3  Facility Age

       Figures 2-12 and 2-13 plot the age of the facility and the age of pulp and paper
operations at the facility, respectively.  In some cases, a facility built for one purpose was later
transformed into a pulp and paper operation; but the two histograms are very similar.  The
industry has a long and venerable history in this country; several operations date back to the
Colonial period.  The kraft pulping process was developed about 100 years ago, immediately
followed by a large increase in the number of facilities.  The number of facilities dipped during
the Great Depression and World War II, and a new influx of facilities came in the postwar
phase.
                                          2-75

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        These two figures do not tell the industry's whole story.  Pulp and paper operations might
 be long-established, but the large majority of mills continue to update, upgrade, and expand their
 operations. The survey asked for the date of the most recent renovation/expansion for the
 facility.  To qualify, the renovation/expansion had to be at least  10 percent of the value of the
 plant's accumulated gross investment. The renovation/expansion dates are shown in Figure 2-14.
 While a portion of the population functions with decades-old equipment, more than half the
 mills renovated or expanded between 1985  and 1990.  One way to interpret the data is that, if
 you have a specialized product or niche market, original equipment is sufficient; otherwise,
 frequent reinvestment is necessary to maintain a competitive edge.
       2.4.4 Capital Investment

       At the end of 1989, the pulp, paper, and paperboard industry showed an original
investment of $68 billion in land, buildings, and equipment (Table 2-26). Even after
depreciation, these investments totaled $42 billion. Single-facility establishments accounted for
approximately 9 percent of this asset base.  There were approximately 161,000 pulp, paper, and
paperboard production workers in 1989 (Table 2-25). The original investment per employee,
then, is approximately $420,000, indicating the capital-intensive nature of the industry.

       Capital investment is a continuing process in this industry.  Table 2-27 lists the
expenditures on new plant and equipment from 1980 to 1990 (AFPA, 1992b).  The investment
shows large increases to $5 billion to $8 billion/year for 1988 through 1990. This corresponds to
the large peak shown for these years in Figure 2-14.  In 1989, the industry invested about $47,000
per employee in new plants and equipment.  Table 2-27 also  lists the expenditures for
environmental protection (AFPA, 1992b).  Pollution control accounted for between 6 and 16
percent of new investment during this period. Since the AFPA data on the environmental
expenditures do  not specify whether the pollution control expenditures  are for the entire industry
or for primary mills, the percentages listed in Table 2-27 might be overestimates.
                                          2-78

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                                                                                                 O
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                                               2-79

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TABLE 2-28

1080 CAPITAL INVESTMENTS BEFORE AND AFTER DEPRECIATION
EPA SURVEY DATA
                          Type of Facility
                          	Type of Investment
   Capital Investment
(Thousands of Dollars)
                          Independent
                                    Land
                                    Buildings
                                    Equipment
                                    Total Capital
                                    Depreciated Value
                          Multi-facility
                          Industry
                                    Land
                                    Buildings
                                    Equipment
                                    Total Capital
                                    Depreciated Value
                                    Land  '
                                    Buildings
                                    Equipment
                                    Total Capital
                                    Depreciated Value
           $73.559
          $495.145
         $5,596,921
         $6,165,624
         $3,934,781
          $713.870
        $5,072,318
       $55,739,993
       $61,526,181
       $37,765,386
          $787,429
        $5,567.463
       $61,336,914
       $67,691,805
       $41,700.167
                          S:\ECON\PULP2\EIA\SECJ2\TABL\CAPIDIF.WK3
                                                                                       19-JUI-93
                                                 2-80

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TABLE 2-27

EXPENDITURES ON NEW PLANT AND EQUIPMENT. 1980-1990
                                         Expenditures on
                                New Plants and Equipment
                          Year
       Expenditures on
Environmental Protection Percent of Total
  (Thousands of Dollars)
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
$3.726.000
$3,957,000
S3.820.000
S3.497.000
S3.71 3,000
S4.290.000
S4,038,000
S3,764,000
S5, 126.000
S7.587.000
S8.307.000
$368,000
$360,000
$318,000
$327,000
$226,000
$342,000
$237,000
$403,000
$572,000
$1,039,000
$1,292.000
9.88%
9.10%
8.32%
9.35%
6.09%
7.97%
5.87%
10.71%
11.16%
13.69%
15.55%
                          S:\ECON\PULP2\EIA\SEC_2\TABL\TABL2_21.WK3

                          Source: AFPA. 1992b (Tables XXVI and XXVIIA).
                                                     2-81

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        2.4.5  Level of Integration

        A facility that both produces pulp and uses it to manufacture paper and/or paperboard
 products is considered an integrated mill.  Information in the survey's  technical part must be
 distinguished from that in the financial part. Only products that are sold appear in the survey's
 financial portion. If a facility manufactures pulp, but consumes it all in the manufacture of
 paper, that facility will appear as a integrated facility in the technical portion but not in the
 financial portion of the survey.  If that facility sells some of its pulp in addition to its paper
 products, it would appear as an integrated facility in both the technical and financial portions of
 the survey.

       Production data in the technical portion of the survey indicate that in 1989, 28 mills
 produced only market pulp, 303 produced only paper or paperboard products, and 235 were
 integrated facilities.  Table 2-28 presents the data on the number of mills by type of production
 derived from the financial portion of the survey.  In 1989, 209 facilities sold only paper, 177 sold
 only paperboard, 15 sold molded pulp products, and 11 sold other products such as photographic
 paper and other specialty items.  Some of these facilities might be integrated, but data from the
 survey's financial portion  do not identify them. Eighteen facilities  sold only pulp. It is highly
 unlikely that any of these facilities are integrated. There were 61 facilities—about 12
 percent—that are identified as integrated facilities with both pulping and papermaking
 operations.8

       Mills that exist to serve other facilities under the same ownership also can be considered
 integrated with respect to company operations.  During the survey  period, 333 of 519 mills
 indicated that they transferred pulp, paper, and/or paperboard to other facilities under the same
 ownership; for example, a mill might produce pulp to transfer it to papermaking operations at
 other locations.  Depending on the year, between 56 and 60 of the 333 mills indicated that 90
 percent or more of their revenues from one product came from such transfers (pulp, paper, or
   "Only 519 mills had 1989 data for products shipped. While even less data are available for 1985
and 1988, the overall pattern seen in Table 2-22 does not change dramatically for these years.
                                          2-82

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TABLE 2-28

LEVEL OF PRODUCTION INTEGRATION AT U.S. PULP AND PAPER MILLS
                                      Type of Production
                                                                            Number of Mills
                                      Pulp, paper, and paperboard
                                      Pulp and paperboard
                                      Pulp and paper
                                      Pulp
                                      Paperboard and other
                                      Paperboard
                                      Paper and paperboard
                                      Paper and other
                                      Paper
                                      Other
                                      Molded Pulp

                                      Total
 15
  6
 40
 18
  1
177
 24
  3
209
 11
 15

519
                                      S:\ECON\PULP2\EIA\SEC 2\TABL\INT
                                                                                13-Jul-93
                                                   2-83

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paperboard). Between 46 and 51 mills reported that over 90 percent of ajl pulp, paper, and
paperboard revenues were from transfers to other facilities under the same ownership
(Table 2-29). These mills are considered captive (Le., they exist to serve other parts of the
organization). The majority of the transfers are done at cost.

       This information affects the baseline closure analysis.  Captive mills will appear to earn
little or no revenues in the survey's financial portion. If captive mills have any salvage value,
they could be deemed as closures in the economic analysis (i.e., the salvage value exceeds the
expected stream of earnings, see Section 3.2) even before the addition of incremental pollution
control costs. Because of this phenomenon, the closure analysis should remove this type of
baseline closure from consideration when evaluating the impacts of the regulatory options.
       2.4.6  Length of Ownership

       An idea of the relative length of ownership can be obtained by examining the number of
mills without available  1985 or 1988 facility-level data. When a mill changes hands, frequently
the process and production information is available for the technical portion of the
questionnaire, but the financial data are not.  Four mills either started operations or changed
ownership between 1989 and 1990 when the survey was performed, and one mill had only one
month of data by the end of 1989. Starting with the 516 mills that could provide 1989 asset data
at the facility level (Table 2-23), 2 percent could not provide 1988 data and 13 percent could not
provide 1985 data. In other words, although companies might have been in existence and the
facilities have been in operation for many years, the precise composition of ownership (i.e., which
mills are owned by which companies) can change frequently. A value of the EPA survey is that
it provides a snapshot of the industry at  a certain point.  From this baseline snapshot, the
potential impacts of additional pollution controls are evaluated. If such a snapshot did not exist,
separating regulation-related impacts from natural industry fluctuations  might be very difficult to
impossible.
                                          2-84

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TABLE 2-29

CAPTIVE MILLS. 1985, 1988, and 1989
                               Transfer Price
                                                              Number of Captive Mills
                                                         1985
                                                                     1988
                                                                                1989
                               Market                       12          13         13
                               Manufacturing Cost            26          27         27
                               Other                         8          10         11

                               Total Number of Captiv         46          50         51
                               A:\CAPTIVE.WK3
                                                                             14-Jul-93
                                                    2-85

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2.5    SUBCATEGORIES

       For the purpose of establishing effluent limitations guidelines and national emission
standards for hazardous air pollutants (NESHAP) maximum achievable control technology
(MACI), an industry might be subcategorized based on manufacturing process and/or other
distinguishing characteristics.  For the guidelines, the pulp, paper, and paperboard industry is
divided into 12 subcategories (see Development Document for details).  The subcategories are
listed in Table 2-30. The table's right portion summarizes the pollution control requirements
applicable to  each subcategory (e.g., all subcategories are subject to best practicable control
technology currently available (BPT) requirements, while only six subcategories are subject to
revised best available technology economically achievable (BAT)/pretreatment standards for
existing sources (PSES) requirements.

       The middle columns of the table list the number of mills in each subcategory and the
number of mills that appear only in that subcategory.  For example, a mill with 70-percent
bleached kraft fiber and 30-percent deink secondary fiber would be counted in each of those
subcategories. No total is given at the bottom of the column due to this overlap. A "pure" mill
has all (100 percent) of its production in a given subcategory; this count is given in the right-
hand column. According to Table 2-30, more than half the mills have production in more than
one subcategory. There are about 281 pure mills that produce in only one subcategory, 168 of
which are  in the non-deink secondary category.

       Costs  of incremental pollution control were determined for individual mills.  The required
additions and upgrades are based on the current mix of production and processes.
2.6    COMPANY-LEVEL INFORMATION
       2.6.1 Number of Companies
       The financial portion of the survey identifies approximately 200 to 225 companies
engaged in the manufacture of pulp, paper, and paperboard in the United States. The number

                                         2-86

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              TABLE 2-30




SUBCATEGORIES AND REGULATORY COVERAGE
Effluent Subcategory
Dissolving Kraft
Bleached Papergrade
Kraft and Soda
Unbleached Kraft
Semichemical
Dissolving Sulfite
Papergrade Sulfite
Mechanical Pulp
Non-wood Chemical
Secondary Fiber, Deink
Secondary Fiber,
Non-deink
Fine and Lightweight
Papers from Purchased
Pulp
Tissue, Filter,
Nonwoven, and
Paperboard from
Purchased Pulp
Number of Mills
Number of
Mills in
this
Subcategory
3
88
58
21
5
11
57
12
43
342
115
169

Number of
Mills with
Production
only in this
Subcategory
3
28
6
0
5
0
0
4
20
168
19
28
281
Clean
Air
Act
MACT
X
X
X
X
X
X






161
Clean Water Act
BAT&
PSES
X
X
X
X
X
X






160
BPT/
BCT
X
X
X
X
X
X
X
X
X
X
X
X
325
BMP
X
X
X
X
X
X

X




172
                 2-87

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of companies remains in flux, as new companies enter the market and others go out of business
or are merged with other entities.  Table 2-31 lists the companies in the industry from the survey
data; most of these mills are included in the financial and market models.
       2.6.2 Number of Facilities by Company

       Table 2-32 summarizes the number of mills owned by the business entities. Most
companies own only one facility.  About a third of the companies own between 2 and 10
facilities. The largest number of facilities owned by a single company is 30. Only about 5
percent of the companies own more than 10 facilities, but they account for nearly 40 percent of
employment.
       2.63 Types of Company Ownership

       Approximately 28 percent of the companies are publicly owned, 64 percent are privately
owned, and the remainder have an unusual corporate structure. Without the survey, then, EPA
could not have analyzed nearly three-quarters of the affected firms.  The 8 percent that
responded "other" when asked how stock was distributed included partnerships, wholly-owned
subsidiaries, joint ownership, and foreign ownership with no stock holdings.  There are 55
independent facilities that have no other facilities under the same ownership and no other
components in the corporate hierarchy.  In other words, of the 126 firms that own one facility, 71
either have other facilities, or are owned by another entity.  S corporations can be identified only
if the financial information submitted with the survey includes this information.  The income
from an S corporation would be taxed at the rate for the individual to whom the income is
distributed. Less than five S corporations have been identified in the survey.
                                         2-88

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                                     TABLE 2-31
                       LIST OF BUSINESS ENTITIES IN SURVEY
A. GUSMER, INC.
AHLSTROM FILTRATION, INC.
ALABAMA RIVER PULP CO.
ALASKA PULP CORPORATION
ALPHA CELLULOSE CORPORATION
AMERICAN FIBRIT, INC.
AMERICAN PAPER PRODUCTS CO.
APPLETON PAPERS, INC.
ASHUELOT PAPER CO.
ATLAS PAPER MILLS
ATLAS ROOFING CORP.
AUGUSTA NEWSPRINT COMPANY
BADGER PAPER MILLS, INC.
BANNER FIBREBOARD  CO.
BEAR ISLAND PAPER CO., L.P.
BELOIT BOX BOARD CO.
BLANDIN PAPER COMPANY
BOISE CASCADE CORPORATION AND
      SUBSIDIARIES
BOWATER INCORPORATED
BRANDYWINE PAPERBOARD MILLS, INC.
BURROWS PAPER CORPORATION
CARAUSTAR INDUSTRIES, INC.
CASCADES, INC.
CELOTEX CORP.
CERTAINTEED CORPORATION
CHAMPION INTERNATIONAL CORPORATION
CHENEY PULP & PAPER CO.
CHESAPEAKE CORPORATION
CHESAPEAKE PAPERBOARD CO.
CLEANERS HANGER COMPANY
CLIMAX MANUFACTURING COMPANY
COLLINS & AIRMAN CORP.
CONNELLY PAPER MILL
CONSOLIDATED PACKAGING CORP.
CONSOLIDATED PAPERS, INC.
CORNWALL PAPER MILLS
CORRUGATED SERVICES, INC.
COTTRELL PAPER CO., INC.
COY PAPER CO.
CPM, INC.
CRANE & CO., INC.
CROCKER TECHNICAL PAPERS, INC.
DAISHOWA AMERICA - PORT ANGELES MILL
DILLARD INVESTMENT/HALLTOWN
       PAPERBOARD
DOMTAR GYPSUM, INC.
DUPONT SPECIALTY IMAGING MEDIA, INC.
E. B. EDDY PAPER, INC.
EASTERN FINE PAPER, INC.
EASTMAN KODAK COMPANY
EHV-WEIDMANN INDUSTRIES, INC.
EKCO GROUP
EQUITABLE BAG COMPANY, INC.
ERVING PAPER MILLS
ESLEECK MANUFACTURING CO., INC.
FAIRFIELD PAPER CO.
FEDERAL PAPER BOARD COMPANY, INC.
FIBRE FORM CORPORATION
FINCH PRUYN & CO., INC.
FLETCHER PAPER CO.
FLOWER CITY TISSUE MILLS CO.
FONTANA PAPER MILLS, INC.
FORT HOWARD CORPORATION
FORT ORANGE PAPER CO., INC.
FOX RIVER PAPER COMPANY
FRASER PAPER LTD.
FRENCH PAPER COMPANY
FSC PAPER CO.
G. E. ROBERTSON CO.
G.S. ROOFING PRODUCTS COMPANY, INC.
GAP BUILDING MATERIALS CORP.
GARDEN STATE PAPER CO.
GAYLORD CONTAINER CORPORATION
GEO. A. WHITING PAPER CO.
GEORGIA - PACIFIC CORPORATION
GEORGIA BONDED FIBERS, INC.
OILMAN PAPER COMPANY
GLOBE BUILDING MATERIALS, INC.
GOLD BOND BUILDING PRODUCTS, DIVISION
       OF NATIONAL GYPSUM CO.
GRAYS HARBOR PAPER CO.
GREEN BAY PACKAGING, INC.
GREIF BOARD CORPORATION
GROVETON PAPER BOARD, INC.
GULF STATES PAPER CORPORATION
HALIFAX PAPERBOARD CO., INC.
HENNEPIN PAPER CO.
HENRY MOLDED PRODUCTS, INC.
HOLLINGSWORTH & VOSE CO.
HOMASOTE CO.
HOWARD PAPER GROUP LIMITED
INLAND CONTAINER CORPORATION
INLAND EMPIRE PAPER COMPANY
INTERNATIONAL PAPER COMPANY
INTERSTATE RESOURCES, INC.
ITT RAYONIER, INC.
IVEX PACKAGING CORPORATION
JAMES RIVER CORPORATION
JEFFERSON SMURFIT CORPORATION
KAPACO GROUP
KEYES FIBRE COMPANY
KIEFFER PAPER MILLS, INC.
KIMBERLY-CLARK CORPORATION
KNOWLTON SPECIALTY PAPERS, INC.
LAKE SUPERIOR FOREST PRODUCTS, INC.
LAUREL HILL PAPER COMPANY
LEATHERBACK INDUSTRIES
LINCOLN PULP  & PAPER CO., INC.
LITTLE RAPIDS CORPORATION
                                     2-89

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                                TABLE 2-31 (Continued)
                       LIST OF BUSINESS ENTITIES IN SURVEY
 LONGVIEW FIBRE CO.
 LOS ANGELES PAPER BOX & BOARD MILLS
 LOUISIANA-PACIFIC CORPORATION
 LUNDAY-THAGARD CO.
 LYDALL,INC
 LYONS FALLS PULP & PAPER, INC
 M H DIELECTRICS, INC
 MACMILLAN BLOEDEL, INC.
 MACON KRAFT, INC
 MADISON PAPER INDUSTRIES
 MANCHESTER BOARD AND PAPER CO., INC.
 MANISTIQUE PAPERS, INC.
 MANVILLE FOREST PRODUCTS
       CORPORATION
 MARCAL PAPER MILLS, INC.
 MARTISCO PAPER CO., INC.
 MCINTYRE PAPER CO., INC.
 MD VALENTINE PAPER CO.
 MEAD CORPORATION
 MENASHA CORPORATION
 MENOMINEE PAPER CO., INC.
 MERRIMAC PAPER CO., INC
 MICHIGAN PAPERBOARD
 MIDTEC PAPER CORPORATION
 MIDWEST FOLDING CARTON, INC.
 MILLEN INDUSTRIES, INC.
 MOHAWK PAPER MILLS, INC
 MONADNOCK PAPER MILLS, INC.
 MOSINEE PAPER CORPORATION
 NEWARK GROUP INDUSTRIES, INC.
 NEWMAN AND COMPANY, INC.
 NEWSPRINT SOUTH, INC.
 NORFOLK PAPER CO.
 NVF COMPANY
 OHIO PULP MILLS, INC
 ORCHIDS PAPER PRODUCTS COMPANY
 P. H. GLATFELTER COMPANY
 PACKAGING CORPORATION OF AMERICA
 PAPCO PAPER CO.
 PAPER SERVICE LTD.
 PAPER-PAK PRODUCTS, INC.
 PAPERBOARD INDUSTRIES, INC.
 PAPERTECH CORPORATION
 PAPYRUS NEWTON FALLS, INC.
 PATRIOT PAPER CORPORATION
 PENACOOK HERE CO.
 PENNTECH PAPERS, INC
 PENTAIR, INC.
 PERKIT FOLDING BOX CORPORATION
PONDEROSA FIBRES OF AMERICA, INC.
 POPE & TALBOT, INC.
PORT TOWNSEND PAPER CORPORATION
POTLATCH CORPORATION
PROCTER & GAMBLE
PUTNEY PAPER CO.
 PWA ROLAND DECOR, INC.
 QUAKER OATS CO.
 QUIN-T CORPORATION
 RAND-WHITNEY PAPER BOARD CORP.
 RED HOOK PAPER, INC.
 REPROCELL CO.
 REPUBLIC PAPERBOARD COMPANY
 RIVERSIDE PAPER CORPORATION
 ROCK-TENN COMPANY
 ROGERS CORPORATION
 SCHOELLER TECHNICAL PAPERS, INC.
 SCOTT PAPER COMPANY
 SEALED AIR CORPORATION
 SEAMAN PAPER CO. OF MASSACHUSETTS
 SHRYOCK BROTHERS/REBAR PAPER CORP.
 SIERRA TISSUE, INC.
 SIMKINS INDUSTRIES, INC.
 SIMPLEX PRODUCTS DIVISION
 SIMPLICITY PATTERN CO., INC.
 SIMPSON PAPER COMPANY
 SMURFTT PACKAGING CORP.
 SONOCO PRODUCTS COMPANY
 SOUTHEAST PAPER MFG. CO.
 SOUTHWORTH PAPER CO.
 SPAULDING COMPOSITES CO., INC.
 SPECIALTY PAPER MILLS, INC.
 SPECIALTY PAPERBOARD, INC.
 ST. JOE FOREST PRODUCTS COMPANY
 STATLER INDUSTRIES, INC.
 STEVENS & THOMPSON PAPER CO., INC.
 STONE CONTAINER CORPORATION
 TAGSONS PAPERS, INC.
 TALLMAN CONDUIT CO.
 TAMKO ASPHALT PRODUCTS, INC.
 TEMPLE-INLAND FOREST PRODUCTS CORP.
 THE CRYSTAL TISSUE CO.
 THE DAVEY COMPANY
 THE DEXTER CORPORATION
 THE WESTON PAPER AND MFG. CO.
 U.S. PACKAGING, INC.
 U.S. PAPER MILLS CORPORATION
 UNION CAMP CORPORATION
 UNITED STATES GYPSUM COMPANY
 USM CORPORATION-TEXON  DIVISION
 VIRGINIA FIBRE CORP.
 W. R. GRACE & CO. - CONN. POLYFIBRON
       DIVISION
 WALDORF CORPORATION
 WAUSAU PAPER MILLS, INC.
WESTVACO CORPORATION
WEYERHAEUSER COMPANY
WHITE PIGEON PAPER COMPANY
WILLAMETTE INDUSTRIES, INC.
WINDSOR-STEVENS, INC.
YORKTOWNE PAPER MILLS, INC.
                                    2-90

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TABLE 2-32



NUMBER OF MILLS OWNED BY EACH  BUSINESS ENTITY
of
One Mi 1 1
2 to 5 Mills
6 to 10 Mills
More than 10 Mills
All Companies
D : \SMALLBUS\COMPANY\CHART .
Number
Companies
126
52
12
9
199
WK3
Percentage
of Companies
63.3%
26.1%
6.0%
4.5%
100.0%

Number
of Employees
32,036
57,657
47,373
83,425
220,491

Percentage
of Employees
14.5%
26.1%
21.5%
37.8%
100.0%
16-Jul-93
                                               2-91

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       2.6.4  Concentration Ratios

       There are approximately 200 business entities in the pulp, paper, and paperboard
industry. Most of these are single-facility companies; only 5 percent have more than 10 facilities
(see Section 2.62).  One method of examining the extent an industry is concentrated in a few
companies is to examine the ratio of production for the top five or ten firms to industry-wide
production.  EPA examined the concentration ratios for four selected products. Table 2-33
shows the data for the concentration ratios for bleached sulfate pulp, which accounts for nearly
80 percent of domestic market pulp shipments for 1989 (see Table 2-3).  The top five producers
account for 45 percent of all shipments.  The next five producers only account for an additional
24 percent of shipments.

       Table 2-34 examines the concentration ratios for three major paper products: newsprint,
clay-coated and converting paper, and uncoated free sheet. These three products account for 64
percent of all 1989 paper shipments (see Table 2-9). The top five companies account for
between 46 to 58 percent of all shipments for each product. The second five companies account
for between 24 to 28 percent of shipments.

       Table 2-35 examines the production for unbleached kraft packaging and industrial
converting paperboard—a product that accounts for nearly half of all paperboard production in
1989. The same pattern is seen for this industry segment; the top five firms produce nearly half
of all domestic production and another 25 percent is produced by the next five firms.

       Georgia-Pacific  and International Paper are the firms that appear most frequently in the
lists of the top five producers (three of five products).  The data for Georgia-Pacific reflect the
takeover of Great Northern Nekoosa that occurred shortly after the close of the survey period.
There are other firms that appear several times on Tables 2-33 through 2-35 and some  that
appear only once. The picture begins to form of an industry with a small  number of large firms
that control substantial  portions of major commodities and numerous small firms in specialized
niches.
                                         2-92

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TABLE 2-33

CONCENTRATION RATIOS FOR MARKET PULP
Product
                                          Off-Machine Tons  Cumulative
                                                    (1989)     Percent
Bleached Sulfate Pulp
     GEORGIA - PACIFIC CORPORATION
     INTERNATIONAL PAPER COMPANY
     SCOTT PAPER COMPANY
     P & G (PROCTER & GAMBLE CELLULOSE)
     FEDERAL PAPER BOARD COMPANY, INC.

Top 5 Companies                                  4,352,549       45.14%

     WEYERHAEUSER COMPANY
     CHAMPION INTERNATIONAL CORPORATION
     JAMES RIVER CORPORATION
     BOISE CASCADE CORP. AND SUBSIDIARIES
     ALABAMA RIVER PULP CO.

Top 10 Conpam'es                                 6,613,499       68.59%

Total Tons Shipped (All Companies)               9,641,598      100.00%

D:\SMALLBUS\COMPANY\PRODUCT\PULP.WK316-Jul-93
                                              2-93

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  TABLE  2-34

  CONCENTRATION  RATIOS  FOR PAPER
  Product
Off-Machine Tons  Cumulative
          (1989)     Percent
 Newsprint
      BOWATER  INCORPORATED
      CHAMPION  INTERNATIONAL CORPORATION
      JEFFERSON SHURFIT CORPORATION
      BOISE CASCADE CORP. AND SUBSIDIARIES
      WEYERHAEUSER COMPANY

 Top 5 Companies                                  3,483,226       58.23%

      AUGUSTA NEWSPRINT COMPANY
      GEORGIA - PACIFIC CORPORATION
      KIMBERLY - CLARK CORPORATION
      STONE CONTAINER CORPORATION
      SOUTHEAST PAPER MFG. CO.

 Top 10 Companies                                 5,120,043       85.59%

 Total Tons Shipped (All Companies)               5,982,294      100.00%


 Clay Coated Printing and Converted Paper


      CONSOLIDATED PAPERS, INC.
      SCOTT PAPER COMPANY
      CHAMPION INTERNATIONAL CORPORATION
      MEAD CORPORATION
      BOWATER  INCORPORATED

 Top 5 Companies                                  3,710,994       45.77%

      INTERNATIONAL PAPER COMPANY
      JAMES RIVER CORPORATION
      WESTVACO CORPORATION
      BOISE CASCADE CORP.  AND SUBSIDIARIES
      MIDTEC PAPER CORPORATION

 Top 10  Companies                                 5,995,405        73.94%

 Total Tons Shipped (All  Companies)                8,107,976       100.00%


 Uncoated  Free  Sheet


      INTERNATIONAL PAPER  COMPANY
     GEORGIA -  PACIFIC CORPORATION
     CHAMPION  INTERNATIONAL  CORPORATION
     BOISE CASCADE CORP.  AND SUBSIDIARIES
     UNION CAMP CORPORATION

 Top 5 Companies                                  5,775,492       54.76%

     JAMES RIVER CORPORATION
     WEYERHAEUSER COMPANY
     MEAD  CORPORATION
     P. H. GLATFELTER COMPANY
     SIMPSON PAPER COMPANY

Top 10 Companies                                 8,276,367       78.47%

Total Tons Shipped (All Companies)              10,547,085      100.00%

0:\SMALLBUS\COMPANY\PROOUCT\PAPER.WK316-Jul-93
                                           2-94

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TABLE 2-35

CONCENTRATION RATIOS FOR PAPERBOARD
Product
Off-Machine Tons
          (1989)
                                                            Cumulative
                                                               Percent
Unbleached Kraft Packaging and Industrial Converting Paperboard
     STONE CONTAINER CORPORATION
     GEORGIA - PACIFIC CORPORATION
     INTERNATIONAL PAPER COMPANY
     WEYERHAEUSER COMPANY
     UNION CAMP CORPORATION

Top 5 Companies

     JEFFERSON SMURFIT CORPORATION
     INLAND CONTAINER CORPORATION
     UESTVACO CORPORATION
     WILLAMETTE INDUSTRIES, INC.
     PACKAGING CORPORATION OF AMERICA

Top 10 Companies

Total Tons Shipped (All Companies)
       9,366,049
      14,053,170

      18,807,504
 49.80%
 74.72%

100.00%
D:\SMALLBUS\COMPANY\PRODUCT\BOARD.WK3
                                                             16-Jul-93
                                                2-95

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       The high level of concentration and specialization is echoed in Census data which
calculates coverage and specialization ratios. A coverage ratio represents the ratio of primary
products shipped by the facilities in the industry to the total quantity of these products shipped
by all manufacturing establishments wherever classified. A specialization ratio represents the
ratio of primary product shipments to total product shipments for the establishment  classified in
the industry. These ratios are calculated on the basis of pulp, paper, and paperboard production
by establishment, while the concentration ratio examines individual product groups by company.
In the 1987 Census data, both the specialization and coverage ratios were about 87 and 69
percent, respectively, for pulp mills, 91 and 96 percent for paper mills, and 91 and 90 percent for
paperboard mills  (DOC, 1990).  Loosely interpreted, these ratios indicate that paper and
paperboard tend to be made only at paper and paperboard mills, respectively, and that is all the
establishments make.  In contrast, pulp mills tend to make only pulp, but a larger proportion of
pulp is manufactured at establishments not classified as pulp mills.
       2.6.5  Employment

       In 1989 the pulp, paper, and paperboard manufacturing industry included approximately
220,000 production and nonproduction employees. Section 2.4.2 provides details on the number
of employees per facility and how the survey value compares with Census and AFPA data.  This
total number is approximately one-third of all employees associated with the paper and allied
products industry (SIC 26) (DOC, 1991).  Of the estimated 90.5 million people employed in the
private sector in the United States during the  1989, paper and allied products account for nearly
1 percent, at 697,000 people  (DOL, 1992). Furthermore, the paper and allied products industry
accounts for 4 percent of U.S. manufacturing jobs.

       Employment by company is available from a combination of survey data and data
published by American Business Institute  (ABI, 1993).  Total employment for companies
involved in pulp, paper, or paperboard production (listed in Section 2.6.1) is over 650,000.
Figure 2-15 is a histogram  showing the number of companies by number of employees.  The
figure indicates that the majority of companies involved in pulp, paper, or paperboard production
                                         2-96

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                                          2-97
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                                                                            • o
                                                                            • o
o
o
£
                                                                                 Q.
£

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 employ fewer than 700 employees, although several large conglomerates employ more than
 10,000 people. The largest, Proctor and Gamble, employs nearly 95,000 company-wide.
       2.6.6 Observations

       The companies in the U.S. pulp, paper, and paperboard manufacturing industry are not
 easy to characterize.  Some companies also have operations in other related industries, such as
 forest products (e.g., Georgia-Pacific and St. Joe Forest Products). For other companies,
 papermaking is but one of several industries (e.g., Quaker Oats, Eastman Kodak, E.I. du Pont de
 Nemours & Co., and Sonoco Products Company). While a few business entities own or control
 more than 10 facilities, the majority are  single-facility operations.  There is a small number of
 foreign corporate parents in the survey, but identifying them illustrates the complexity  of some
 corporate hierarchies.  For example, in the data base, a company lists itself as the corporate
 parent for other companies in addition to facilities under its own name. The responses to survey
 questions that ask for the business entity and the corporate parent do not identify the corporate
 parent as an indirect wholly owned subsidiary of a European company; that information is
 contained in the 10K forms submitted with the survey. Foreign corporate parents with U.S.
 facilities—identifiable in the survey—include: Compagnie de Saint Gobain, Daishowa  America
 Co. Ltd., Deutsche Fibrit Gesellschaft, Jefferson Smurfit Corporation, and Noranda Forest, Inc.
 In two cases, a joint corporate parent controls the business  entity.

       The industry is marked by the diversity of its companies, which in turn reflects the
variation in products—ranging from  large-volume common commodities (such as tissue) to
specialized products (such as paper used in printing money).
2.7    FINANCIAL PATTERNS FOR THE INDUSTRY

       The value of shipments, which is the best estimate of pulp, paper, and paperboard
manufacturing revenues, grew from $37 billion to $59 billion from 1985 to 1989 (see Section 2.3).
                                         2-98

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Revenue and profit data are reported by AFPA (1992b), but these relate to paper and allied
products.  As seen in the employee data in Section 2.6, this category includes much more than
the industry studied in this analysis. The value of exported products also increased from $2.4
billion to $6 billion during the 1985 to 1989 period.  According to Fortune magazine, a leading
U.S. business journal, the  pulp and paper industry is one of the few domestic industries capable
of competing well in an international market (Kupfer, 1992).

       The discount rate is an estimate of the pulp facilities' average cost of capital.  In the data
base, respondents provided discount rates  of 1 percent to 50 percent. In addition, nearly one in
five facilities said they did not use a discount rate when evaluating capital investments.  Another
eight mills gave a discount rate of zero, ostensibly because they do not borrow money. These
facilities are assigned the  average discount rate to represent the cost of having to raise the money
through a loan or from diverting the cash  from a revenue-producing project  (opportunity cost).
In the cost annualization model (described in Section 3.1), discount rates less than 5 percent or
greater than 19 percent are replaced with  the average discount rate. A rate below 5 percent is
suspiciously low given that banks in 1989 charged a prime rate of nearly 11 percent, and the
discount rate at the Federal Reserve Bank of New York was nearly 7 percent (CEA, 1993).  A
rate above 19 percent is more likely to be a "hurdle" rate—the rate of return desired in a project
before it will be undertaken.  About 7 percent of the responses that provided a discount rate fell
into the "unacceptable" range (37 mills).  For the remaining questionnaires, the average  discount
rate was 13 percent.

        Based on survey data, predictions can be made about the financial health of the facilities
and companies potentially affected by the regulation.  Financial ratios derived from facility and
company income statements and balance sheets provide insight into the industry's financial health
and how it changes through time.  Ratios, depending on how they are calculated, can be used to
evaluate profitability, leverage, and liquidity. Section 3.13  describes the ratios used in the
analysis.  After the ratios are calculated for each facility and/or business entity, the average and
median values are calculated.  Table 2-36 shows the facility-level ratio analysis for 1985,1988,
and 1989.  Both the median and mean value are presented because of the variability in the
ratios; median values are much less affected by outliers.  The median 1985 gross income margin
and return on assets values indicate how poor a year it was; these ratios are almost half the
values for 1989.  The current ratio, on the other hand, remains above 1.0 for all 3 years,

                                           2-99

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TABLE 2-36

BASELINE FACILITY-LEVEL RATIO ANALYSIS
ALL HILLS
Ratio
Gross Income Margin:
Mean:
Median:
Return on Assets:
Mean:
Median:
Current Ratio:
Mean:
Median:
Net Uorking Capital:
Mean ($000):
Median ($000):
Net WC/ Total Assets:
Mean:
Median:
Baseline
1985
2.1%
5.7%
17.0%
9.5%
3.16
1.85
$5,275 $5
$2,211 $2
16.4%
11.0%
Parameter
1988
1.8%
11.6%
31.0%
17.3%
2.72
1.84
,948
.778
12.0%
9.8%
1989
0.3%
12.3%
32.3%
17.5%
3.26
1.81
$5,392
$2,284
10.3%
8.8%
Percent
Variation
87.9%
53.2%
47.6%
45.9%
16.4%
1.7%
11.3%
20.4%
37.2%
20.5%
Notes:  This table includes independent,  single-facility,  and
multi-facility entities.  There are 523 mills in the  analysis.
D:\SHALLBUS\RATIOS.WK3
16-Jul-93
                                             2-100

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indicating that the typical facility had more assets than liabilities.  The industry downturn actually
started at the end of 1989 (DeKing et aL, 1990); most facilities closed out 1989 with lower net
working capital than in 1988. This pattern is also seen in the 1989 drop in net working
capital/total assets.  The percent variation is defined as the ratio of the difference between the
maximum and minimum values to the maximum value.  The measure provides an estimate of the
variation in ratios seen during a business cycle.

       Baseline financial ratios for the company or business entity are shown in Table 2-37. As
expected, net income margin is smaller than the gross income margin in Table 2-36, but with the
same business cycle pattern. The company's return on assets also is smaller because all costs are
considered, and it also reflects the business cycle pattern. Current ratio and debt-to-asset ratio
stayed very stable during this period, which might indicate that little can be learned from these
ratios in the impact analysis.  The difference between the mean and median times interest earned
(TEE) is  striking. Some companies have very small debts on their balance sheets and, therefore,
very high TIE ratios, which skew the average up and away from the median. A similar
phenomenon occurs with the net working capital.

       Tables 2-36  and 2-37 indicate the cyclical nature of the pulp, paper, and paperboard
industry.  For this report, the fluctuatiohs in financial ratios due to the business cycle are
important to consider when assessing the impact of incremental pollution control costs.  For all
ratios that do not involve net working capital, impacts will be evaluated on a facility-by-facility
basis, and the average and median impact will be reported (i.e., the mean change).  In contrast,
the incremental impacts for net working capital and net working capital/total assets were
measured on a population basis (i.e., the change in the mean), because some mills have negative
net working capital.  Further reductions appear as positive changes and provide misleading
results.
2.8    INTERNATIONAL COMPETITIVENESS OF THE PULP AND PAPER INDUSTRY
       The 1980s marked a watershed in U.S. economic activity. The global dominance the U.S.
industrial sector had enjoyed since the end of World War II was eroding quickly in the face of

                                          2-101

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 TABLE 2-37

 BASELINE BUSINESS  ENTITY-LEVEL RATIO ANALYSIS
 ALL COMPANIES

Ratio
Net Income Margin:
Mean:
Median:
Return on Assets:
Mean:
Median:
Current Ratio:
Mean:
Median:
Net Working Capital:
Mean ($000):
Median (SOOO):
Net WC/ Total Assets:
Mean:
Median:
Debt/Asset Ratio
Mean:
Median:
Times Interest Earned:
Mean:
Median:
Baseline
1985
1.8%
4.2%
4.6%
5.8%
3.55
1.90
$46,172 3
$5,584
20.3%
18.3%
51.5%
50.2%
45.5
6.3
Parameter
1988
6.2%
5.3%
9.3%
8.5%
2.48
1.91
170,231
$7,090
20.0%
17.5%
57.2%
53.2%
34.2
8.8

1989
4.7%
5.0%
8.0%
6.5%
2.43
1.79
$62,005
$5,841
18.2%
13.2%
58.4%
54.4%
21.1
7.1

Variation
71.0%
19.8%
50.8%
31.8%
31.6%
6.0%
34.3%
21.2%
10.5%
28.3%
11.7%
7.8%
53.8%
28.8%
Notes:  Includes independent, single-facility,  and multi-facility entities.
        There are 196 companies in the analysis.
D:\SMALLBUS\COMPANY\BIZSTAT2.WK3
                                                                 16-Jul-93
                                           2-102

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increased international competition from Europe and Asia. Many businesses found themselves
unprepared for a worldwide marketplace.  The pulp and paper industry has succeeded in
maintaining and  enhancing its international performance level throughout this economic
transition, as a result of both of the general capital and labor structure of U.S. pulp and paper
mills, and of favorable economic conditions.  This section reviews the factors contributing to the
pulp and paper industry's advantageous position in the global market.
       2.8.1 Foreign Trade Statistics

       According to the U.S. Industrial Outlook: 1993, published by the U.S. Department of
Commerce International Trade Administration, the trade deficit for the pulp and paper industry
has been declining continuously over the past several years (ITA, 1993). In 1991, the trade
deficit measured $1.1 billion; by 1992,  the deficit had shrunk to $330 million.  By adding to this
total the export/import figures  for wastepaper trade, the 1992 balance changes to a $260-million
surplus.  The paper and allied  products industry witnessed a record high value of exports in 1992,
shipping $10.4 billion of pulp, paper, and board products (excluding wastepaper) to U.S. trading
partners.  Export tonnage in 1992 exceeded 20 million metric tons for the first time in history.
Wood pulp exports accounted for about 31 percent of the dollar total;  printing  and writing
papers (including newsprint) brought in another 15 percent of this total, followed by linerboard
(11 percent), boxboard (8 percent), and sanitary and all other converted products (almost 30
percent).  In 1991, Canada, Japan, Mexico, Germany, and Italy purchased over 50 percent of all
U.S. pulp, paper, and board exports (ITA, 1993). In that same year, over three-quarters of the
paper imported to the United States came from Canada, which ships a significant, but
diminishing, amount of newsprint to this country.  Finland, Germany, Japan, and Brazil
accounted for another 9 percent of U.S.  imports (ITA, 1993).

       The £7.5. Industrial Outlook examines export data  for the entire paper and allied products
industry, which includes manufacturers investigated in this study, as  well as converting mills that
export products such as cigarette paper and books (AFPA, 1992b).  The pulp, paper,  and
paperboard mills subject to the rulemaking  have experienced equally large increases in exports,
                                         2-103

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 as is shown in Tables 2-5, 2-9, and 2-13.  Total exports grew from $2.4 billion in 1985 to nearly
 $6 billion in 1989.  The reasons for this increase are discussed in the following section.
        2.8.2 Global Competitiveness of U.S. Paper Industry
       According to Fortune magazine, this country's forest products industry is one of two
 major U.S. industries whose dominant position in the world market is "not likely to erode
 significantly in the 1990s" (Kupfer, 1992).  Fortune supports its argument with statistics released
 by the Organization for Economic Cooperation and Development, which indicate that U.S. forest
 products manufacturers' share of total production among facilities in Japan, Europe, and the
 United States has risen from 46 percent in 1980 to 49.3 percent in 1989 (Kupfer, 1992; OECD,
 1992). The U.S. share of total world pulp and paper production points to similar dominance:  in
 1991, the United States produced 30 percent of the world's paper and paperboard and 35 percent
 of the world's wood pulp. U.S. production levels exceed the total pulp and paper output of the
 next four largest pulp- and paper-producing nations combined—Japan, Canada, Germany, and
 China (Storat, 1992).

       The continuing success of U.S. pulp and paper manufacturers in the global marketplace
 can be attributed to a series of industry and market  factors. First, the United States possesses
 vast natural reserves of trees and highly developed tree farming practices, resulting in steady and
 relatively inexpensive  fiber sources. More important, however, the pulp and paper industry has
 managed to maintain  a well-trained work force by investing billions of dollars since 1980 to boost
 productivity and to gain a foothold in new markets with new products (Kupfer, 1992). This high
 productivity, along with an industry operating rate that exceeds 90 percent, has resulted in low
 unit labor costs. In addition, by generating 56 percent of its own energy through incineration of
 manufacturing byproducts, the pulp and paper industry has relatively low energy costs.

       On the market side, a favorable foreign currency exchange rate has buoyed U.S. exports
of pulp and paper in recent years  (ITA, 1993). In addition, several recently concluded trade
agreements have improved the export  market for U.S. pulp, paper, and board. The U.S.-Canada
Free Trade Agreement (FTA), which commenced January 1, 1993, eliminates all paper industry
                                        2-104

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tariffs between the two signatories.  In April 1992, Japan and the United States concurred on
measures to help lower barriers to Japan's $27-billion paper market. Moreover, the General
Agreement on Trade and Tariffs (GATT) and the North American Free Trade Agreement
(NAFTA), if concluded, promise to enhance even further the international preeminence of the
U.S. pulp and paper industry (FTA, 1993). At present, the rate of export growth to developing
nations is more than double the rate to industrialized nations.  Exports have become increasingly
important to the paper industry since 1980; exports now account for about 8 percent of total U.S.
pulp and paper sales.9  With an increased focus on global markets among U.S. producers and
continued economic growth in developing nations, U.S. pulp and paper exports should continue
to increase throughout the 1990s (ITA, 1993).
       2.8.3 Environmental Regulations and Considerations

       The U.S. pulp and paper industry currently complies with three broad divisions of federal
environmental regulations:  water pollution, air pollution, and solid and hazardous waste. Each
category is discussed below from the perspective of existing regulations, ongoing regulatory
development activities, and nonregulatory initiatives that could affect the pulp and paper
industry.
       2.8.3.1 Water Pollution Control

       From 1974 to 1986, EPA promulgated several regulations that establish national effluent
 limitations for conventional and some toxic water pollutants emitted from pulp and paper mills.
 These pollutants include BOD5, TSS, pH, zinc, trichlorophenol (TCP), and pentachlorophenol
 (PCP). These limitations form the basis for the National Pollutant Discharge Elimination System
 (NPDES) permits that have been issued for pulp and paper facilities.  Under these permits,
 facilities are required to meet numerical limits on releases  of specific pollutants. For PCP, TCP,
    "Survey data for 1989 indicate exports were 45 percent of market pulp shipments (see Tables 2-4
 and 2-5), 2 percent of paper shipments (see Tables 2-10  and 2-11), and nearly 9 percent of
 paperboard shipments (see Tables 2-16 and 2-17).
                                         2-105

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 and zinc, new source performance standards (NSPS) have also been established. Individual
 facility permits can reflect more stringent requirements based on state and regional water quality
 issues and guidance on specific pollutants (e.g., dioxin).  Revised effluent limitations are part of
 the Agency's integrated rulemaking, which is the focus of this report's economic analysis.
        2.5.5.2 Air Pollution Control

        In 1978, under authority of the Clean Air Act (CAA), EPA promulgated NSPS to limit
 kraft pulp mills' emissions of particulates and reduced sulfur compounds (e.g., hydrogen sulfide,
 methyl mercaptan, dimethyl sulfide, and dimethyl disulfide). Revisions to these standards were
 adopted in 1986.  CAA compliance is mandatory for all facilities that began construction or
 significant modification after September 24,  1976. The CAA rules contain numerical emission
 limitations and monitoring requirements for particulates and reduced sulfur compounds from
 specific kraft mill  operations, including recovery furnaces, smelt dissolving tanks, digesters, brown
 stock washing systems, evaporators, and condensate stripper systems.

       Under the Clean Air Act Amendments of 1990, EPA will promulgate emission limits for
 189 hazardous air pollutants. As discussed in Section One, revised air emission standards are
 part of the integrated rulemaking for the pulp, paper, and paperboard industry.
       2.8.3.3 Solid and Hazardous Waste Control
       Solid and hazardous waste regulations affect pulp and paper mills insofar as they govern
facility sludge disposal and land application sites. Under the terms of a 1988 consent decree
(EDFINWF v. Thomas, D.D.C. No. 85-0973, July 27, 1988), EPA announced in November 1991
that there was insufficient evidence of potential risk to justify regulation under the Resource
Conservation and Recovery Act (RCRA) of landfill or surface impoundment disposal of
bleached pulp and paper mill sludge. Under a separate consent decree (EDF v.  Reilly, D.D.C.
No. 89-0598), EPA is required to "promulgate a listing determination for sludges from pulp and
paper mill effluent on or before the date 24 months after promulgation of an effluent guideline
                                        2-106

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regulation under the Clean Water Act for pulp and paper mills" (Id. at 10). The decree
specifies, however, that a listing determination would not be required if the final rule for the
effluent guideline revision is based on "the use of oxygen delignification, ozone bleaching, prenox
bleaching, enzymatic bleaching, hydrogen peroxide bleaching, oxygen and peroxide enhanced
extraction, or any other technology involving substantially similar reductions in uses of chlorine-
containing compounds," (Id. at 10-11).  Also in response to the 1988 consent decree, regulatory
actions to control land application under the Toxic Substances Control Act (TSCA) were
proposed in April 1991 and are still under development (EPA, 1993).
       2.8.4  Environmental Regulations Affecting Foreign Competitors

       U.S. environmental regulations often are compared with other countries' corresponding
rules to gauge potential effects on American international competitiveness.  Many pulp and
paper industry representatives express concern that stringent effluent limitations could put U.S.
firms at a disadvantage internationally because of increased costs of compliance.  The
environmental regulations faced by Canadian and some European manufacturers are examined
below.
       2.8.4.1 Canadian Regulations

       The pulp and paper industry is the single, largest discharger of wastewater in Canada
(Sjoblom, 1990). Canadian pulp and paper mills have confronted many of the same
environmental issues U.S. mills face today. Canada's national environmental regulatory bodies
have revised regulations governing BOD, TSS, acute toxicity, and environmental effects
monitoring.  These effluent regulations, which took effect on July 1, 1992, established the
following guidelines:  a monthly average per-facility BOD effluent limit of 7.5 kg/ton; a monthly
average per-facility TSS limit of 11.25 kg/ton; stricter toxicity tests on local fish populations; and
increased reporting and surveying of waterways.  The Canadian government also forbids  the sale
and use of wood chips from wood treated with PCP in mills using chlorine and/or chlorine
dioxide.  In other regulatory activity, mills using a chlorine bleaching process are prohibited from
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 releasing final effluent that contains any measurable concentration of dioxin or furan. Canadian
 provinces have established chlorinated organics (adsorbable organic halides, or AOX) limits for
 pulp and paper mills which vary in stringency. In Quebec, for example, existing softwood pulp
 mills must comply with a 2.5 kg/ton AOX limit, while new softwood mills must release no more
 than 1.5 kg/ton.  In Alberta, limits vary from mill to mill, but range from 0.3 kg/ton to 1.5 kg/ton
 (Pryke, 1992). In Ontario, a goal of 0.0 kg/ton AOX has been set for December 2002, with
 intermediate goals from 1.5  to 0.8 kg/ton (Bodien,  1993).

       Atmospheric emission regulations have been promulgated by Canada's provinces for
 sulfur dioxide (SO2), particulates, and total reduced sulfur (TRS), which includes a variety of
 sulfur-based emissions that cause odors. Canadian mills may not emit more than 200 to 300
 parts per million  (ppm) of SO2, 5 to 70 ppm of TRS, and 3 to 10.5 kg/ton of particulates
 depending on the province and, in some cases, the age of the mill (Sjoblom, 1990).
       2.8.4.2 European Regulations

       Until 1989, regulatory issues were the driving force behind the development of more
environmentally sound pulp and paper products and processes in Europe. In recent years,
however, market forces have been the main source of pressure for manufacturers to improve the
environmental performance of pulp and paper processes.  Influenced by environmental groups,
consumers—especially in Germany, Austria, and Switzerland—increasingly prefer products that
contain recycled fibers and chemical pulps bleached with minimal quantities of chlorine
chemicals.  Pulp and paper manufacturers throughout the European Community and Scandinavia
have responded quickly to meet changing demands (Malinen, 1992).

       In many European countries, recycled fiber in products is becoming accepted and even
required, and for many consumers,  environmental friendliness overrides concerns about
brightness.  Demand for both ECF and TCP pulp products is increasing in Europe. Sulfite
pulping of softwood predominates in Europe (OECD, 1992). A common nonchlorine pulping
process in Scandinavia involves (1) achieving low Hgnin levels through improved cooking
techniques, (2) oxygen delignification,  (3) efficient washing to remove dissolved and suspended
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organics and other impurities, (4) ozone delignification, and (5) peroxide bleaching (Malinen,
1992).  In addition, the sulfite pulp process, which does not require chlorine bleaching to achieve
brightness, dominates pulp production in Europe.

       Table 2-38 summaries various AOX regulations for the pulp, paper, and paperboard
industry.  Salzhammergut in Austria  and the Canadian province of Ontario have the strictest
requirements—0.0 kg/ton AOX. The Austrian limit is currently in effect while the Ontario limit
must be attained by the end of 2002.  Several of the European countries vary the limits by the
type of wood pulped (hardwood or softwood) or the pulping process (kraft or sulfite).
                                         2-109

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                                    TABLE 2-38

        JURISDICTIONS REGULATING AOX AS A WASTEWATER POLLUTANT
                                (AS OF APRIL 1993)
AUSTRALIA
Australia issued guidelines in 1989 for new bleached eucalypt kraft
pulp mills discharging to marine waters.  These guidelines stipulate
the following limitations on the discharge of AOX:
                           Maximum 24 hour average
                           (based on rated production capacity):
                           Maximum 1 year moving average
                           (based on actual production):
                                               2.5 kg/t1

                                               1.0 kg/t
CANADA

    Alberta



    British Columbia

    Ontario3
    Quebec
No Federal regulations for AOX, however, several provinces have
regulated AOX as follows:

Has no AOX regulations, however, all existing and new bleached
kraft mills have AOX limitations in their licenses.  These
limitations range from 0.29 kg/t (annual average) for a new facility
to 1.5 kg/t (monthly average) for existing facilities.

1.5 kg/t (monthly average) by 31 December 1995, and 0.8 kg/t by
31 December 2002, or 0.0 kg/t by 31 December 2000.2

1.5 kg/t (monthly average) by 31 December 1995.
1.93 kg/t  (daily maximum) by 31 December 1995.
0.80 kg/t  (monthly average) by 31 December 1999.
1.03 kg/t  (daily maximum) by 31 December 1999.
Goal of 0.0 kg/t by 31 December 20002.

1.5 kg/t (monthly average) for hardwood by 31 December 1993.
2.5 kg/t (monthly average) for softwood by 31 December 1993.
1.0 kg/t (monthly average) for hardwood by 30 September 1995.
2.0 kg/t (monthly average) for softwood by 30 September 1995.
0.8 kg/t (monthly average) by 31 December 2000.
EUROPE
   Austria

   Finland


   Germany

   Norway
One area of Austria, the Salzkammergut, has required the
attainment of 0.0 kg/t by the year 1992.

2.0 kg/t (maximum annual average) for softwood by 1995.
1.0 kg/t (maximum annual average) for hardwood by 1995.

1.0 kg/t for sulfite mills.

2.0 kg/t for kraft mills.
1.0 kg/t for sulfite mills.
                                      2-110

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TABLE 2-38 (cont.)
Sweden
Helsinki
Convention

Paris Convention



JAPAN
UNITED STATES
Oregon
Idaho
1.0 kg/t (annual average) by 1995 for softwood.
0.5 kg/t (annual average) by 2000 for softwood.
0.5 kg/t (annual average) by 1995 for hardwood.
0.3 kg/t (annual average) by 2000 for hardwood.
Following a 15 February 1988 meeting of the Ministers of the
Environment of the Baltic Sea Area, a proposal was worked out
that all new sulfite mills must meet immediately and all existing
chemical pulp mills must meet before the year 2000 the following
emission standards:
— Bleached kraft mills 2.0 kg/t
— Bleached sulfite mills 1.0 kg/t
The most recent Paris Convention meeting was held in London on
January 17-19, 1989. At that meeting, Sweden presented the
following proposal aimed at the reduction of chlorinated
substances from the production of bleached pulp:
1. As of January 1, 1994, the discharge of chlorinated organic
substances (AOX) should not, as an annual average, exceed
the following values for each contraction party's total
production of:
— softwood kraft pulp bleached with
chlorine chemicals 2 kg/t
— hardwood kraft pulp bleached with
chlorine chemicals 1 kg/t
— sulfite pulp bleached with
chlorine chemicals 1 kg/t
2. The annual average values for each mill should, as a minimum,
be based on one analysis a month. Analysis should be made
on representative 24 hours, unsettled samples.
The Japan Paper Association has established a goal of 1.5 kg/t for
all bleached pulp mills to be achieved by the end of 1993.
No federal or state regulations for AOX prior to this rulemaking;
however, several mills have been permitted for AOX as follows:
Two bleached kraft pulp mills have been permitted at 1.5 kg/t
(annual average) and 1.9 kg/t (monthly average) to be achieved by
15 November 1995.4 The remaining bleached kraft pulp mill in
Oregon, has been issued an order to achieve an annual average
AOX of 1.5 kg/t by 31 December 1997.
An existing facility was issued a permit with mass AOX limits
based on 1.5 kg/t (annual average) and 1.9 kg/t (monthly average).
  2-111

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                                   TABLE 2-38 (cont)
     Washington
Permit limits for bleached kraft pulp mill #1 are 1.5 kg/t5 (annual
average) and 1.9 kg/t (monthly average).  Permit limits for
bleached kraft pulp mill #2 are 1.3 kg/t (annual average) and 1.6
kg/t (monthly average) and must be achieved by 9 May 1996.
Permit limits for a dissolving sulfite mill are 1.5 kg/t (annual
average) and 1.9 kg/t (monthly average) and must be achieved by
10 December 1996.
Source: Bodien, 1993; McCubbin, 1992.

       'All tons are bleached metric tons unless other wise noted.
       2This alternative allows the discharger an exemption from meeting the 31 December 1995
requirements provided a plan is submitted to the director on or before 30 June 1992 for meeting
the 31 December 1990 requirement.
       3Draft regulations.
       "The permit for one facility was issued to the city POTW.
       5Limits for this mill based on unbleached metric tons  of production.
                                     2-112

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2.9    REFERENCES

ABL  1993. American Business Information, Inc. American business lists (online data base).
Omaha, Nebraska.

AFPA.  1992a. American Forest and Paper Association (formerly American Paper Institute).
Paper recycling: A primer, and Paper: Linking people and nature. Three handouts.  Washington,
DC.

AFPA.  1992b. American Forest and Paper Association (formerly American Paper Institute).
1992 statistics of paper, paperboard & wood pulp.  New York.

AFPA.  1993. American Forest and Paper Association.  Recovered paper statistical highlights
1992. New York.

Becker, M., and A. White. 1993.  Corporate versus societal perspectives on pollution prevention
benefits and total cost assessment.  Presentation at International Symposium on Pollution
Prevention in the Manufacture of Pulp and Paper:  Opportunities and Barriers. Washington,
DC.

Bodien, Dan.  1993. Jurisdictions regulating AOX as a wastewater pollutant (4/14/93). Table
prepared for U.S. Environmental Protection Agency, Office of Water, Office of Science and
Technology.

Broeren, LA.  1990.  Deinkmg of secondary fiber gains acceptance as technology evolves. Pulp
and Paper 64(3):71-75.

CEA.  1993. Council of Economic Advisers. Economic report of the president. Washington,
DC. Tables B-56 and B-69.

Congreve, R.  1992. Performance and cost considerations in pollution prevention practices.
Presentation at International Symposium on Pollution Prevention in the Manufacture of Pulp
and Paper: Opportunities and Barriers.  Washington, DC.

DeKing, Noel, Regina McGrath, Debra Garcia, Rob Galin, and Will Mies. 1990.  U.S. paper
industry is prepared for cyclical slowdown this year. Pulp and Paper pp. 57-60. (January)

DOC.  1989.  Department of Commerce. Current  industrial reports: Pulp, paper, and board.
MA26A(89)-1. Washington, DC:  U.S. DOC, Bureau of the Census.

DOC.  1990.  Department of Commerce. 1987 Census of Manufactures:  Pulp, paper, and board
mills. Document No. MC87-I-26A. Washington, DC: U.S. DOC, Bureau of the Census.

DOC.  1991.  Department of Commerce. County business patterns 1989:  United States.
Document No. CBP-89-1. Washington, DC: U.S. DOC, Bureau of the Census.
                                        2-113

-------
 DOL. 1992. Department of Labor. Monthly Labor Review 115(1):82. Washington, DC:  U.S.
 DOL, Bureau of Labor Statistics.

 Ducey, Michael. 1989. Chlorate, oxygen leap forward in pulp bleaching operations.  Pulp and
 Paper 63(7):43.

 EPA. 1991a. U.S. Environmental Protection Agency. Multimedia analysis of alternative pulp
 and paper technologies. (Draft of unpublished document.) Washington, DC: EPA Office of
 Pollution Prevention.

 EPA. 1991b.  U.S. Environmental Protection Agency. Markets for selected postconsumer waste
 paper grades.  (Final draft of unpublished document.) Washington, DC:  EPA Office of Solid
 Waste.

 EPA. 1992a.  U.S. Environmental Protection Agency. Characterization of municipal solid waste
 in the United States: 1992 update.  EPA/530-R-019. Washington, DC: EPA Office of Solid
 Waste and Emergency Response.

 EPA. 1992b.  U.S. Environmental Protection Agency. EPA guidelines for implementing the
 Regulatory Flexibility Act. Washington, DC: EPA Office of Policy, Planning, and Evaluation.

 EPA. 1993. U.S. Environmental Protection Agency.  Pollution prevention technologies for the
 bleached kraft segment of the U.S. pulp and paper industry. EPA/600/R-93/110. Washington,
 DC:  EPA Office of Pollution Prevention and Toxics/Pollution Prevention Division.

 Erickson, D. 1993.  Meeting the challenge of "no effect" pulping and bleaching.  Presentation at
 International Symposium on Pollution Prevention in the Manufacture of Pulp and Paper:
 Opportunities and Barriers.. Washington, DC.

 Espe, Carl.  1993. Capital spending plans: 1992-94. Pulp and Paper 67(l):75-82.

 Falatko, Debra.  1993. Information transmitted to Maureen F. Kaplan, Eastern Research Group,
 Inc. by Debra Falatko, Radian Corporation via facsimile. July 15.

 ITA. 1993. International Trade Administration. U.S. industrial outlook: 1993. Washington, DC:
 U.S. Department of Commerce International Trade Administration,  pp. 10-1 to  10-32.

 Kline, James. 1982. Paper and paperboard: Manufacturing and converting fundamentals. San
 Francisco: Miller Freeman Publications, Inc.

 Kupfer, Andrew. 1992. How American industry stacks up. Fortune 9:30-46.  (March)

 Malinen, Raimo. 1992. Chlorine-free bleaching: State of the art in Scandinavia.  Presented at
 the Non-Chlorine Bleaching Conference sponsored by Pulp and Paper Emerging Technology
Transfer, Inc., Hilton Head, SC.

McCubbin, Neil,  Howard Edde, Ed Barnes, Jens Folke, Eva Bergman, and Dennis Owen.  1992.
Best available technology for the Ontario pulp and paper industry. Report prepared by N.

                                        2-114

-------
 McCubbin Consultants, Inc. for the Ontario Ministry of the Environment:  Water Resources
 Branch.  Ontario, Canada. February.

 OECD.  1992. Organization for Economic Cooperation and Development. The pulp and paper
 industry. Paris, France.

 Pryke, Doug. 1992. Regulatory issues in Canada.  Presented at the Non-Chlorine Bleaching
 Conference sponsored by Pulp and Paper Emerging Technology Transfer, Inc.  Hilton Head, SC.

 Rovansek, Wendy. 1993. Pulp and paper mill math II. Radian Corporation. Memorandum to
 pulp and paper project team. Herndon, VA. June 29.

 Sjoblom, Krister.  1990.  Pulp mill emissions and environmental regulations.  Presented at the
 1990 TAPPI Pulping Conference.

 Sproull, H. 1993. Opportunities and barriers for using chlorine-free paper in North America.
 Presentation at International Symposium on Pollution Prevention in the Manufacture of Pulp
 and Paper: Opportunities and Barriers. Washington, DC.

 Storat, Richard.  1992. A profile of the U.S. pulp, paper, and paperboard industry. Presented at
 the International Symposium on Pollution Prevention in the Manufacture of Pulp and Paper:
 Opportunities and Barriers.  Washington, DC.

 Young, Jim.  1991. Pulping and bleaching chemicals accelerate enviro-driven shift.  Pulp and
Paper 65(ll):62-64.
                                       2-115

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                                  SECTION THREE
                    ECONOMIC IMPACT AND REGULATORY
                   FLEXIBILITY ANALYSIS METHODOLOGY
       The Agency is proposing effluent limitations guidelines and maximum achievable control
standards (MACT) for the pulp, paper, and paperboard industry.  The compliance options and
regulatory alternatives evaluated by the Agency are summarized in Section 4.1.  Compliance costs
include both capital costs (such as equipment) and annual operating costs (such as labor and
chemicals). Capital costs are one-time expenditures while incremental operating costs are
incurred  each year. Both types of costs generally increase the cost of production.

       The economic analysis investigates the change in financial  conditions caused by these
additional costs.  The first step in the process is to estimate what  a business would actually pay to
purchase, install, and operate the new pollution control equipment.  The estimation of the
cost—called the industry compliance cost—takes into account tax  savings the business accrues
through depreciation  and other tax shields. The compliance cost estimates what the industry
would pay to meet the new pollution control requirements. As  such, it is the appropriate
measure  of cost with  which to analyze industry impacts. The  data, assumptions, and model used
to estimate compliance costs for each facility are described in Section 3.1.

       Two methodologies are used  to examine the potential economic impacts of the
compliance costs on the pulp, paper, and paperboard industry.  The first method, described in
Section 3.2, uses a financial  model that focuses on individual  facilities. The second method,
described in Section 3.3,  uses a market model that examines interactions among all the facilities.
In Section 3.4. the models, their assumptions,  and  results are  compared.

       The Regulatory Flexibility Act requires an  analysis of  whether the potential impacts of
proposed regulations  fall disproportionately on small entities. Section 3.5 describes this study's
definition of "small entities" and the methods  used to examine economic impacts on these
entities.
                                          3-1

-------
3.1    COMPLIANCE COST MODEL

       The compliance cost model, also called the cost annualization model, estimates the cost
actually incurred by the facility to upgrade its pollution controls.  Figure 3-1 is an overview of the
compliance cost methodology. Inputs to the model include the capital and annual costs of the
pollution control equipment. The discount rate, also called the cost of money, is taken from the
1990 National Census of Pulp, Paper, and Paperboard Manufacturing Facilities, Part B:  Financial
Information survey data.  These inputs, in conjunction with financial  assumptions, are used to
calculate the cash outflows over time before and after tax shields.

       There are several reasons why the capital and annual costs need to be annualized.  First,
the initial capital outlay should not be compared against the facility's income in the first year
because the capital cost is incurred only once in the equipment's  lifetime.  The initial investment,
then, should be spread out over the equipment's life. Second, money has  a time value.  A dollar
today is worth more  than a dollar in the future. The cost annualization model is defined in
terms of 1989 dollars because  1989 is the most recent year for which financial data are available
from the survey. Pollution control capital and annual costs, which were initially  estimated in
1991 dollars, are deflated to 1989 dollars prior to projecting cash outflows. The  cash flows are
discounted to calculate the present value of the future cash outflows in terms of 1989 dollars. It
is a way of evaluating what the business would pay in 1989 dollars for all initial and future
expenditures.  Finally, the model calculates the annualized cost for the cash outflow as an
annuity that has the same present value as the cash outflow.  The annualized cost represents the
annual payment required by the business to finance the cash outflows and includes the cost of
money or interest. The annualized cost is analogous  to a mortgage payment that spreads the
one-time investment  in a home into a series of constant monthly  payments.  The annualized cost
is inflated to 1991 dollars for presentation  of the costs in the report  and for comparability with
the engineering cost  data presented in the  Development Document.

       Section 3.1.1  discusses the data sourees for inputs to the compliance cost model. Section
3.1.2 summarizes the financial assumptions  for the model.  Section 3.1.3 presents all  steps  of the
model with a sample calculation.
                                           3-2

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       3.1.1 Input Data Sources

       Table 3-1 illustrates the cost annualization model with fictitious data.  The inputs and
assumptions for the analysis are listed in the spreadsheet's top portion. The first input is the
survey identification number for the facility analyzed.  The second line is the number of the
regulatory option or alternative for which the annualized costs are calculated.

       The third and fourth lines are the option's capital and O&M costs, developed by the
engineering staff.  The capital investment is the initial investment to purchase and install the
equipment.  The capital cost is a one-time cost. The O&M cost is the annual cost of operating
and maintaining the equipment.1  O&M costs are incurred every year of the equipment's
operation. These costs are provided in terms of 1991 dollars. They are deflated to 1989 dollars
because the financial survey data are in 1989 dollars  (see discussion above).2

       The  life of the asset is determined according to the Internal Revenue Code's classes of
depreciable  property. Fifteen-year property is assumed to have a  class life of 20 to 25 years—a
typical life span for the equipment considered  in the  costing analysis. For example, a 20-year
lifetime for  a recovery boiler is a reasonable estimate (see Development Document).  According
to the U.S. Master Tax Guide, 15-year property includes such assets as municipal wastewater
treatment plants (CCH, 1991b, p. 329).  Thus,  for the purposes of calculating depreciation,  most
components of the capital cost for  a pollution control option are assumed to be 15-year property.
Section 3.1.2.3 discusses the effect  of using another asset  lifetime in the cost annualization
calculation.
    'The engineering cost model provides three components used in the compliance cost model:
total capital investment (TCI), annual noncapital fixed costs (GAC), and annual variable costs
(VAC).  Total capital investment is the cost of control dcvice(s) or process equipment needed to
meet the standard, including installation labor and materials.  TCI is the capita] cost used in the
compliance model.  GAC includes  general and administrative  overhead, property taxes, and
property insurance.  VAC includes operating and maintenance labor and materials, chemical
usage, and energy costs associated  with operating the control dcvice(s) and process equipment.
The compliance cost model uses the sum of GAC and VAC as its O&M cost.
    2The deflation factor is 4615/4835—roughly 0.95—based on the change in the Engineering
News Report Construction Cost Index from 1989 to  1991 (ENR, 1993).
                                            3-4

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       The discount rate is used in calculating the present values of the cash flows.  The discount
rate represents an estimate of the facility's average cost of capital, i.e., what it will cost the
facility to raise the money whether through debt (a loan), equity (sale of stock), or working
capital (opportunity cost). Section 2.7 reviews the survey data regarding discount rates and the
assumptions used for the cost annualization model.  Where facility-specific data are available and
where they are between 5 and 19 percent, the facility-specific data are used in the cost
annualization model. Where no discount data are available or where the data are outside of the
5 to 19 percent range, the industry average discount rate of 13 percent is used in the model.

       Since the cost annualization model is developed in terms of constant 1989 dollars, the
discount rate must be adjusted for  inflation before use in the model. Table 3-2 lists the average
inflation rate for the years 1981 to  1991  as measured by the Consumer Price Index.  An
estimated average inflation rate of 4 percent is used in the cost annualization model to convert
the nominal discount rate to a real discount rate.

       The final inputs to the model are the federal and average state tax rate, which  are used in
determining the facility's tax shield or tax benefit. A business can offset taxable income both
with incremental O&M costs and with the depreciation of the equipment itself. The federal tax
rate used in the model is  the marginal federal tax rate (the rate applied to corporate income
above $335,000).3 Table 3-3  lists each state's corporate income tax rate and calculates a national
average state tax rate.  The cost annualization model uses the average state tax rate because of
the complexities in  this industry; for example, a  facility could be located in one state,  while its
corporate headquarters are located in a  second state, and the corporation's holding company is
located in a third state. Given the  uncertainty over which state tax rate applies to a given
    'Costs for all facilities must be annualizcd to obtain the industry compliance cost.  Not all
facilities, however, have sufficient information in the data base for the closure analysis. Facilities
lacking such information could be mills that began operations after 1989, changed ownership
after 1989, have assets carried only at the corporate level, or have financial information held only
on a combined basis with another facility.  For all facilities, the cost annualization model uses the
34-percent marginal  federal income tax rate. The closure model  adjusts tax rates used to
determine post-tax earnings depending on whether the business is an S Corporation, a
multifacility corporation, or a single-facility, independent operation.
                                            3-6

-------
TABLE 3-2
INFLATION RATE 1981-1991
Year
  Consumer
      Price
      Index
Change
        1981
        1982
        1983
        1984
        1985
        1986
        1987
        1988
        1989
        1990
        1991
      90.9
      96.5
      99.6
     103.9
     107.6
     109.6
     113.6
     118.3
     124.0
     130.7
     136.2
  6.2%
  3.2%
  4.3%
  3.6%
  1.9%
  3.6%
  4.1%
  4.8%
  5.4%
  4.2%
Average Inflation Rate
                         4.1%
Source:
CEA, 1993, Table B-56.
                                                3-7

-------
TABLE 3-3
STATE CORPORATE INCOME TAX RATES
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennesee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Average'
Corporate Income
Tax Rate
5.00%
9.40%
9.30%
6.00%
9.30%
5.00%
11.50%
8.70%
5.50%
6.00%
6.40%
8.00%
4.00%
4.50%
12.00%
6.75%
8.25%
8.00%
8.93%
7.00%
9.50%
2.35%
9.80%
5.00%
5.00%
6.75%
7.81%
0.00%
8.00%
9.42%
7.60%
9.00%
7.00%
10.50%
8.90%
6,00%
6.60%
12.25%
9.00%
5.00%
0.00%
6.00%
0.00%
5 00%
8.25%
6 00%
0,00%
9.30%
790%
0.00%
675%
Basis for States
With Graduated
Tax Tables

$90,000+

$100,000+






$100,000+

Plus Excise Tax

$250,000+

$250,000+
$200,000+
$250,000+




$10.000+


$50,000+



$1Million+


$50.000+
Based on Stock Value









$250.000+






 Sources: Fortune Magazine. June 3,1991. pg 22. Commerce Clearing House
        "State Tax Handbook", 1991
 S:\ECON\PULP2\EIA\SEC_3\STATETAX.WK3
21-Sep-93
                                             3-8

-------
facility's revenues, the average state tax rate is used in the cost annualization model for all
facilities.
       3.1.2 Financial Assumptions

       The cost annualization model incorporates several financial assumptions:

       •      Depreciation method
       •      Timing between initial investment and operation
       •      Depreciable lifetime for the equipment
       •      Tax shields on interest payments

Each assumption, and the alternatives examined in making the assumption, is discussed in detail
below.
       3.1.2,1 Depreciation Method

       The Agency examined three alternatives for depreciating capital investments:

       •      Modified Accelerated  Cost Recovery System (MACRS)
       •      Straight-line depreciation
       •      Section 169 provision of the Internal Revenue Code

       Modified Accelerated Cost Recovery System (MACRS) applies to assets put into service
after December 31, 1986.  MACRS involves the ability to write off greater portions of the
investment in the early years.  In contrast, the straight-line depreciation writes off a constant
amount of the investment each year.  MACRS offers companies an advantage over the straight-
line method, since a company's income may be reduced under MACRS by a greater amount in
                                            3-9

-------
 the early years when the time value of money is greater. Table 3-4 illustrates that although the
 absolute amount depreciated under each method is equivalent, MACRS provides a $1.9 million
 benefit owing to the timing differences in writing off the investment.  The example in Table 3-4
 uses a midyear convention for putting the equipment into operation, which assumes only 6
 months of depreciation in the first year.

        Section 169 of the Internal Revenue Code provides the option to amortize pollution
 control facilities over a 5-year period (IRS, 1988). Under this IRS provision, 75 percent of the
 investment could be rapidly amortized in a 5-year period using a straight, line method. The 75-
 percent figure is based on the ratio of the allowable lifetime (15 years) to the estimated usable
 life (20 years) as specified in IRS Section 169, Subsection (f).  Although the tax provision enables
 the facility to expense the investment over a shorter time period, the advantage is substantially
 reduced because only 75 percent of the capital investment can be recovered.  Table 3-5 illustrates
 this tax provision using hypothetical costs. The present value of the tax shield from depreciation
 increases only slightly, from $22,562 (Table 3-1)  to $22,694 (Table 3-5).4

       Since the benefit of the provision is only slight and facilities  might not be able to get the
 required certification to take advantage of it, this provision was not included in the cost
 annualization model. Its exclusion results in a more conservative estimate of the compliance
 costs. The benefit of using MACRS rather than the straight-line method for depreciation is
 clear;  MACRS is the depreciation method used in the cost annualization model.
       3.1.2.2 Timing Between Initial Investment and Operation

       A business cannot begin to depreciate a capital investment before it goes into operation.
While the midyear convention is frequently used when calculating depreciation (i.e., the
equipment is operational halfway through its first year), it is not appropriate for this analysis.
Approximately 1 year would be required  to build and  install most of the equipment  considered in
the regulatory alternative. Additional time might be required for design, permitting, and site
   These figures are expressed in thousands of dollars, as in the tables.
                                           3-10

-------
TABLE 3-4
DEPRECIATION METHODS
COMPARISON OF STRAIGHT LINE VS. MODIFIED ACCELERATED COST RECOVERY SYSTEM
Capital Cost (5000) Discount Rate
*100,OOO 13.O%
Life (yrs)
15
Marginal Tax Rates:
Federal 34.0%
State 6.8%
Overall 40.8%
Depreciation
Year

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Sum
Present Value
Net benefit of
using MACRS vs. SL (year 1 dollars)
For Year
(MACRS)
$5,000
$9,500
$8,55O
$7,700
$6,930
$6,230
$5,900
$5,9OO
$5,910
$5,900
$5,910
$5,900
$5,910
$5,900
$5,910
$2,950
$10O,OOO
$24,239


Depreciation
For Year
Straight-Line
$3,333
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$6,667
$3,333
$10O,OOO
$19,576

$ 1 ,900

Tax Shield
(MACRS)
$2,038
$3,871
$3,484
$3,138
$2,824
$2,539
$2,404
$2,404
$2,408
$2,404
$2,408
$2,404
$2,408
$2,404
$2,408
$1,202
$40,750
$9,878



Tax Shield
Straight-Line
$1,358
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$2,717
$1,358
$40,750
$7,977


SL MACRS.WK3
                               24-Jun-93
                                                  3-11

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preparation.  The cost annualization model, therefore, assumes a 1-year delay from the initial
capital expenditure to operation.  As shown in Table 3-1, while the capital expenditure is listed in
Year 1, depreciation and annual O&M costs are not listed until Year 2, assumed to be the first
full year of operation. Assuming a 1-year delay also changes each year's depreciation rates.
Table 3-6 shows the derivation of the depreciation rates used in the cost annualization model.
As a result of the timing assumption, the present value calculation covers 16 years—the 1-year
delay plus the 15-year depreciable lifetime  for the equipment.
       3.1.2.3 Depreciable Lifetime for the Equipment

       An asset's depreciable life can differ from its actual life.  The U.S. Master Tax Guide lists
15-year property as property with a class life of 20 years or more but less than 25 years.
Municipal wastewater treatment plants are given as an example of 15-year property (CCH,
1991b, Section 1240). The pollution control equipment is considered in this analysis as 15-year
property; however, the actual life could extend to 25 years.  Under these circumstances, up to 10
years of O&M expenses would be excluded from the present value calculations.  The effect of
excluding such costs, however, would not be large, since in Year 16, a dollar is worth only $0.16
(assuming a 13-percent discount rate).  Furthermore, by adding more years to the calculation, the
annualized cost is lowered because even though O&M costs are incurred during the  extra years,
payments for the capita! investment will be spread over a longer time period.
       3.1.2.4 Tax Shields on Interest Payments
       The cost annualization model docs not consider tax shields on interest paid to finance
new pollution control equipment. A facility could finance through a bank loan (debt), take
money out of working capital, issue a corporate bond, or sell additional stock (equity shares).  In
any case, the present value analysis  assumes a cost to the facility to use the money (the discount
rate), whether that amount is paid as interest or is the opportunity cost of the internal funding.
According to current tax law, if the  facility finances  the investment using  debt, the associated
interest expenses can be deducted, thereby  reducing taxable income. The tax shield on the

                                            3-13

-------
TABLE 3-6
CALCULATION OF MACRS DEPRECIATION RATES
Assumptions:
       Property goes Into service at beginning of year
       150% double declining balance (DB) method
       15-year property
       Assume 410,000 unadjusted basis
       Switch to Straight-Line occurs In Year 5
Years Romaining
At Beginning
Year Of Year

1
2
3
4
5
e
7
8
9
10
11
12
13
14
15
Sum

15
14
13
12
11
10
9
8
7
6
5
4
3
2
1

150% DBRato
Straight-Line On Adjusted
Rate Bash;
0.00%
6.67%
7.14%
7.69%
8.33%
9.09%
10.00%
11.11%
12.50%
14.29%
16.67%
20.00%
25.00%
33.33%
50.00%
100.00%

0.00%
10.00%
10.71%
11.54%
12.5O%
9.09%
1O.OO%
11.11%
12.50%
14.29%
16.67%
20.00%
25.00%
33.33%
50.00%
100.00%

Depreciation
For Year

41,000
$964
S927
$889
$565
4565
4565
4565
4565
4565
4565
4565
4565
4565
4565
410,000
Adjusted 150% DBRate
Basis at On Unadjusted
Year End Basis
41O,OOO
49,000
48,036
47,109
46,220
45,655
$5,089
44,524
43,958
43,393
42,827
42,262
41,696
41,131
4565
40


10.000%
9.643%
9.272%
8.886%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
5.655%
100.00%
                                 24-Jun-93
                                                    3-14

-------
interest payments thus would reduce the annualized cost of compliance. It is not known what
mix of debt and capital a facility will use to finance the cost of pollution control equipment.
According to Table 3-7, which illustrates the effect of 100-percent debt financing, the annualized
compliance cost would drop by approximately 4 percent due to tax shields on the interest
payments. If the facility financed the entire investment out of working capital, there would be no
associated tax benefit and the compliance cost should be calculated without interest tax shields.
To maintain a conservative cost estimate, tax shields on interest payments are not considered in
the cost annual ization model.
       3.1 J Sample Cost Annualization  Spreadsheet

       In Table 3-1, the spreadsheet contains numbered columns that calculate the cost of the
investment  to the facility.  The first column lists each year of the equipment's life span, from its
installation through its 15-year depreciable lifetime.

       Column 2 of Table 3-1 represents the portion of the capital costs that can be written off
or depreciated each year.  These rates are based upon the MACRS.  Multiplying these rates
times the capital cost gives the annual amount the facility may depreciate (Column 3).  These
amounts will be used to offset annual income.  Column 4 shows the tax benefit provided from
the depreciation expense—the overall tax rate times the depreciation amount for the year.

       Column 5 of Table 3-1 is the annual O&M expense, a constant  amount, except for Year
1 when no  O&M costs are incurred  because the equipment  is not yet in service. The sixth
column is the tax shield or benefit provided from expensing the O&M costs.

       Column 7 lists the facility's total expenses associated with the additional pollution control
equipment. Total expenses include  capital costs, assumed to be incurred during the first year
when the equipment is installed, along with each year's O&M expense.  Column 8 lists the
annual cash outflow minus the tax shields from the O&M expenses and depreciation, since the
facility will recoup these costs as a result  of reduced income taxes.
                                            3-15

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3-16

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       Column 8 shows the annual after-tax-shield cash outflows. The sum of the 16 annual
payments is $124.4 million (1989 dollars). The present value of the payments is $109.4 million.
The present value calculation takes into account the time value of money and is calculated as:
             r>       *7i    * /-.  u /^  «      v^    cash outflow in Year i
             Present Value of Cash Outflows = >
                                                    (1  +  real discount rate)'"1

The exponent in the denominator is i-1 and not i because the real discount rate does not apply
to the cash outflow in Year 1.  The cell formula in Lotus is: initial cash outflow in Year 1 +
@npv(real  discount rate, cash outflows in Year 2 to Year 16).  The present value of the cash
outflows is  used in the closure  analysis to calculate the post-regulatory present value of future
earnings for the facility (Section 3.2.1).

       The present value of the cash outflows must be transformed into a constant, annual
payment for use as the annualized facility compliance cost.  The annualized cost is calculated as
the 16-year annuity that  has the same present value as the bottom line in Column 8. The
annualized  cost represents the  annual payment required to  finance the cash flows after tax
shields.  In essence, paying the annualized cost every year and paying the amounts listed in
Column 8 for each year  are equivalent. The annualized cost is calculated as:

      Annualized Cost  =  Present value of cash outflows  *       real discount rate
                                                          l-(feal discount rate +l)~n
where n is the number of payment periods.

In Lotus, the cell formula is:  @pmt(present value of cash flows, real discount rate, 16).  In this
example, based on the capital investment of $100 million and annual O&M cost of $8 million
(1991 dollars), the annualized cost is $13.2 million in 1989 dollars.

       Note that the annualized cost can be determined in two ways.  The first way is to
calculate the  annualized cost as the difference between the annuity value of the cash flows
(Column 7) and the tax shields (Columns 4 and 6). The second way is to calculate the annuity
value of the cash flows after tax shields (Column 8). Both ways yield the same value. The
                                           3-17

-------
annualized cost is used in calculating the compliance cost of the regulation and in the ratio
analysis (Section 3.2.2).

       The social cost of the regulation  differs from the compliance cost. The compliance cost
represents the cost to the industry, and takes into account cost savings due to tax shields.  The
federal government loses the money saved by industry through tax shields.5 The cost to society
includes the costs borne by the industry, as well as the cost borne by the federal government
through lost tax revenues.  The cost to society, therefore, is always higher than the cost to
industry.  Section 3.3 contains a more detailed discussion of social costs.
       3.1.4 Cost Annualization Model and Total Cost Assessment

       EPA, 1992a describes the Total Cost Assessment (TCA) approach for evaluating
pollution prevention alternatives.  TCA is comprehensive financial analysis of the life cycle costs
and savings of a pollution prevention project. A TCA approach includes:
              Internal allocation of environmental costs to product lines or processes through
              full cost accounting.
              Financial analysis of direct and indirect costs, short- and long-term costs, liability
              costs, and less tangible benefits of an investment.
              Evaluation of project costs and savings over a long-time horizon, e.g., 10 to 15
              years.
              Measures of profitability which capture the long-term profitability of the project,
              e.g., net present value and internal  rate of return.
TCA approaches are being developed as alternatives to traditional financial analysis methods in
order to capture and properly evaluate the long-term costs and savings inherent in pollution
prevention activities.
    5The annualized cost to federal and state governments can be calculated as the difference
between the annualized cost before and after tax shields (Table 3-1, columns 7 and 8).
                                            3-18

-------
       The cost annualization model incorporates several features of a total cost assessment

analysis, including:


       •      Long-time horizon (the annualization model uses a 15-year time frame).

       »      Short- and long-term costs.

       •      Cost savings due to reduced chemical usage, etc., which are included in the cost
              estimates prepared by the EPA engineers  (see Development Document).

       •      Depreciation, taxes, inflation, and discount rate.

       •      The associated  closure analysis (see next section), which uses the net present
              value of the investment calculated in the cost annualization model to evaluate the
              long-term impacts on profitability.


The economic analysis differs  from the TCA approach in that it does not include a "liability
avoided" component or an evaluation of the less tangible benefits of the regulation. There are
insufficient data to estimate potential future liability costs for each facility.  The exclusion of this
parameter results in a  more conservative analysis where potential impacts are not offset by
avoiding future liability costs.  A separate analysis and report compare the costs and benefits of
the regulation.
3.2    FINANCIAL IMPACT ANALYSIS METHODOLOGY


       There are two major components to the financial model methodology for estimating the

economic impacts for the proposed rule:
              Facility closure analysis through the comparison of estimated salvage value,
              projected earnings, and regulator)' costs (Section 3.2.1).

              Financial ratio analysis at the facility and company level to identify impacts short
              of closure (Section 3.2.2).
                                           3-19

-------
The closure analysis and the financial ratio analysis are facility and business entity specific. As
such, both analyses' are based on information gathered in the 1990 National Census of Pulp,
Paper, and Paperboard Manufacturing Facilities, Part B: Financial Information (EPA, 1991).6

       Figure 3-2 is an overview of the financial model methodology. The present value of the
pollution control options is calculated within the cost annualization model (Table 3-1). The
closure model reduces the present value of pre-regulatory projected earnings by the present value
of the pollution control option. The adjusted earnings for the facility are compared against its
salvage value, and the likelihood of closure is evaluated.  The closure model is discussed in more
detail in Section 3.2.1.

       Financial ratios are an accepted method for evaluating financial performance and health.
Ratios are calculated with  the financial data as presented in the survey.  The ratios are then
recalculated with the inclusion of the annualized cost of the pollution control option. Section 3.1
discusses the calculation of annualized costs.  Ratio analysis is used to identify financial  impacts
on a facility that are not as severe as closure.  Ratio analysis is also calculated at the business
entity level to evaluate the impacts of a business needing  to upgrade  multiple facilities.  Section
3.2.2 discusses the financial ratio analysis methodology.
       3.2.1  Closure Model

       A mill is assumed to close if long-term profits are worth less than closing the mill and
selling its assets.  One component of the economic analysis is estimating whether the costs of
    6A mill must meet three requirements to be in the closure and ratio analyses:  it must be in
the survey financial data base (QFIN Version 2), its assets must be carried at the facility  level,
and it must  have reported financial records for the individual facility location.  With respect to
the third requirement, for a small number of survey respondents, two separate facilities had
financial records maintained only on a combined basis. The facilities provided separate technical
information, but only one combined report of financial information.  To maintain comparability
between the technical and financial data sets, both facilities are included in the financial data
base,  but one mill  has no entries.  For the purpose of economic analysis, the pollution control
costs  for both mills were added and compared to the assets and revenues for the combined
facility. Approximately seven combination mills arc in the closure analysis.

                                            3-20

-------
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-------
 regulation are so great that an individual facility is no longer profitable.  In addition to lost
 profits, closures could lead to secondary impacts such as:

        •      Losses in employment
        •      Losses in government tax revenues
        •      Adverse effects on small business
        •      Losses in paper or pulp production capacity, leading to:
                      Supply/demand adjustments and product pricing shifts
                      Negative impacts on the U.S. foreign trade account

        Facility closures are estimated by comparing the mill's "salvage value" to the present value
 of its future earnings. The salvage value represents the expected amount of cash the owner
 would receive if the mill were closed and liquidated. The present value represents the value in
 current dollars of the expected stream of earnings that the mill can generate. If the salvage
 value of the mill is greater than the earnings the mill is expected to generate, then the owner
 presumably would liquidate the mill rather than operate it.7  Figure 3-3 provides a schematic
 diagram of the methodology and components used in the closure analysis. Sections 3.2.1.1 and
 3.2.1.2 describe  the calculation of the salvage value and the present value of future earnings,
 respectively. Section 3.2.1.3 describes a sample closure analysis.  Section 3.2.1.4 discusses the
 scoring methodology used  to project closure, and Section 3.1.2.5  reviews the reasons mills could
 be identified as  closures before any incremental pollution control costs are incurred (i.e., baseline
 closures).
    7Whcn a mill is liquidated for its salvage value, the Agency assumes that the mill  no longer is
operated; thus, closure-related impacts could result. In contrast, mills that are sold because a
new owner presumably can generate a greater return are considered transfers. Transfers cause no
closure-related impacts, even if the transfer was prompted  by increased regulatory costs.
Transfers arc not estimated in this analysis.
                                            3-22

-------
              Incremental
              Capital Costs
                                  Assessed Value of
                                 Land, Buildings, and
                                     Equipment
                              Book Value of:
                                  Land
                                Buildings
                                Equipment
                           Less Cum. Depreciation
   Equipment Lifetime
     Discount Rate
   Depreciation Rates
       Tax Rates
 Present Value of
Plant Cash Flows
vs.
Salvage
 Value
     Discount Rate
         majsi
  Forecasted Cash Flow
        Streams
    Analysis of Recent
     Industry Trends,
     Impacts of Other
    Recent Regulations
             Figure 3-3. Overview of closure analysis methodology.
                                  3-23

-------
        3.2.1.1 Salvage Value

        The salvage value is calculated assuming the mill will be closed. Thus, assets are
 evaluated based not on their potential for contributing to operations, but only on their market
 value in a liquidation sale of plant and equipment.  Salvage value is estimated assuming that all
 cash transactions are realized in the current year and that discounting is not required.  In fact,
 many mills could face multiyear obligations that are not dismissed with  mill closure. The salvage
 value is the net cash realized by the plant owner after all assets are sold and obligations are
 dismissed.

        Salvage value includes the value of short-term (or current) assets and long-term and fixed
 assets. Short-term assets, defined as those assets not expected to be held beyond a year, include
 cash, short-term  Certificates of Deposit, inventory, and other assets.  Long-term assets  include
 financial instruments expected to be held beyond a year and fixed assets of plant, equipment, and
 land.

        Short-term assets held on mill balance sheets generally will be considered part of the
 mill's working capital and therefore are clearly part of the mill's  asset base. Long-term financial
 assets, such as deferred  bond expense, stocks, bonds, and intangibles, could be held on  the
 balance sheet of either the mill  or the parent company.8 There is no method of determining
 what share of the long-term  financial assets of a parent company or headquarters mill should be
 allocated to individual mills.  These assets are also typically considered independent of normal
 mill working capital or mill operations. Timberlands are considered  long-term investments that
 are essentially separate from the mill (i.e., they have value whether or not the mill continues to
 operate). Therefore, timberlands and long-term financial assets other than  land, buildings, and
 equipment were excluded from the salvage value calculations. All other tangible assets (both
    "The survey has separate sections for balance sheet information depending on whether the
facility is part of a multifacility operation.  An independent, single-facility company would be able
to show a detailed balance sheet for the mill, while mills that belong to a multifacility company
might have components held only at the corporate level,  not at the facility level. Only those
components allocated to a facility were included in the closure  analysis.
                                            3-24

-------
short- and long-term) are included in the salvage value.  The most recent data in the survey
(1989) is used in the salvage value calculation.

       Valuing Current Assets. Current assets include cash and near-cash financial assets,
accounts receivable, and inventories.  The valuation of these assets is based on their probable
stability  during an auction/liquidation process. Since cash and near-cash financial instruments
would not decline in value in the event of liquidation, they would command their face value even
in a distress sale.  Accounts receivables and inventories (including both inventories of raw
materials and finished products) are likely to  decline in value to some degree depending on
factors such as company and industry experience with bad debt problems, economic conditions,
and the  geographic proximity of potential purchasers of raw materials or finished products.

       Current assets are carried  at the mill level based on their original purchase cost or, in the
case of finished goods, at the manufacturing cost. In valuing these assets, the Agency assumes
that they are made up of two components:  intangibles (e.g., cash, receivables, and short-term
investments) and inventories (e.g., raw materials, supplies, fuels, work-in-progress,  and finished
•goods).  In the event that the facility is liquidated at an auction,  these assets would be recovered
at varying proportions of their book value.

       Since intangible current assets are the most  liquid, the Agency assumes they would be
recovered at their face value.  Unlike inventories, most intangible current assets would maintain
their book value in the event of an auction. Some items, such as CDs and other short-term
investments, actually are likely to  appreciate in value compared to their cost as recorded on the
books. Accounts receivable, however, could be worth less than their book value, depending on
each mill's accounting practices for recognizing bad accounts. Overall, the Agency assumes that
the book value of these assets  accurately reflects their actual market value (i.e., they  are valued
at 100 percent in the salvage value calculations).

        Inventories are not as marketable as the rest of current assets  because of their unique  or
specialized purposes.  In the event of liquidation, a  mill would have to sell its inventories at a
fraction  of their recorded book value. For example, the demand for specialty items such as
deinking chemicals would depend on the number of nearby deinking mills that use similar

                                            3-25

-------
processes. Such products likely could not be sold for what the mill paid to the chemical supplier.
For this reason, the analysis values inventories by applying a recovery factor that represents the
portion of book value expected to be recouped in a sale.  A 40-percent recovery factor is used to
calculate the salvage value of inventories. This recovery factor reflects the fact that many of the
specialty supplies and unfinished products would have to be sold at a fraction of their book
value, while basic commodities such as finished pulp and raw materials likely would maintain
most  of their value in the event of liquidation.9

        Valuing Fixed Assets.  Two approaches are used to estimate the value of the fixed or
long-term assets at each facility:  based on the tax assessment values and based on the book
value of the fixed assets.  Since neither method is always satisfactory, both are incorporated into
the closure model.

        Tax Assessments. Most  of the mills pay local property taxes based  on the assessed value
of the mill's fixed assets.  Questionnaire responses provide information about the 1989 assessed
value of each facility's land, buildings, and equipment. The questionnaire also provides the
percent of market value on which the tax assessment was based.  Each facility's market value is
calculated as the facility's assessed value divided by the percent of market value rate.  A 20
percent recovery factor  is applied to the result to reflect the fact that the assets would be
liquidated at a  fraction  of their value.

       Not all  facilities  could provide both tax assessments and percentage of market value.
Questionnaire responses indicate several possible reasons:

       »      Some facilities were not assessed for tax purposes.
       •      Some assessments included nonmill assets.
       •      Some assessments bore no relationship  to current market value of the assets.
   'Companies might maintain their inventories under a "First In First Out" (FIFO) approach or
under the "Last In First Out" (LIFO) approach.  During inflationary periods, LIFO will tend to
undervalue inventories,  generally as a means of limiting tax liability.  The survey did not ask the
respondent to identify the inventory accounting system used; however, the system used is unlikely
to create a significant difference in the analysis.
                                           3-26

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       Book Value.  An alternative approach for estimating the salvage value of each facility's
fixed assets is according to the most recent balance sheet. The book value of the fixed assets
(including the facility land, buildings and improvements, equipment, and machinery)  can be
calculated from the survey data. The book value is equal to the  recorded cost less any
accumulated depreciation.  (As mentioned above, assets such as  long-term investments and
timberlands are excluded from this calculation.)  Similarly to  the tax assessment approach, a 20
percent recovery factor is  applied to the book value of the fixed  assets to reflect the liquidation
value of those assets.

       There are potential difficulties with using the book value of assets  to estimate the salvage
value of a mill. The book value understates the  true value of some assets while overstating the
value of others. For instance, a  facility's  land could have been purchased as long ago as the 19th
century, and has since appreciated in value tremendously.  Other assets, however, such as a
cement settling tank, might have no market value, but could continue to carry a book value since
they have not yet been completely depreciated.

       Summary of Salvage Value Estimates. The Agency examined the estimated salvage
values for the 317 mills that are  expected to bear the costs of regulation and that can be analyzed
in the closure model. For all of these mills combined,  the book value approach led to a higher
average salvage value than the tax assessment approach.  When looking at individual mills,
however, the tax assessment salvage value was higher than the book value in about 3 of 10 cases
(Table 3-8).

       Mill closure costs, which  reduce the overall salvage value of the facility,  are difficult to
estimate even by mill executives.  These costs can include pension administration, payout costs,
and site cleanup prior to sale. These costs are not included in the  salvage value estimate.  As a
              s
result,  the calculated salvage value could  be  high, which would make the mill more likely to be
projected to close in the analysis. This approach leads  to a conservative estimate of the number
of mill closures.
       In summary, the closure mode! relies on two estimates of salvage value for each facility:
       •      Tax assessment value of fixed assets plus short-term assets

                                           3-27

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TABLE 3-8
SUMMARY OF TECHNIQUES FOR DETERMINING SALVAGE VALUE
Parameter
 Salvage Value (Thousands, 1989 Dollars)

	Average	Total
                                                                      Percent of Time
                                                                        Salvage Value
                                                                   Estimation Approach
                                                                      Produced Greater
                                                                               Value
  Assessment Approach:
  Book Value Approach:
           $38,490
           $41,905
$10,854,209
$13,032,453
29%
71%
S:\ECONVPULP2\EIA\SEC 3\T3  8.WK3
                                                                           24-Jun-93
                                             3-28

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       •     Book value of fixed assets plus short-term assets

The values of fixed assets and inventories are reduced by recovery factors to reflect liquidation
values.
       3.2.7.2 Present Value of Forecasted Earnings

       The present value of each mill is its future stream of earnings in current dollars. The
valuation assumes that the mill continues to be used for the manufacture of paper or pulp. The
methodology uses recent earnings and other data to estimate future earnings, and then discounts
the future stream to derive the present value.  The components of this analysis  include measuring
earnings, establishing a time frame for the  analysis, projecting earnings, discounting earnings, and
incorporating the incremental  costs of regulation.  In addition, Subchapter S corporations require
separate consideration because income is taxed at the rate for individuals, not corporations.

       Definition of Economic Earnings.  Two alternatives were examined to estimate the
present value of future plant operations:
              Net income, calculated as revenues less manufacturing cost of goods sold; selling,
              general, and administrative expenses; depreciation; interest; and taxes.
              Cash flow, which equals net income plus depreciation.
Estimates of the present value generated from future plant operations generally are based on
cash flow projections.  Depreciation is added to net income because it reflects previous, rather
than current, spending and does not actually absorb any portion of incoming revenues.
       Net income figures also can be used to project the value of continued plant operations.
This approach assumes that ongoing reinvestment in plant and equipment will be necessary and
that in the long run, depreciation costs should be reflected as a charge against earnings (i.e.,
annual maintenance is not sufficient to ensure a mill's efficiency and capacity in the long run).
This approach was chosen to reflect the continuing capital investment and expansion seen for the

                                           3-29

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majority of mills in the survey (see Section 2.4.4)—the more conservative indicator of the future
value of continued plant operations.  This approach, however, might overestimate the potential
closures of newer plants, which would report higher depreciation figures (i.e., the required
investment is overstated) and thus lower earnings.  These facilities might appear less
economically viable than they actually are in such an analysis.

       In the closure model, the present value of future earnings  is calculated based on net
Income. For independent  facilities, earnings generated from long-term investments are not
included.  These revenues (identified in survey responses) are considered to be independent from
the mill's paper and pulp production.  Furthermore, since the assets generating these revenues
are excluded from the salvage value calculation, their  earnings should not be included on the
opposite side of the closure equation.

       Time Frame for Analysis.  The capital expenditures  associated with  additional pollution
control for the  pulp and paper industry are depreciated over a 15-year lifetime in the cost
annualization model (see Section  3.1.1).  The same time frame is  used for the present value
analysis.

       Earnings Forecast.  Three methods are used to forecast future earnings.   All three
methods are based on the 1985, 1988, and 1989 data collected in the survey and all use the same
general set of assumptions and procedures:
              No cost pass-through. The mill is assumed to be unable to raise prices to recoup
              incremental pollution control costs.  It is as if there is a foreign supply  waiting at
              the U.S. border; if domestic mills raise their prices, imports will flood into the
              domestic market.
              No growth.  The mill is assumed to be running at or near capacity and significant
              growth is considered unlikely without a major capacity addition.
              Constant 1989 dollars.  Data from 1985 and 1988 are inflated using the change in
              the Consumer Price Index (see Table 3-2).
                                           3-30

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              Earnings for 1986 and 1987.  Earnings from 1985, 1988, and 1989 were regressed
              to estimate  1986 and 1987 earnings.  If no 1985 data were available, the earnings
              were set to zero for that year.10

              Tax rate applied, if necessary, to obtain after-tax earnings.  For facilities that are
              part of multiple-facility companies, earnings are estimated as revenues minus
              costs.  These amounts are adjusted to after-tax earnings using tax rates for
              corporate income shown in Section 2 of the questionnaire for the business entity.
              For independent facilities, net income is taken from the income statement and
              does not need to be adjusted. For S-Corporations, after-tax earnings are
              estimated using personal tax  rates.11
       The three forecasting methods can be summarized as follows:

       •      Simple Cycle
                     Peak year of cycle is 1989, based on industry data.
                     Data for 1985 to 1989 are repeated in mirror image to provide cycle.
                     Advantage:  Stays closest to survey data, retains cyclical nature of industry.
                     Disadvantage:  Does not account for what happened in 1990 and 1991, at
                     least not on an industry-wide basis.

       •      Moving Average
                     Data for 1990 and 1991 are generated by scaling 1989 earnings based on
                     industry-wide decline rates.
                     Data for 1992 to 2011 generated as a 7-year moving average.
                     Advantage:  Data for 1990 and 1991  incorporate more information than
                     simple cycle method.
                     Disadvantage:  Moving average dampens industry cycle.

       •      Modified Cycle
                     Data for 1990 and 1991 are generated by scaling 1989 earnings based on
                     industry-wide decline rates.
    '"Where 1985 earnings were available in the survey data; about half the entries were positive
and half were negative (i.e.. the facility suffered a loss). Thus, in the absence of survey data , a
value of zero is a reasonable estimate of 1985 revenues for a facility.

    "A facility's operating losses, like earnings, are reduced by the tax shield.  The owner may
use the operating loss to offset income from another facility or carry the loss forward to offset
income generated in the future.  For mills owned by muititacility companies, the closure model
selects a federal tax rate based on the parent's marginal income tax rate.  If the parent shows a
loss, logic implies a 0-percent tax rate.  The fact  that a parent company has net losses should not
imply that a mill's earnings arc tax-free.  The closure model uses a marginal federal tax rate of
34 percent for mills whose parent shows a net loss.  The 34-percent  bracket was the most
representative for companies in the closure analysis.

                                           3-31

-------
                     Data for 1985 to 1991 are repeated for 1992 to 1998 and from 1999 to
                     2005.
                     Advantage:  Data for 1990 and 1991 incorporate more information than
                     simple cycle method, retains cyclical nature of industry.
                     Disadvantage: Sharp shifts are seen between cycles; could be interpreted
                     as sharp management action to correct the mill's financial performance.
These forecasting methods reflect both smoothed and unsmoothed approaches to modeling the
cyclical nature of the paper and pulp industry.12  In the moving average and modified cycle
methods, earnings  for 1990 and 1991 are scaled from 1989 data using the industry-wide decline in
profits shown in Mies et al., 1992.  Decline rates used in the calculations are 30.7 percent (for
1990) and 28.0 percent (for 1991).

       Figure 3-4 illustrates the three forecasting methods. The survey data are the points
shown for 1985,1988, and 1989 (Figure 3-4, right side). The data  for 1986 and 1987 are
obtained by regressing the 1985, 1988, and 1989 data.  These five values form the basis for the
forecasted values (Figure 3-4, left side).

       For the simple cycle, the value for  1988 is repeated for 1990, 1996,  1998, 2004, and 2008.
The forecasted sequence has two peaks, 1997 and 2005, and two low points, 1993 and 2001.  The
data for 1990 and 1991 are the same for the moving average and modified  cycle
approaches—both  are scaled by the industry decline rates. The moving average approach rapidly
smooths the fluctuations of the business cycle to a near-horizontal line. The modified cycle has
timing differences  from the simplified cycle—there are  two peaks, 1996 and 2003, but three low
points, 1992, 1999, and 2006. While Figure 3-4 illustrates a typical pattern  seen in the  survey
data,  a wide range of possible patterns exist.  Because of the uncertainty about the choice of
forecasting models and potential outcomes, a methodology was developed to incorporate all
three forecasting methods in the closure analysis (Section 3.2.1.3).
    12Other parameters, such as gross domestic product and population, are not included in the
forecasting model because they arc measured on a national basis while the forecasts are done on
a facility basis.  For example, a population increase may lead to increased paper demand, but the
mill cannot increase its output beyond its capacity.
                                           3-32

-------
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                                                 3-33

-------
       Discounting. The final step in estimating each mill's baseline present value is to discount
the earnings stream back to current dollars.  This step does not adjust the stream for
inflation,since the earnings projections are in real terms. Thus, the discount rate used for
discounting must be a real discount rate, obtained by subtracting the estimated annual rate of
inflation (see Table 3-2) from the nominal discount rate. The same requirement used in the cost
annualization model (i.e., the discount rate must be between 5  and 19 percent) is used in the
calculating the present value of future earnings.

       Summary of Forecasting Earnings.  In summary, three estimates of earnings are used in
the closure model:

       »     Moving average
       •     Simple  cycle
       •     Modified cycle

       The Agency examined the present value of future earnings as calculated by the three
forecasting methods for the 317 mills that are estimated to bear regulatory costs and are in the
closure analysis.  Table 3-9 summarizes the results. The moving average method results in the
highest average present value and, in more than half the cases,  the highest present value for an
individual mill. This result is expected because the moving average dampens out the business
cycle (see Figure 3-4). For almost all the remaining  cases,  the  simple cycle method results in the
highest present value for an individual mill.  The modified  cycle results in the highest present
value for a mill in only 1 percent of the cases.  The modified cycle method also h ••.<•. the lowest
average present value.

       The  three forecasting methods produce average present values of future earnings vhat are
within  13 percent of each other.  For specific facilities, the  estimates can show a wider variation.
Since the determination of whether a facility  is likely  to close is a comparison  of the salvage
value and value of .future earnings, the choice of a forecasting method may affect whether the
facility of projected to  close.  The choice of a forecasting method  may also change the closure
determination if there  is very little margin  between the salvage  value and post-regulatory future
                                           3-34

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TABLE 3-9
SUMMARY OF TECHNIQUES FOR DETERMINING FORECASTED EARNINGS
                          Present Value of Forecasted Earnings
                          (Thousands, 1989 Dollars)	
Parameter
                                 Average
                     Total
                  Percent of Time
                      Forecasting
                 Method Produced
                         Highest
                         Estimate
  Simple Cycle:
  Moving Average:
  Modified Cycle:
$160,503
$164,256
$142,026
$51,039,796
$49,052,970
$45,164,127
62%
37%
 1%
S:\ECON\PULP2\EIA\SEC 3\T3 9.WK3
                                     24-Jun-93
                                              3-35

-------
earnings.  For these reasons, the closure analysis incorporates all three forecasting methods in
the evaluation of facility closure.
       3.2.L3 Sample Closure Analysis

       Table 3-10 cross-references the data used in the closure analysis with the survey data.
Figures 3-5a and 3-5b are an annotated printout of the closure model based on hypothetical data.
When actually used, however, the closure model output closely resembles Figures 3-5a and 3-5b,
and contains facility-specific confidential information.

       In Figure 3-5a, the section labeled "A" contains input variables for the calculation. The
estimated inflation rate  is based on the change in the Consumer Price Index from 1981 to 1991
(Table 3-2). The company-specific discount rate is taken from survey data. The average
discount rate is calculated from the survey data based on company discount rates that fall
between 5 and 19 percent. The next line shows the nominal discount rate  used in the present
value calculations. The real discount rate is calculated as the nominal discount  rate minus
inflation. Recovery factors for inventories and fixed assets are given as 40 and 20 percent,
respectively.  The company tax structure is  used to identify which set of tax rates should be used
to calculate after-tax income. In the example, the facility's tax rate is based on the income level
of the company that owns the mill.  For an independent facility, the net income does not need to
be adjusted for taxes. For an S Corporation, personal income tax rates are used (CCH, 1991a).
The average state tax rate is added to federal tax rate to provide the combined effective tax ratd
for the mill.

       Two methods were used to calculate the salvage  value of a mill:  tax assessment and book
value.  Salvage values for the mill are calculated in Section B of Figure 3-5a.  (Note that all
values  are expressed in  thousands of dollars.) The salvage value of currents assets is: $30,000 +
($62,000 x 40%) = $54,800.  Under the tax assessment method, the mill's salvage value is
$36,000, which is 20 percent of its market value, $180,000. The book value of the mill is the sum
of the book value for the individual components minus the cumulative depreciation ($6,500 +
                                           3-36

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TABLE 3-10
COMPONENTS USED IN THE CLOSURE ANALYSIS
Description
Location in Questionnaire

Multifacility    Independent
                                                                    SAS File Member Name
                                                                    Multifacility    Independent
SALVAGE VALUE COMPONENTS:

1989 Book Value of Current Assets         57a
1989 Book Value of Inventories            57b
1 989 Assessed Value of Fixed Assets       77d
Percent of Market Value                  78

1989 Book Value of Land                 58e
1 989 Book Value of Buildings              58g
1989 Book Value of Equipment            58h

1 989 Cumulative Depreciation             58j
1 989 Book Value of Other NC  Assets       58i

EARNINGS COMPONENTS:

Independents:
 Net Income
   1985
   1988
   1989
 Other Income:
   1985
   1988
   1989
            45a
            45b
            77d
            78

            46d
            46f
            46g

            46k
            46h-j
                  B3C
                  B3C
                  BSD
                  BSD

                  B3C
                  B3C
                  B3C

                  B3C
                  B3C
              B3B
              B3B
              BSD
              BSD

              B3B
              B3B
              B3B

              B3B
              B3B
             16k
             19k
             22k

             16b
             19b
             22b
                               B2B
                               B2B
                               B2B

                               B2B
                               B2B
                               B2B
Multis:
 Revenues
   1985
   1988
   1989
 Manufacturing Costs
   1985
   1988
   1989
 Non-Manufacturing Costs
   1985
   1988
   1989

Company Discount Rate
65 (1985)
65 (1988)
65 (1989)

68
71
74

69a
72a
75a

13
35
BSD
BSD
BSD

BSD
BSD
BSD

BSD
BSD
BSD

B2A
                               B3A
s:\econ\.\sec 3\t3 10
                   24-Jun-93
                                             3-37

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     CONFIDENTIAL   BUSINESS   INFORMATION
     CLOSURE MODEL
                            Survey 10$:
     ALL FIGURES  IN THOUSANDS OF DOLLARS
     INPUT VARIABLES:

     Inflation Rate (1990-2011):
     Co.-Specific Discount Rate (HOOT.):
     Avg. Discount Rate (Nominal):
     Nominal Discount Rate:
     Seal Discount Rate:
     Inventory Recovery Factor:
     Fixed Asset Recovery Factor:
     Company Tax Structure:
     Taxable Income (Corp. Parent):
     federal Income Tax Rate:
     Avg. State Income Tax Rate:
     Combined  Eff. Income Tax Rate:
                                            1234 Class:
                4.0X
                 14X
               13.0*
               14.OX
               10.OX
               40.OX
               20.0X
                  1
            800,000
               34.OX
                6.8X
               40. SZ
                                                            BAT
                                                                                        run date: Zfl-Jun-93
Federal Corp. Tax Table:
Taxable Average
Income Effective
($000) Tax Rate
$0 15. OX
$50 16.7X
$75 20. 4X
$100 28.3X
$335 34. OX
Federal Personal Tax Table:
Taxable Average
Income Effective
($000) Tax Rate
$0 15.0X
$20 21 .5%
$47 30. 5X
$93 31. OX
                                                            (1=Multi; 2»Independent; 3=S-Corp.)
                                                            (what if '85 income: is  in different bracket than '88 £ '89)
Q   SALVAGE VALUE:

       CURRENT ASSETS:
        1989 Cash:               30,000
        19S9 Inventories:        62,000

          Total:                $54,800
       FIXED ASSETS:

        Tax Assessed Value:


        Total CbOTTD):

        Book: Value:

        1989 Land:
        1989 Buildings:
        1989 Equipment:

        Less Cm. Deprec.:

        Total:
        Recoverable Value:
 Assessed Assessment     Market Recoverable
    Value       Rate      Value     Value
  183,000        100X  $180,000   $36,COC
    6,500
   62,000
  820,000

  310,000

.$578,500
 $115,700
     TOTAL SALVAGE VALUE OF MILL:
            Using Tax Assessments:        $90.800
            Using Boole Value:            $170,500


     Need to examine notes sections to see if assessment rate« vary for real  assets vs. fixed assets.
     Figure 3-5a.  Closure analysis model—Inputs and salvage value using hypothetical data.
                                                       3-38

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PRESENT VALUE:

  PAST EARNINGS ($1989):
    Corporate Tax Structure:
Hulti-facilityCo.




Estimated
Estimated
FORECASTED El

Earnings
Earnings
Earnings
Earnings
Earnings
THINGS:

1985
1988
1989
1986
1987

Pre-Tax
<50,000)
120,000
150,000
$4,615
$56,154

Post-Tax
($29,625)
$71,100
$88,875
$2,735
$33,271

Regression Output:
Constant
Std Err of
R Squared

T Est

No. of Observations
Degrees of

Freedom

-1.026+08
15689.291
0.9894203
3
1

X Coeff icient(s) 51538.462



























rear
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

'

>

t


(


\




{


1
4



I


BASELINE PRESENT VALUE:
SUMMARY:


Cycle
f($29,625>
J2,735
$33,271
> $71,100
$88,875
k $71, 100
$33,271
$2,735
(529,625)
$2,735
, $33,271
$71,100
k $88,875
$71,100
$33,271
$2,735
($29,625)
$2,735
$33,271
'$71,100
k $88,875
$71,100
$33,271
$2,735
K$29,625)
$2,735
$33,271
$266,661

Assessment:




Regulatory Option
Baseline
Option 2
Option 3
Option 4
Option 5
Ootion 6
Dot i on 7
Option 8
Option 9
Opt i on 10
Option 11











PV of
Incremental
Reg. Costs
SO
850
2,500
5,000
10,000
25,000
50,000
75.000
100,000
150,000
226,000

Cycle
$266,861
0
0
0
0
0
0
0
0
0
0
1
Avg.
<$29,625)
$2,735
$33,271
$71,100
$88,875
$61,590
$44,345
$38,899
$48,688
$55,253
$58,393
$56,577
$51,964
$50,588
$51,480
$53,278
$53,933
$53,745
$53,081
$52,581
$52,669
$52,967
$53,179
$53,165
$53,055
$52,957
$52,939
$416,898

$90,800

Cycle2 Std Err of
($29,625) \
$2,735
$33,271
$71,100
$88,875
$61,590
$44,345 >
($29,625) <
$2,735
$33,271
$71,100
$88,875
$61,590
$44,345 <
C$29,625) '
S2,735
$33,271
$71,100
$68,875
$61,590
$44,345 '












f







($29,625) *
$2,735
$33,27t
$71,100
$88,875
$61,590
$288,859
Salvage Value:
Book:
Present Value:
Coef. 5329.3871




























$170,500
































Mov. Avg. Mod Cycle Cycle Nov. Avg. Hod Cycle
$416,898
0
0
0
0
0
0
0
0
0
0
0
$288,859 $266,861
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 1
0 1
1 1
$416,898 S2BB.859
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 1
0 1
Closures
0
0
0
0
0
0
0
0
1
2
A
     Figure 3-5b.  Forecasted earnings and closure score using hypothetical data.
                                          3-39

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$62,000 + $820,000 - $310,000 = $578,500). Liquidation value is 20 percent of the book value:
$115,700. The total  salvage value for the mill is:

       •     Tax assessment = $54,800 + $36,000 = $90,800
       •     Book value = $54,800 + $115,700 = $170,500

       Earnings are forecasted in Section C of Figure 3-5b. The first three lines list the earnings
for 1985, 1988, and 1989 as taken from the survey. The three pretax values are regressed, and
the values for 1986 and 1987 are calculated.  Because the example mill part of a multifacility
company, the earnings (revenues minus costs) must be adjusted to posttax earnings. The present
value is calculated for each of the forecasted earnings streams using the discount rate in
Section A.

       The simple cycle uses data from 1985 to 1989 in mirror-image fashion, as indicated by the
brackets. There are two peaks,  1997 and 2005, and two low points, marked by dots at 1993 and
2001. For the moving average and modified cycle, the data for 1990  and 1991 are scaled using
industry  decline  factors.  The moving average is calculated on a 7-year basis  (i.e., the value for
1992 is the average for 1985 through 1991.  The modified cycle repeats the values for the 1985-
1991 period. There  are two peaks, 1996 and 2003, and three low points, marked by dots at 1992,
1999, and 2006.
       Section D of Figure 3-5b summarizes the results of the closure analysis. Each row,
beginning with the one entitled "Baseline," represents a regulatory alternative or option. The
present value of the incremental regulatory cost for each option is calculated with the cost
annualization model (Section 3.1, Table 3-1). With two methods of estimating salvage value
(book and tax assessment)  and three methods of estimating the present value of future earnings
(simple cycle, moving average, and modified cycle), there are six ways to evaluate  facility closure.
The post-regulatory earnings are calculated by subtracting the present value of incremental
regulatory costs from the present value of projected earnings.  For example, under Option 9, the
present value of the post-regulatory earning is $266,861 - $100,000 = $166,861 for the simple
cycle method of projecting  earnings.  This value is greater than the salvage  value as calculated by
the tax assessment method ($90,800) but lower than the salvage value as calculated by book value
                                            3-40

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 ($170,500). A mill that is determined not to close under a particular combination is given a
 score of 0 for that combination. A mill that is determined to close under a particular
 combination is given a score of 1 for that combination.  The scores are then totaled for all
 combinations.  Under Option 9, the simple cycle/tax assessment combination has a score of 0,
 while the simple cycle/book value combination has a score of 1.  The right-hand column sums the
 entries for all six earnings projections/salvage value combinations to provide a closure score.  The
 closure score for a given facility, then, can range from 0 (no closure under any combination) to 6
 (closures under all combinations).
       3.2.1.4 Scoring Method for Projecting Facility Closure

       The last step in the closure analysis is to evaluate when a mill would be considered a
closure.  The closure score for a mill can range from 0 to 6. As mentioned earlier, there could
be difficulties with a particular mill's data or estimation methods.  For this reason, the mills with
closure scores of 1 or 2 are not considered closures. A score of 4 or higher in the closure model
is considered a facility closure.  A score of 4 or higher results from the salvage value exceeding
the post-regulatory projected earnings under at least two forecasting  methods and both methods
of estimating salvage value.  Under these circumstances, the Agency  assumes  the mill would
close.  In the example given in Figure 3-5di the mill experiences adverse financial impacts
beginning with Option 9, but is not considered a closure until Option 11.

       For mills with no tax assessment salvage value, however, a score of 3 predicts closure.  A
mill with a score of 3 would have scored 1  for every combination of forecasting method and book
value for salvage value estimate, and the Agency assumed that, if a tax assessment were available,
the mill would be likely to close under at least one forecasting method/tax assessment for salvage
value combination.
                                           3-41

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       3.2.1.5 Baseline Closures

       A baseline closure is a mill that fails the salvage value test before the addition of
incremental pollution control costs.  Section 2.4.5 of the industry profile identified a category of
mills that is likely to appear as baseline closures. These are "captive" mills—mills that exist to
serve other facilities under the same ownership. In the entire mill population, between 46 and 51
mills reported that over 90 percent of all pulp, paper, and paperboard revenues were from
transfers to other facilities under the same ownership. In addition to these captive mills, between
56 to 60 mills indicated that 90 percent or more of their revenues from one product (pulp, paper,
or paperboard) were from transfers to other facilities under the same ownership.  Over half of
the mills indicated they transferred some product to other facilities under the same ownership
during the  survey period.

       Since many of the transfers are done at cost, these captive and near-captive mills would
show little, if any, profit.  If the captive mills have any salvage value, they could be deemed
closures before the addition of incremental pollution control costs.  In actuality, these mills
would not close but would raise the transfer prices for their products to meet the incremental
costs of pollution control; they should not be considered as  closures due to the incremental cost
of regulation.

       Of  the 338 mills estimated to bear incremental costs in this rulemaking,  data were
available to perform the closure analysis on 317. About 84  of these 317 mills are considered
baseline closures.  Nearly 40 percent of the baseline closures (31 mills) show anywhere from 1  to
3 years of losses,  fourteen mills  show only minimal profits. (The earnings for these mills might
be more favorable if we examined cash flow rather than  net income.)   Sixteen mills are
considered "captive" mills.  Fifteen mills had high salvage values because of their large amounts
of cash.  (Current assets, other than  inventory, are valued at 100 percent while all other
components in the salvage value are reduced by a recovery  factor.) These mills are unlikely to
close even  though the  salvage value  exceeds the present value of future earnings.
       In other words, the industry profile identified a category of mills likely to appear as
baseline  closures before the closure analysis was performed. Given the widespread practice of

                                            3-42

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 transferring product to other mills under the same ownership, low earnings may be a frequent
 phenomenon  in the survey data. The methodological choice of analyzing net income rather than
 cash flow for  projected earnings also results in low earnings projections.  The analysis of the
 baseline closure results also identified a small number of mills whose large cash positions led to
 high salvage values, which in turn, resulted in the mills considered as baseline closures. In
 summary, a mill could be a baseline closure for a wide range of reasons.  The projection of
 baseline closures is consistent with the industry structure as seen in the survey data and the
 methodology  chosen for the financial  analysis. The objective of the closure analysis, however, is
 to examine the impacts of additional pollution control costs on the pulp and paper industry.  To
 examine impacts, only the incremental closures (i.e., beyond baseline) are counted because these
 closures can be attributed solely to the incremental  costs of compliance.
       3.2.2 Ratio Analysis
       Financial ratios represent an accepted method for evaluating financial performance and
health. For example, investors and lenders often use ratios to determine whether a firm is
creditworthy.  Managers use ratios to help build strategies for capital investment, mergers and
acquisitions, pricing, or any other decision that could affect the firm's financial structure.
Similarly, in an investigation of regulatory compliance costs, ratio analysis can provide insight
into how additional pollution control requirements will affect the financial structure of mills. In
contrast to the closure model discussed in Section 3.2.1, financial  ratio analysis identifies
economic impacts on facilities and companies that are less severe than closure.

       In ratio analysis, standard financial data arc translated into statistics  that allow for
comparison of the health of reporting entities or groups of entities.  Financial health comparisons
are based on profitability, leverage, liquidity, and other relevant characteristics.

       Pulp and paper firms might make capital expenditures and incur annual operating and
maintenance costs associated with additional levels of pollution control.  These investments,
which might not contribute to product quality or output level, could adversely affect their
financial  structure. The magnitude of such impacts depends on the size  of the investment

                                            3-43

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required, the size of the firm, and the method of financing. Furthermore, the size of the
investment, or the cost of compliance, is often a function of the products produced, the current
equipment and processes used, and the  new level of control required.

       Data gathered in the survey are  used to develop a financial profile of the industry's
facilities and firms. The cost of additional pollution control is then combined with the balance
sheet information under two alternative financing options (i.e., long-term debt and working
capital). A pre- and post-regulation ratio analysis of the facilities and companies  is used to
compare the  financial health of the firms before regulation and under alternative  regulatory
options.
       3.2.2.1 Financial Ratios

       To derive an accurate financial profile of the industry, a variety of financial ratios are
used. Several measures of economic impacts often must be examined to obtain a clear picture of
the regulation's potential effects.  The ratios to be used in the analysis cover three basic aspects
of the financial structure and health of a facility or firm:

       •      Profitability
       •      Leverage
       •      Liquidity/solvency

       Profitability Ratios.  Profitability  ratios measure the company's ability to make a profit
relative to the size of its sales, stockholders investment (equity), and capital investments (assets).
Examples of profitability ratios include net income margin, return on equity, and return on
assets.

       Net Income Margin.  Net income margin  measures the percentage of sales revenue that is
converted into profit. Net income, for this analysis, will be calculated as earnings after interest
and taxes.  This ratio is a  good indicator of profitability to  use when comparing the regulatory
                                            3-44

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effects on prices.  For instance, knowing that a firm converts $0.22 of every $1.00 in sales to
profit helps assess its ability to absorb additional pollution control costs without a price increase.
The larger the margin, the greater the facility's ability to absorb increased costs and still remain
profitable. This ratio will be calculated from survey data at the business-entity level and, for
independent single-facility entities, at the facility level.


       Return on Assets.  Return on assets (ROA) measures the firm's efficiency in using assets
to generate profits.  An ROA of 18 percent indicates that, $0.18 in profit is generated for every
$1.00 in assets.  ROA reflects differences in leverage as well as in profitability because high
interest payments to finance assets can result in lower taxes." ROA is used in the analysis
                                                                        i
because it can be calculated for both the facility level and the business level.14


       Leverage Ratios.  Leverage measures the level of debt a firm uses to finance its
operations.  Investment in additional pollution control equipment could affect a firm's leverage if
additional debt is taken on  to finance pollution control equipment.  The  reduction in  leverage
due to investment in pollution control could affect the firm's financial flexibility.  In general,  a
highly leveraged firm has less flexibility to ride out a market downturn; similarly, it would not
have the resources to take advantage of opportunities for upgrading, expansion, or acquisition.
    "The Agency considered using return on equity (ROE) in the financial analysis.  ROE
measures how effectively the company creates value for the equity holders. An ROE of 18
percent indicates that for every $1.00 of equity invested in a firm's assets,  $0.18 of net income is
generated.  This ratio measures the  firm's efficiency in using invested money to generate profits.
ROA and ROE highly correlated, i.e., they tend to move  together, (see Brealy asd-Myers", 1984,
pp. 580). Using both variables would not provide much additional information.  Because equity
information needed to calculate ROE is generally not held at the facility level and because equity
information for common shareholders only is not available for most organizations, the Agency
did not use ROE in the  financial analysis.

    '"At the business entity level, ROA is calculated as net income/total  assets.  At the facility
level, it is calculated as (revenues - manufacturing costs - nonmanufacturing costs)/total  assets,
because taxes and interest are rarely kept at the facility level. Technically, interest tax shields
should be removed from cash flows  and an average of assets from the beginning of the year to
yearend should be used when calculating ROA values. Since neither parameter is available  from
the survey, however, these adjustments arc not included.  The analysis focuses on the change in
the ratio due to  incremental pollution control costs, rather than fine-tuning the baseline
estimates.

                                            3-45

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Instead, such a firm would be committed to making interest payments on its debt, thus
minimizing outlays for ongoing operations or expansions.

       Times Interest Earned.  The times interest earned (TIE) ratio measures the amount of
interest payments a firm must make in relation to its cash flows. The TIE ratio is calculated as
follows:

       TIE = [Earnings before interest and taxes (EBIT) + depreciation] 4- interest expense

For'example, a firm with a TIE ratio of 5.0 has cash flows sufficient to cover a five-fold increase
in interest expense.

       Debt Ratio. The debt ratio,  as calculated in  this analysis, is the proportion of total debt
to total assets.  Total debt will be calculated as the sum of all  liabilities.  This ratio is a common
indicator of the degree to which debt is used to finance the assets of the company.

       Considered in conjunction with one another, these two ratios provide a good  picture of a
firm's leverage.  A firm with an above-average debt ratio, for example, might be very profitable
and thus have a high TIE ratio. In  this case, the high level of debt might present no problems.
Conversely, a low debt ratio might make a firm appear healthy; but if it also  has a low TIE ratio,
problems could arise when the firm incurs additional debt.

       Liquidity/Solvency Ratios. The third group of ratios assesses firm liquidity and near-term
solvency. They describe a firm's ability to meet its short-term  financing needs using its own
short-term  resources.   Liquidity can affect a firm's ability to raise capital, since lenders are
concerned with a borrower's ability  to meet  payments on a day-to-day basis.   The liquidity of
pulp and paper manufacturers should be examined, since any use of current assets to finance
pollution control equipment, or the operation of that equipment, could significantly reduce
liquidity.
       Current Ratio. The current ratio, calculated as the proportion of current assets to current
liabilities, indicates whether a firm can cover its current obligations using its available cash or

                                            3-46

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 liquid assets. Firms opting to finance pollution control equipment with working capital could see
 their current ratio decline dramatically.  Easy to calculate, this ratio provides a very common and
 accurate tool with which to assess the impacts of the proposed regulations.15

        Net working capital. Net working capital is the difference between current assets and
 current liabilities, and represents the amount of cash or liquid assets that a firm or facility has
 available  for short-term operations.  If pollution control costs are paid by internal funding, net
 working capital will be affected.

        Net working capital to total assets. Dividing net working capital by total assets creates a
 ratio to evaluate the potential for future investment compared to past investment.

        Summary. Table 3-11 displays the seven financial  ratios discussed above and shows how
 each is calculated. A preliminary selection of these ratios for consideration in this analysis was
 made based on their potential usefulness in evaluating the effects of the proposed regulations.
 Together, these ratios will provide insight into the three key aspects of firms' and facilities'
 financial structure—profitability, leverage, and liquidity. The asterisks used in Table 3-11 signify
 whether the ratio is affected by debt-financing, working capital-financing, or both.

       Two sets of financial ratio analysis are performed  in this study for different levels in the
 business hierarchy—the facility level and the business entity level. The business entity level is the
 level above the facility level at which separate financial data is generated (e.g., corporate
 divisions or subsidiaries).  Both sets of analyses are based on survey data.

       The survey provides a financial  profile of the industry in 1985, 1988, and 1989 to
characterize the industry through  several recent years.  These years include a very poor year in
the pulp, paper, and paperboard industry (1985). and a healthy year  for the industry (1989)—a
    15 The Agency considered using the quick ratio in the financial analysis. The quick ratio is
similar to the current ratio, but excludes inventories  from the calculation of current assets.
Current ratios are more commonly reported on financial summaries (S&P, 1992), and that
tradition is followed here.
                                            3-47

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TABLE 3-11
FINANCIAL RATIOS INCLUDED IN THE PAPER, PULP, AND PAPERBOARD ECONOMIC IMPACT ANALYSIS
            Financial
            Ratio
Calculation
Profitability Ratios:

          * Net Income Margin

          *  Return on Assets
Net Income/Sales Revenue

Net Income/Total Assets
Leverage Ratios:

          • Times Interest Earned

       + • Debt Ratio
(EBIT + Depreciation)/lnterest Expense

Total Debt/Total Assets
Liquidity Ratios:

          + Current Ratio

          + Net Working Capital

          + Net Working Capital/Total Assets
Current Assets/Current Liabilities

Current Assets-Current Liabilities

(Current Assets-Current Liabilities)/ Total Assets
Notes:    EBIT refers to earnings before interest and taxes.
          Net Income refers to earnings after interest and taxes.
          Owner's Equity refers to the difference between total assets and total liabilities.
          Total Debt refers to total liabilities.
          + Indicates a ratio which could be directly affected by working capital approach to financing of
          required pollution control investments.
          * Indicates a ratio which could be directly affected by debt approach to financing of
          required pollution control investments.
          All ratios could be indirectly affected by either method of financing pollution control equipment.
ratios.wk3
                                     24-Jun-93
                                                     3-48

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 low point and a high point in the market cycle. (DeKing et al., 1990 and Mies et al., 1992
 discuss the cyclical nature of the pulp, paper, and paperboard industry.) Thus the analysis will
 characterize  recent variations in financial structure in the context of normal, recent business
 conditions. The cost annualization model and engineering cost data are incorporated in the
 facilities'/firms' balance sheets under the alternative financing options. These two profiles
 (before and after regulatory costs are incurred) are used to examine the potential  effects of the
 proposed regulations on the firms and facilities.  In particular, the Agency searches for any
 significant impacts that might exceed those seen in the industry's natural cycle.
       3.22.2  Facility-Level Ratio Analysis

       The ratio analysis is performed at the facility level to examine the potential regulatory
impacts on individual plants, particularly to flag and assess impacts less severe than closure.
Independent facilities, for whom the facility, business entity, and corporate levels are identical,
are examined only at the business entity level (see Section 3.2.2.3).

       Some multifacility companies do not carry all financial components necessary for a
complete  ratio  analysis at the facility level.  For example, for facilities that carry interest only at
the business entity or corporate level, a TIE ratio cannot be calculated. More than half of the
facilities do not carry noncurrent liabilities on the facility books, making it difficult to calculate  a
meaningful return on equity.  The return on sales or income margin can still be calculated. Since
many expenses  are not carried at the facility level (e.g., income taxes, pension expenses, and
other corporate expenses), the ratio represents more of a gross income margin.  The ratios
examined  at the facility level are:

       •      Gross Income Margin.  (Mill revenues -  manufacturing costs - nonmanufacturing
              costs)/ mill revenue. Depreciation expense is included in the nonmanufacturing
              costs. For the incremental impacts, the annualized cost is  also subtracted from
              revenues.
       •      Return on Assets. Gross income, as calculated above, as a percentage of total
              mill assets.  The incremental impacts on  this ratio were examined by decreasing
              the gross income by the annualized cost,  and increasing the asset base by the
             capjtal investment required for each  option.
                                            3-49

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       •      Current Ratio.  Current assets/current liabilities.  The incremental impacts were
               analyzed after the annualized cost for each option was taken out of current assets.
       •      Net Working Capital. Current assets - current liabilities.  Incremental impacts
               were examined by subtracting the annualized cost for each option.
       •      Net Working Capital/Total Assets.  Net working capital, as calculated above, as a
               percentage of total mill assets.  For the incremental impacts, the net working
               capital was adjusted for the annualized cost and the total  assets were adjusted for
               the new capital equipment needed under each option.

Net working capital and net working capital/total assets are included to examine both the
incremental impacts on liquidity (working capital as a proportion of mill  assets), as well as the
mill's overall ability to finance  the annual cost of regulation.  Table 3-12  cross-references the
data in the survey with the components of the facility-level financial  ratio analysis.
       3.2.2.3  Business-Entity-Level Ratio Analysis

       The ratio analysis performed at the business-entity level investigates the impacts of
aggregated costs on the company.  If an entity operates five paper facilities, the ratio analysis
must incorporate the costs expected to be  borne by all five facilities. In other words, while added
pollution control costs might not force any of the mills to close, the aggregate costs for several
mills might severely affect the company's financial health.  The business entity is defined in the
survey as the level closest to the facility for which complete financial data are available.
Table 3-13 cross-references the  survey data and the business-entity-level financial ratio analysis.

       A ratio analysis is not planned at the corporate parent level, i.e., whatever owns the
business entity.  Higher up the corporate hierarchy, the impacts become more diluted because of
an increased asset base.  For single-establishment firms, ratio analysis at the facility level,
business-entity level, and the corporate level would coincide.
                                            3-50

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TABLE 3-12
COMPONENTS NEEDED FOR FINANCIAL RATIOS
FACILITY-LEVEL ANALYSIS
                                                             Location of Data In 199O National Census
                                                             Part B: Financial and Economic Information
  Independently Owned
                                                       1985      1988     1989
                                                                                            Multi-Facility Company
                                                                                          1985
                                                                                                        1988
                                                                                                                     1989
Asset Related:
Current Assets
Total Assets

37c
38n

41 c
42n

45c
46n

49c
50m

53c
54m

57c
58m
Liability Related:

      Current Liabilitie

      Total Liabilities
39s       43e       47 a           51a           55a          59a

39a + 39b 43a + 43b 47a + 47b      51a + 51c     55a + 55c     59a + 59c
Income Statement Related:
Sales Revenues
Earnings Before Interest and Taxes (EBIT)
Interest Expense
Taxes
Manufacturing Costs
Non-Manufacturing Costs (w/depreciation)
Net Income
Depreciation

16a
16h
16i
16)
NN
NN
16k
16f

19a
19h
19i
19j
NN
NN
19k
19f

22a
22h
22i
22j
, NN
NN
22k
22f

65
NA
NA
NA
68
69a
65-168 + 69a)
69b

65
NA
NA
NA
71
72a
65-(71 +72a)
72b

65
NA
NA
NA
74
75a
65-(74 + 75a)
75b
Notes:NA Not available.
      Income statement related data for facilities owned by multi-facility companies may not be accurate since
      items such as taxes and interest may or may not be carried on the facility's books.

      NN Not necessary. )
      This information is not needed for the ratio analysis, since more accurate data can be obtained from
      Section 2 of the questionnaire.
compnts.wkS                                 24-Jun-93
                                                             3-51

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TABLE 3-13
COMPONENTS NEEDED FOR FINANCIAL RATIOS
BUSINESS-ENTITY LEVEL ANALYSIS
Location of Data in 1 990 National Census
Part B: Financial and Economic Information
Independently Owned *
Component 1985 1988 1989
Asset Rotated:
Currant Assets See Table 3
Total Assets
Liability Related:
Current Liabilities
Total Liabilities
Income Statement Related:
Sales Revenues
Earnings Before Interest and Taxes (EBIT)
Interest Expense
Taxes
Net Income
Depreciation
Multi-Facility Company
1 985 1 988 1 989

15a 18a 21a
15d 18d 21d

15e 18e 21o
15h 18h 21h

16a 19a 22a
16h 19h 22h
16! 19i 22i
16j 19j 22j
16k 19k ' 22k
1 6f 1 9f 22f
Notes:  * Components for independents are the same as the facility components found in Table 3-12.


s:\econ\pulp2\oia\sec_3\t3_13.wk3            24-Jun-93
                                                      3-52

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       3.2.2,4  Baseline Results

       Baseline results are based on the financial ratios and their change due to the business
cycle before the addition of incremental pollution control cost.  After the ratios are calculated
for each facility and/or business entity, the average and median values are calculated. Table 3-14
presents the summary results for the facility-level  ratio analysis for 1985, 1988, and 1989.l6  Both
the median and mean value are presented because of the variability in the ratios;  median values
are much less sensitive to outliers. The median 1985 gross income margin and return on assets
values indicate how poor a year it was;  these ratios are almost half the values for  1989.  The
current ratio, on the other hand, remains  above 1.0 for all 3 years, indicating that  the typical
facility had more assets than liabilities.  The industry downturn actually started at the end of
1989 (DeKing et al., 1990); most facilities closed out 1989 with lower net working capital than in
1988. This pattern is also seen in the drop in net  working capital/total assets  for 1989.

       Baseline financial ratios for the  company or business  entity are shown in Table 3-15. As
expected, net income margin is smaller  than the gross income margin seen in Table 3-14, but
with the same business cycle pattern. Return  on assets also Is smaller for the company because
all costs are considered, and it also shows the business cycle pattern. Current ratio and debt to
asset ratio stayed very stable during this period, which might indicate that little can be learned
from these ratios in the impact analysis. The  difference between the mean and median  times
interest earned (TIE) is striking. Some companies have very small debts on their  balance sheets
and  therefore  have very high TIE ratios, which skew the average upwards and away from the
median.  A similar phenomenon occurs with the net working capital.

       Tables 3-14 and 3-15 indicate the cyclical nature of the  pulp, paper, and paperboard
industry.  For  this  report, the fluctuations  in financial ratios due to the business cycle are
    "The first pass in the analysis revealed several outliers with large and negative values for
current assets.. Closer investigation revealed that ail outlying mills apportioned most of their
liabilities to an intercompany account that did not distinguish between current and noncurrent
liabilities.  All of these intercompany liabilities were recorded as current. These  large values
affected the current ratio and the net working capital estimates  for the entire population.  For
these mills, the intercompany account was excluded from the estimate of current  liabilities. This
change did not affect  the median net working capital.
                                            3-53

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TABLE 3-14

BASELINE FACILITY-LEVEL RATIO ANALYSIS
ALL HILLS

Ratio
Gross Income Margin:
Mean:
Median:
Return on Assets:
Mean:
Median:
Current Ratio:
Mean:
Median:
Net Working Capita^:
Mean ($000):
Median ($000):
Net WC/ Total Assets:
Mean:
Median:
Baseline
1985
2.1%
5.7%
17.0%
9.5%
3.16
1.85
$5,275 $5
$2,211 $2
16.4%
11.0%
Paramel
1988
1.8%
11.6%
31.0%
17.3%
2.72
1.84
,948
:,778
12.0%
9.8%
:er
1989
0.3%
12.3%
32.3%
17.5%
3.26
1.81
$5,392
$2,284
10.3%
8.8%

Variation
87.9%
53.2%
47.6%
45.9%
16.4%
1.7%
11.3%
20.4%
37.2%
20.5%
Notes:  This table includes independent,  single-facility,  and
multi-facility entities.  There are 523 mills in the analysis.
D:\SMALLBUS\MRATIOS.WK3
                                                     28-Jun-93
                                                3-54

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 TABLE  3-15

 BASELINE  BUSINESS ENTITY-LEVEL RATIO ANALYSIS
 ALL  COMPANIES
Baseline Parameter
Ratio
Net Income Margfn:
Mean:
Median:
Return on Assets:
Mean:
Median:
Current Ratio:
Mean:
Median:
Net Working Capital:
Mean ($000):
Median ($000):
Net WC/ Total Assets:
Mean:
Median:
Debt/Asset Ratio
Mean:
Median:
Times Interest Earned:
Mean:
Median:
1985
1.8%
4.2%
4.6%
5.8%
3.55
1.90
$46,172
$5,584
20.3%
18.3%
51.5%
50.2%
45.5
6.3
1988
6.2%
5.3%
9.3%
8.5%
2.48
1.91
$70,231
$7,090
20.0%
17.5%
57.2%
53.2%
34.2
8.8
1989
4.7%
5.0%
8.0%
6.5%
2.43
1.79
$62,005
$5,841
18.2%
13.2%
58.4%
.54.4%
21.1
7.1
Percent
Variation
71.0%
19.8%
50.8%
31.8%
31.6%
6.0%
34.3%
21.2%
10.5%
28.3%
11.7%
7.8%
53.8%
28.8%
Notes:  Includes independent, single-facility,  and multi-facility entities.
        There are 196 companies in the analysis.
D:\SMALLBUS\COMPANY\BIZSTAT2.WK3
                                                                 28-Jun-93
                                                3-55

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important to consider when assessing the impact of incremental pollution control costs.  For all
ratios that do not involve net working capital, impacts will be evaluated on a facility-by-facility
basis, and the average and median impact will be reporte'd (i.e., the mean change). In contrast,
the incremental impacts for net working capital and net working capital/total assets were
measured on a population basis (i.e., the change in the mean). This is because some mills have
negative net working capital. Further reductions appear as positive changes and provide
misleading results.
       3.23   Associated Impacts

       3.2.3.1 Direct Impacts

       The closure analysis is facility-specific and impacts associated with mill closure are based
on survey information. Direct, or primary, impacts such as job losses, revenue losses, and export
losses are all calculated based on specific mill closures.  The direct impacts associated with a
specific regulatory alternative or option are estimated by summing the losses for all facilities
projected to close.
       3.2.3.2 Secondary Impacts

       Any positive or negative economic activity can have a ripple effect on the local and
regional economy. Whether it be the start-up of a factory, the introduction of a public spending
program, or reductions in export sales at a local manufacturing plant, changes in economic
activity influence the welfare of the surrounding region through inter-industrial relationships and
impacts on households.  A factory closing, for example, would not only decrease sales of local
and regional  raw material suppliers, but could also reduce the sales of local merchants through
lowered employment and earnings in  the area.
       The U.S. Department of Commerce, Bureau of Economic Analysis, has developed a
Regional Input-Output Modeling System (RIMS II) that aims to quantify these ripple effects for

                                           3-56

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over 500 different industries in all regions of the nation (DOC, 1992). RIMS II is based on an
accounting framework called an input-output (I-O) table, which shows—for each industry—the
inputs purchased from and outputs sold to other industries and households in the region.

       National-level I-O multipliers from RIMS II for SIC codes 261 (pulp mills), 262 (paper
mills), and 263 (paperboard mills) are used to estimate total impacts from projected mill
closures. Impacts estimated by these multipliers include both direct and indirect impacts, that is,
they include the impacts described in Section 3.2.3.1. The final-demand multiplier for output
(Table 3-16) represents  the total dollar change in output for each dollar change in industry
output;  e.g., every $1 change in pulp output results in a $3.52 change in total output.  The final-
demand multiplier for employment  is the total change  in jobs for each $1,000,000 change in
output (Table 3-16). For example, a loss of $1,000,000 in paper shipments  results in a loss of
27.2 jobs. This employment loss includes the loss in jobs estimated by the facility closure, i.e., it
includes both  direct and indirect job losses.  The multiplier is based on 1989 data, as is the
survey data (Pigler, 1993).

        The financial model analysis estimates the loss  in the value of shipments associated with
facility  closures. The loss in the value of shipments estimated by the facility closures is the input
to the analysis of secondary and community effects.
       3.2.3.3. Loss in Federal and State Tax Revenues

       Tax shields that lower costs to the industry represent a loss in tax revenues to state and
 federal governments. The difference between pre-tax and post-tax annualized costs represent the
 potential loss in income to the governments.
                                            3-57

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                                TABLE 3-16




   RIMS II MULTIPLIERS FOR THE PULP, PAPER, AND PAPERBOARD INDUSTRIES
Industrial Category
Pulp Mills
Paper Mills
Paperboard Mills
Final-demand multipliers
Output
(dollars per dollar)
3.5183
3.2303
3.3589
Employment
(jobs per $1,000,000 )
29.7
27.2
28.2
Source:  Pigler, 1993.
                                   3-58

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 3.3     MARKET IMPACT ANALYSIS METHODOLOGY

        Implementing regulations to control air and water pollutants from pulp and paper
 manufacturers will affect the costs of production in the U.S. pulp and paper industry. The costs
 of the regulations will vary across the many different mills in the industry, depending on the
 production processes currently employed. Mill-level production responses to these additional
 costs will determine the market impacts of the regulations.  Specifically, the cost of the
 regulations may induce some mills, or product lines within mills, to close or to change their
 current level of production. These choices affect, and in turn are affected by, the market price
 for market pulp, paper, and paperboard products.

        A variety of approaches may be used to quantify and evaluate economic  impacts; they
 reflect a variety of underlying paradigms.  The market impact model applies standard
 microeconomics concepts to model the supply of pulp, paper, and paperboard products and the
 impacts of the regulations on production costs and facility output decisions.  The three main
 elements of the analysis are regulatory effects on the manufacturing facility, market responses,
 and facility-market interactions.  For a more comprehensive and technically detailed discussion of
 the market impact analysis methodology and model, please  see Appendix A of this report.
       3.3.1  Market Impact Model Concepts

       3.3.1.1 Facility-Level Effects

       At any point in time, the costs that a firm faces can be classified as either unavoidable
(sunk) or avoidable.  In the former category, we include costs to which the firm is committed and
that must be paid regardless of any future actions of the firm. The second category, avoidable
costs, describes any costs that are  foregone by ceasing production.  These costs can be further
refined to distinguish between costs that vary with the level of production and those that are
independent of the production level.  For example, production factors such as labor, materials,
and capital (except in the short run) vary with the level of output, whereas  expenditures for
                                           3-59

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facility security and administration may be independent of production levels but avoidable if the
facility closes down.

       Figure 3-6 illustrates the derivation of a facility supply function for a market pulp, paper,
or paperboard product from the classical U-shaped structure of production costs with respect to
output. The horizontal axis, q/t, represents output per period and the vertical axis, $/q,
represents the cost per unit of output. Let AVAC be the facility's average variable (avoidable)
cost curve and ATAC the average (avoidable) cost curve for producing the product. The vertical
distance between ATAC and AVAC is the per-unit average cost of nonvariable avoidable  costs,
and it approaches zero as the number of units of output increases.  MC is the marginal cost of
producing paper, paperboard, or market pulp, which intersects AVAC and ATAC at their
respective minimum points.  All these curves are conditional  on input prices and the technology
in place at the facility.

       The  facility supply function is the section of the marginal cost curve bounded by the
quantities qm and qM.  qM is the largest feasible production rate that can be sustained at the
facility given the technology and other fixed factors in place, regardless of the output price.
Quantity qm is the minimum economically feasible production rate .determined by the minimum
of the AVAC curve, which coincides with the price p™.  Suppose the market price of paper is less
than pm.  In this case, the firm's best response is to close the facility and not produce paper
because P < AVAC implies  that total revenue would be less  than variable costs if the facility
operated at  the associated output levels below qm.

       Now consider the effect of the proposed regulatory control costs.  These control costs fall
                                                                     i
into one of two categories:  avoidable variable and avoidable  nonvariable.  We characterized
these proposed costs as avoidable because a firm can choose  to cease operation  of the facility
and thus  avoid incurring the costs of compliance.  The variable control costs include the O&M
costs of the controls, and the nonvariable costs include  compliance capital equipment.

       The effect of these additional  costs is illustrated in Figure 3-7.  The facility's AVAC and
MC curves shift upward (to AVAC' and MC') by the per-unit variable compliance costs.  In
addition,  the nonvariable  compliance costs increase total avoidable costs and thus the vertical
                                           3-60

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$/q
  pm   .
                                Figure 3-6. Facility cost curves.
                                           3-61

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                                     MC'

                                     MC
                                     ATAC'
                                     AVAC1
                                     ATAC
                                     AVAC
                   qm qm-        qM
q/t
Figure 3-7. Effect of compliance costs on facility supply function.
                       3-62

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 distance between AT AC' and AVAC'.  The facility's supply curve shifts upward with marginal
 costs, and the new (higher) minimum operating level (qm') is determined by a new (higher) pm/.

       Now consider the effect of compliance costs on the derived demand for inputs at the
 regulated facility. Paper and paperboard manufacturing facilities are market demanders of pulp.
 We can employ a similar neoclassical analysis to the one above to demonstrate the effect of
 compliance costs on the demand for the market pulp input. Figure 3-8 illustrates the paper and
 paperboard manufacturing facility demand function for market pulp.  Each point on the derived
 demand curve equals the firm's maximum willingness to pay for the corresponding marginal
 input.  This is typically referred to as the input's value of marginal  product (VMP), which is
 equal to  the price of the output (P) less the per-unit compliance costs (c) times  the input's
 "marginal physical product" (MPP), which is the incremental output attributable to the
 incremental input. Ignoring any effect on the output price for now, an increase  in per-unit •
 compliance costs due to the  regulations will lower the VMP of all inputs by the  unit amount of
 the additional compliance costs, leading to a downward shift in the derived demand curve in
 section a of Figure 3-8 from Dy to D'y.

       The paper and paperboard manufacturing facility demand curve for market pulp is
 downward sloping in this example, indicating that the marginal physical product  of market pulp
 diminishes as more  is used to produce paper and paperboard, and substitution possibilities  exist
with other inputs. This model  assumes  that the input-output relationship between the market
pulp and the final paper and paperboard product is strictly fixed, not only by product
specification but also by constant efficiency of use at all  input levels. Therefore, the VMP of the
market pulp is constant and the derived  demand curve is horizontal with the constant VMP as
the vertical intercept, as shown in section b of Figure 3-8.
       3.3.1.2  Market-Level Effects
       Consider the relationship depicted in Figure 3-9 between the markets for a single paper
or paperboard product, Qx, and a market pulp input, Qy.  Qy, along with other inputs, such as
labor, energy, and chemicals, is used in the production of Qv  We assume that prices for the
                                          3-63

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                                              $/q.
                                 qy/t
a) Without Fixed Input Coefficients
                                                                               •V
                               qy/t
b) With Fixed Input Coefficients
Figure 3-8. Effect of compliance costs on derived demand for market pulp at regulated facility.
                                       3-64

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    $/Qx
     Px1
     PxO
    $/Qy
     Py2
Py3 =
     P/1
                                              Qxi  Qxo
               (a) Market for Paper or Paperboard Product, Qx
                                                                   Dx
                                   Qx/t
Qy1  Q/3 Qy2      QyO
                           (b) Market for Pulp, Qy
         Figure 3-9. Market equilibria with and without compliance costs.
                                                                   Qy/t
                                  3-65

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 respective commodities are determined in competitive markets (i.e., individual facilities have
 negligible power over the market price of the commodities and thus take the price as "given" by
 the market). Under perfect competition, market prices  and quantities are determined by the
 intersection of market supply and demand curves. A market supply curve is the sum of all
 facility supply curves, and a market demand curve is the sum of the demand curves for all
 demanders of the commodity. The demanders of paper or paperboard product, Qx, are final
 product consumers, and the demanders of market pulp,  Qy, are the individual  facilities that
 purchase market pulp for producing paper and paperboard products. Without the proposed
 compliance costs, the market quantity and price of paper or paperboard product, Qx (Q^, P^),
 are determined by the intersection of the market demand curve (DJ and the market supply curve
 (SJ, and the market quantity and price of market pulp,  Qy (Q^, Py,,), are determined by the
 intersection  of the market demand curve (Dy) and market supply curve (Sy).

       Imposing the regulations  increases the costs of producing pulp and, thus, paper and
 paperboard, shifting the market supply function for both commodities  upward to S'x and S'y,
 respectively.  The supply  shift in  the market for paper and paperboard products causes the
 market quantity of each to fall to Qxl and the market price to rise to Pxi in the new equilibrium.
 In the market for pulp, the drop  in the market  quantity  is unambiguous; however, the direction
 of the change in the market price can only be determined if we know the relative magnitudes of
 the demand and supply shifts.  If the downward demand effect dominates, the price will fall (e.g.,
 Pyl); if the upward supply effect dominates, the price will rise (e.g., P^); and if the effects just
 offset each other, the price remains unchanged (e.g., Py3 = P^).

       The sign (positive or negative) of the effect of these market adjustments on commodity
 prices and quantities is summarized in Figure 3-10; the magnitude of these effects is estimated by
 the market impact model. The supply shifts for market  pulp, paper, and paperboard cause the
 market price to rise and market quantity to fall for these commodities at the new equilibrium.
 However, the downward shift in the demand curve for market pulp will have an offsetting effect
 on price, leaving the total effect ambiguous,  while exacerbating the effect on quantity, resulting in
 an even lower quantity produced. In both cases, the producers that are unaffected by the
 regulations receive the higher price for their products without the associated increase  in
compliance costs and thus increase their  production levels.
                                          3-66

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                    Quantity
                Increase    Decrease
    Increase
Price
   Decrease
Yes
Yes
Yes
Yes
                a)  Market Pulp
                                                    Quantity
                                               Increase    Decrease
 Increase
                               Price
Decrease
No
                                                                  Yes
Yes
            No
                                   b) Paper and Paperboard Products
      Figure 3-10.  Market adjustments for market pulp, paper, and paperboard products.
                                     3-67

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       3.3.1.3 Facility-Level Response to Control Costs and New Market Prices

       In evaluating the market effects for pulp, paper, and paperboard products, we must
distinguish between the initial effect of the regulations and the net effect after all markets have
adjusted.  Initially all affected facilities' supply curves for market pulp, paper, and paperboard
shift upward by the unit variable costs of the regulation. As a result, all affected facilities'
derived demand curves for market pulp shift downward by the unit variable control costs.
However, the upward shift in the industry supply curves for paper and paperboard pushes up the
prices of those commodities, which subsequently raises the VMP of the market pulp and, thus,
puts upward pressure on the derived demand for that commodity. In general, the initial upward
shift in supply at the facility will be greater than the subsequent increase in market price so that
the mill reduces supply of market pulp, paper, or paperboard.  The initial downward shift in
demand will typically dominate the subsequent upward shift so that the net shift is downward and
the mill reduces demand for market pulp. However, determining which shift dominates for a
particular mill is difficult:   it depends on  the relative magnitude of the facility-specific unit
variable costs of the regulation and the changes in market prices.

       Given changes in market prices and costs, mills will elect to either:
              Continue to operate, adjusting production and input use based on new revenues
              and costs, or
              Close the facility if expected revenues do not exceed total avoidable costs.
This decision can be extended to the multiproduct facility where product lines may be closed if
product revenues are less than product-specific avoidable costs, and the entire facility may be
closed if total expected revenues from all products (market pulp, paper, and paperboard) do not
exceed facility-specific avoidable costs.

       This approach to  modeling the facility closure decision is based on conventional
microeconomic theory. It compares the AT AC—which includes all cost components that fall to
zero when production discontinues—to the expected postregulatory price. Figure 3-7 illustrates
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this comparison. If price falls below the AT AC, total revenue would be less than the total
avoidable costs.  In this situation, the owner's cost-minimizing response is to cease production.

       An additional aspect of the facility-level impacts is the quantity adjustments.  Changes in
costs will change producers' output rates. However, some of this effect is mitigated when prices
are increased. Of course, facility and product-line closures directly translate into quantity
reductions.  However, the output of operating facilities also will change as will supply from
foreign sources.  Affected facilities that continue to produce may increase or decrease their
output levels depending on the relative magnitude of the  unit variable control costs and the
changes in market prices.  Unaffected facilities will not face an upward shift in their product
supply curves, so their  response to higher product prices is to increase production. This response
is illustrated in Figure  3-11 as an upward movement along the facility's supply curve for the
product.  Foreign producers, which do not incur higher production costs because of the
regulations,  will respond in the same manner as these unaffected U.S. mills.
       33.2  Operationalizing the Market Impact Model

       To estimate'the economic impacts of the regulations, we operationalized the competitive
market model of the pulp and paper industry outlined in the previous subsections.  The model
incorporates  the facility-specific information on production obtained from the EPA's 1990
National Census of Pulp, Paper, and Paperboard Manufacturing Facilities (EPA, 1991) and model
                                                     I
parameters characterizing domestic and foreign (export) demands as well as foreign supply
(imports).  The model incorporates these data sources to provide an empirical characterization of
the U.S. pulp and  paper industry and product markets for a base year of 1989. We chose this
base year of  analysis because it is the last year for which facility-specific production and technical
data were available from the National Census (EPA, 1991) and for which supporting economic
data were readily available.

       The model analyzes  market adjustments for 31 paper and paperboard product markets
and 6  market pulps by employing a process of latonnemenl whereby prices approach equilibrium
through  successive correction—modeled  as a Walrasian  auctioneer.  Integrated facilities and

                                            3-69

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 $/q
   o
pm
                         •m
,M
                                                                              Qi/t
          Figure 3-11. Movement along the product supply function.
                                     5-70

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paper-making facilities constitute those facilities supplying final paper products; the pulp mills
and those integrated mills involved in the market for pulp, either as a supplier or demander,
constitute those facilities  included in the model for market pulps. The model also includes a
foreign trade sector with which to assess the impact of international trade responses on market
outcomes and vice versa.

       To implement this model, we identified commodities and facilities to be included in the
analysis, specified the supply and demand side of the market and associated response parameters,
                  I
specified the foreign trade sector and provided the corresponding response parameters,
incorporated demand and supply specifications into a market model framework, and evaluated
market adjustments due to imposing regulatory compliance costs and estimated the impacts.
       3.33.1  Model Dimensions

       Clearly the analysis must account for all marketable commodities involved in producing
pulp and paper, as well as all suppliers of these commodities.  Figure 3-12 illustrates the modeled
interactions between commodities and producers.  Trje first marketable product is pulp, either
bleached or unbleached; the second marketable product is the final paper or paperboard product.
The model analyzes the market adjustments for 6 market pulps and 31 paper and paperboard
products.  All of these products are consumed and produced domestically,  as well as traded
internationally.  Therefore, domestic producers export some pulp and paper products to other
countries, and foreign producers supply their products to U.S. markets.
       The pulp and paper industry is characterized by both nonintegrated and vertically
integrated mills.  Nonintegrated mills include pulp mills that produce market pulp as well as
paper mills that purchase market pulp to produce paper and paperboard products.  Vertically
integrated mills rely mostly on their own production of pulp to produce paper and paperboard
products.  Those vertically integrated mills without enough internally produced pulp are also
demanders of market pulp, and those that produce an excess supply of pulp are suppliers of
market pulp.  We modeled the production  from 566 pulp, paper, and paperboard manufacturing
facilities, including 28 pulp mills, 303 paper mills, and 235 integrated mills.
                                          3-71

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             Domestic
            Consumers
                     Foreign
                     (Exports)
          C
PAPER/PAPERBOARD (31)
Integrated
  Mills
  (235)
                            i
                        Paper Mills
                          (303)
                                                 Foreign
                                                 (Imports)
                                                 Foreign
                                                 (Exports)
                                MARKET PULP (6)
                        Pulp Mills
                           (28)
                                 Foreign
                                 (Imports)
      Figure 3-12. Interactions between commodities and producers.
                          3-72

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       3.3.2.2  Commodities

       EPA's 1990 National Census of Pulp, Paper, and Paperboard Manufacturing Facilities
identifies the 566 mills existing in 1989 that may be affected, either directly or indirectly, by the
air and water pollution regulations.  The detailed production data obtained from this source on
each mill form the basis for characterizing the commbdities included in the model. Table 3-17
lists the products with a description of each product and its product code.

       The National Census identifies 42 product markets to analyze—33 final paper and
paperboard products and 9 pulp produpts.  However, National Census data on facility-level
production indicate no U.S. production of either "other shipping sack" (product code 32) or
"hardboard" (product code 52) in 1989. Therefore, the markets for these two product groups are
not included in the model.
       Although some of the pulp product categories provided by the National Census
distinguish between bleached and unbleached pulps, not all pulp categories have this distinction.
Consequently, as shown in Table 3-18, the pulp product categories were expanded to 17 to
account for bleached and unbleached versions of each pulp by matching the pulp category with
pulp process codes from the National Census. Bleached and unbleached pulps were categorized
using National Census data on the fiber source indicated by the pulp process codes and the
percentage of the fiber that is bleached and unbleached. Distinguishing the pulp products by
these features—pulping process and bleaching—is particularly important because the regulations
arc aimed primarily at chemical pulping and bleaching.  Thus, the model includes 17 pulp inputs
into the production of paper and paperboard.

       Some subsets of the 17 pulps described above are sold on the market (i.e., market pulps).
A number of the pulp inputs  are only produced at integrated facilities for in-house production of
paper and papcrboard products and arc consequently not marketed. In addition, some of these
pulps are  traded in very small quantities by a small number of suppliers; therefore, data were
insufficient to derive prices for some of" these market pulp products. The  U.S. Department of
Commerce's Current Industrial Reports:  Pulp, Paper, and Board does not contain  data on value of

                                           3-73

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                                      TABLE 3-17

                     PULP, PAPER, AND PAPERBOARD PRODUCTS
Product (Code)"
Product Description
Pulp

Special alpha and dissolving
woodpulp (1)
Sulfate-bleached (2)
Sulfate-unbleached (3)
Sulfite-bleached (4)
Sulfite-unbleached (5)
Groundwood-bleached (6)
Groundwood-unbleached (7)
Thermomechanical-bleached (8)
Thermomechanical-unbleached (9)
Semichemical-bleached (10)
Semichemical-unbleached (11)
Defibrated or exploded-bleached
(12)
Defibrated or exploded-unbleached
(13)

Secondary-bleached (14)
Secondary-unbleached (15)

Cotton and rag pulp-bleached and
unbleached (16)
Chemical pulp from wood and other fibers with a very
high alpha cellulose content, readily adaptable for uses
other than paper and paperboard making.

Made from an alkaline pulp manufacturing process that
cooks chips in a pressure vessel using a liquor of primarily
sodium sulfide and sodium hydroxide with sodium sulfate
and lime being used to replenish these chemicals in
recovery  operations (also  kraft).

Made from acid pulp manufacturing process that cooks
chips in a pressure vessel  using a liquor composed of
calcium, sodium, magnesium, or ammonia salts of
sulfurous acid.

Slurry produced by mechanically abrading fibers from
barked logs through forced contact with the surface of a
revolving grindstone. Used as newsprint and publication
paper.

Pulp made by presteaming chips and reducing them into
their fiber components during an initial mechanical
treatment in refiners under elevated temperature and
pressure. Subsequent  refining done at atmospheric
pressure.

Lower quality pulp made by cooking fibrous materials in a
neutral sodium sulfite-sodium carbonate liquor followed
by a final separation of the fiber using unpressurized
mechanical means.

Pulp made by thermomechanical process in which
woodchips are pretreated  with a chemical, usually sodium
sulfite, either prior to or during presteaming as an aid to
subsequent mechanical processing in  refiners.

Any type  of paper- and paperboard-making fiber obtained
from wastepapers and  other used, reclaimable fiber
sources.

Pulp made from rags or cotton linters by a conventional
cooking process with lime and sodium hydroxide, followed
by refining and bleaching.
                                         3-74

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                                    TABLE 3-17 (cont)
 Product (Code)*
 Product Description
 All other fiber, n.e.c. (17)
 Pulps other than wood such as pulp of fibrous vegetable
 material (e.g., straw, reed, bagasse, bamboo, etc.); or
 synthetic and semi-synthetic sources (e.g., glass, fiberglass,
 rayon, nylon,  combinations).
 Paper

 Newsprint (20)
 Uncoated groundwood paper (21)
 Clay-coated printing and converted
 paper (22)


 Uncoated free sheet (23)
Bleached bristols (24)


Cotton fiber writing paper and thin
paper (25)


Unbleached kraft packaging and
industrial converting paper (26)


Special industrial paper, except
specialty packaging (27)

Tissue (28)
Wrapping (30)
 Light, inexpensive grade made largely from mechanical
 pulps and some unbleached sulfite or other chemical
 pulps.

 A higher grade than newsprint that is smoother and
 brighter and used in newspaper inserts, catalogs,
 paperback books, and directories.

 Printing and converting papers that contain a layer of
 coating material, such as clay or pigment, in combination
 with an adhesive.

 Contains no more than 10% mechanical pulps,  including
 most grades of business paper (forms, bond, stationary,
 tablet, envelope, xerox, and computer paper, and cover
 and text grades used in printing).

 High-quality cardboards used for products such as  index
 tags, cards, file folders, and postcards.

 Papers in which cotton or other nonwood fibers comprise
 25% or more of the total (e.g., bond, ledget, specialty
 papers [also, rag]).

 Various types of paper used for industrial or commercial
 purposes, such as wrapping papers, bag and sack stock,
 specialty papers.

 Special industrial papers such as photographic sensitizing
 paper, blotting paper, filter paper.

 Light, fairly  transparent, strong, absorbable, easily
disposable paper, characterized by its gauze-like texture,
made from mainly bleached kraft and sulfite pulps.  Used
for sanitary products.

Grade of nonsanitary tissue, all M.G. and M.F. wrapping
papers,,treated and  untreated butcher papers, arid
miscellaneous wrapping.
                                          3-75

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                                   TABLE 3-17 (cent)
Product (Code)*
Product Description
Shipping sack (31)


Other shipping sack (32)


Other bag and sack (33)


Other bag and sack paper for
conversion (34)
Waxing stock (35)

Other (36)
Specialty packaging (37)
Glassine, greaseproof, and vegetable
parchment (38)
Paperboard

Unbleached kraft (40)


Semichemical paperboard (41)



Recycled paperboard (42)
 Wet machine board (43)
Paper made mainly from sulfate or soda, unbleached or
bleached woodpulp characterized by toughness and
strength, used in the manufacture of shipping sacks.

Rope and combination kraft and rope shipping sack
paper.

All other kraft wrapping paper made, mainly from sulfate
or soda, used, in the manufacture of grocery bags and bags
other than shipping sacks.

Used for conversion in liquor, millinery, notion, or other
variety bags.
Packaging paper with weight over 29.4 g/m2.

Other packaging and industrial converting paper such as
asphalting and creping stocks, coating and laminating,
gummed, twisting and spinning stocks (weight over 29.4
g/m2).
Packaging paper of weight not more than 150g/m2.

Papers made from pure chemical woodpulp or from
mixtures of chemical woodpulp, cotton fiber pulp, treated
by highly hyclrated or hand beaten to render the resulting
paper resistant  to oil,  grease, and water.
 High-strength paperboard made from sulfate pulp, usually
 with a naturally brown color from unbleached pulp.

 Made from semichemical pulp, mostly used for
 corrugating medium, which forms the inner, fluted layer
 of cardboard and corrugated containers.

 Made from a combination of recycled fibers from various
 grades of paper stock, used for folding boxboard; core,
 can, and tube grades, corrugating medium; and gypsum
 linerboard.

 Paperboard manufactured using a paper machine
 consisting  essentially of a wire-covered cylinder rotating in
 a vat of pulpstock on which a mat of varying thickness is
 formed by drainage, such as binder's board and shoe
 board.
                                           3-76

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                                    TABLE 3-17 (cont.)
 Product (Code)*
 Product Description
 Construction paper (50)
 Hardboard (51)
 Insulating board (52)
Heavy paper used for watercolor and crayon artwork,
made in various colors primarily from groundwood pulp.

Paperboard made resistant to water and ink penetration
by exposure to high degree of sizing treatments.

Paperboard used for insulating electric cables.
 Bleached linerboard (60)
 Folding carton type board (61)
 Milk carton board (62)
 Heavyweight cup and round nested
 food container (63)


 Plate, dish, and tray stock (64)


 Bleached paperboard for
 miscellaneous packaging (65)

 Other solid bleached board (66)
 Molded pulp products (70)
.Kraft paperboard used to line or face corrugated
coreboard to form shipping boxes and various other
containers.

Type of boxboard made of bleached chemical woodpulp
and used in the manufacture of "folding type" containers
that are formed, filled, and closed by the user.

Special grade of bleached boxboard capable of being
converted into containers for milk, cream, and other
beverages.

Bleached paperboard used in the manufacture of cups
and other nested cylindrical containers, used for hot and
cold drinks and in packaging moist, liquid, and oily foods.

Bleached paperboard, hard-sized for moisture resistance
and strength qualities.

Paperboard for miscellaneous packaging purposes such as
nonfolding board for shipping cases and set-up boxboard.

Single-ply, homogeneous types of paperboards, made from
the same stock throughout the sheet structure, including
paperboard for moist, oily, and liquid foods.

Products including fruit and vegetable packs and egg
cartons.
       "For all products termed bleached or unbleached: bleaching is the process of chemically
treating fibers to reduce or remove coloring matter so that the pulp is improved in terms of
whiteness or brightness; unbleached is produced without being treated with bleaching agents'.
                                          3-77

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                          TABLE 3-18




      PULP PRODUCTS, PRODUCT CODES, AND PROCESS CODES
Pulp Product
Special alpha and dissolving woodpulp
Sulfate-bleached
Sulfate-unbleached
Sulfite-bleached
Sul fite-unbleached
Groundwood-bleached
Groundwood-unbleached
Thermomechanical-bleached
Thermomechanical-unbleached
Semichemical-bleached
Semichemical-unbleached
Defibrated or exploded-bleached
Defibrated or exploded-unbleached
Secondary-bleached

Secondary-unbleached
Cotton and rag pulp-bleached and
unbleached
All other fiber, n.e.c.
Pulp Product
Code
1
2
3
4
5
6
7
8
9
10
11
12
13
14

15
16
17
National Census
Code'
A,D
C, W
C,W
B
B
H, J
H,J
G
G
E
E
I,F
'l,F
K, L, M, N, O, P,
U,Y,Z
K, L, M, N, 0, P,
U,Y,Z
V
Q,X,SS
Process












F S T,

R, S, T,


"Process codes taken from Subappendix Table AA-1.
                             3-78

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 product shipments and quantity of product shipped for a number of pulps because of disclosure
 concerns. Thus, the model analyzes only six market pulps for which good information was
 available:

        •     Special alpha and dissolving woodpulp
        •     Bleached sulfate
        •     Unbleached sulfate
        •     Bleached sulfite
        •     Bleached secondary fiber
        •     Unbleached secondary fiber


       3.32.3 Domestic Supply of Pulp, Paper, and Paperboard

       In this model, facilities are classified as either integrated or nonintegrated, and
nonintegrated mills are broken down further into pulp mills and paper mills.  Each type of
facility has a different decision to make regarding production of pulp,  paper, and paperboard, so
we model the production decisions at each type of facility accordingly.

       Integrated mills must determine optimal output given the market prices for all paper
products they produce, which will determine the amount of internal pulp to produce. Excess
supply of pulp will spillover into the market, while excess demand will cause the facility to
demand market pulp. For nonintegrated paper mills,-the market prices for pulp inputs  and final
paper and paperboard outputs will determine the optimal level of output to produce, and then,
the corresponding market pulp to  purchase. For pulp mills, the price of market pulp will
determine the optimal supply of market pulp. The market supply of pulp is the sum of supply
from all market pulp suppliers, and the market demand for pulp is the sum of demand from all
market pulp demanders. The same is true for paper and paperboard products.
                                          3-79

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       Mills have the ability to vary output in the face of production cost changes.  To allow for
mills to vary output in the face of regulatory control costs, the model uses facility-specific,
upward-sloping supply curves for each product.  The model employs supply functions for pulp
and paper products that are derived from a generalized Leontief technology with the assumption
of no substitutability across final products (i.e., cross-price elasticity of supply equal to zero for
all mill outputs). The specification also restricts production to a fixed-proportion relationship
between paper and pulp—that is, each unit of paper product requires a fixed number of units of
pulp input. This fixed-proportions relationship implies that the firm's profit function, supply
functions, and derived demand functions depend on product output price and market pulp input
prices only insofar as they depend on net price.  Further, we assumed that the variable
proportions input combines with pulp according to a generalized Leontief technology, which is
not fixed proportion.

       The upward-sloping product supply curve for each facility is econometrically estimated by
ordinary least squares (OLS) using facility-specific data on production from the 1990 National
Census of Pulp, Paper, and Paperboard Manufacturing Facilities and market prices  obtained from
U.S. Department of Commerce data. The supply curves are specified over a productive range
with an upper bound given by facility production capacity and a lower bound given  by the
facility's minimum economically viable output level.
       3.32.4 Incorporating Regulatory Control Costs

       The starting point for assessing the impact of the regulations on the markets for pulp and
 paper products is to incorporate the mill-level regulatory compliance costs. The compliance costs
 for each mill are estimated by Agency engineers and include the total capital investment,  the
 annual general and administrative costs, and the annual operating and maintenance costs
 (variable costs).

       The primary challenge of incorporating regulatory control costs into the model structure
 is to appropriately assign variable production costs to the pulp products directly affected by the
 incidence of control costs.  In some cases  this assignment is straightforward, such as the case of
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bleach plant process changes or the case of bleach plant process vent controls. In these cases,
the variable costs are shared by each bleached pulp product produced by the affected process.
Other cases are not as straightforward, such as the case of secondary wastewater treatment
controls. Because the costs of these controls are not readily attributable to any specific
production area of the mill, the costs are assumed to be shared by all pulp products produced at
                   i
the mill. The result of assigning variable costs to the pulp products produced by each mill is a
mill-specific, per-unit production cost change for each of the 17 pulp products.

       The second challenge of incorporating regulatory control costs into the model structure is
                                                      i
to calculate the annual nonvariable cost of regulation-imposed controls.  The annual nonvariable
control costs are determined from the net present discounted  value (NPDV) of the stream of
annual cash outflows, where the cash outflows are the total capital investment and the annual
general and administrative costs. The length of the stream of cash outflows corresponds to the
average depreciable life of the capital investment, which is estimated as 15 years, and the costs
are discounted using the facility-specific discount rate reported in the National Census (which
averages around 12 percent).  The annual nonvariable control cost is then computed by
annualizing the NPDV over the lifetime  of the investment at the facility-specific rate of discount.
The annual nonvariable control  costs enter the model at the facility level, while the per-unit
variable control costs enter at the product level  for all facilities affected by the regulations.
       3.32.5 The Facility's Product-Level Supply Decisions

       The production decisions at the three types of facilities—integrated paper mills,
nonintegrated paper mills, and pulp mills—are affected differently by the variable costs of control
(i.e., the annual O&M costs).  These direct costs are borne by pulp producers, both suppliers of
pulp to the market and to integrated mills that produce and consume their own pulp.  Because
of the direct costs of control, market pulp prices will rise, leading to indirect costs borne by
nonintegrated paper mills and integrated paper mills who purchase market pulp. The
nonvariable control costs do not directly affect product-level supply decisions except in the case
of facility closure, where supply is  reduced to zero.
                                            3-81

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       For integrated mills, the variable costs of control associated with onsite production of
pulp will be borne at the level of paper and paperboard production. These costs are expressed
per unit of pulp and can be transmitted up to the paper product through the input ratios.
Integrated mills will be indirectly affected by increases in the price of market pulp inputs.  These
                                                    i
increases in pulp prices are transmitted through the purchased input ratios.  Nonintegrated paper
mills may not be directly affected by the control costs, but they will be indirectly affected through
the changes in the prices of market pulp inputs to paper production.  Pulp mills will be directly
affected by the regulatory control costs, which enter the supply decision as a net price change to
pulp producers.
       3.33.6 Facility Closure Decisions

       The facility may not always find complying with the regulation feasible and thus may shut
down the pulp and paper manufacturing operation because it is no longer profitable.  Thus, a
facility's  optimal choice could be to produce zero output (i.e., close the facility). The model
defines the sufficient condition for production at the mill as non-negative net earnings before
interest,  depreciation, and taxes (EBEDT).  EBIDT is defined as the annual difference between
postregulatory production revenues less postregulatory production costs, including the variable
and nonvariable costs of compliance.  The closure decision as defined here does not include an
annualized value for the liquidation opportunity cost, which is equivalent to assuming that the
opportunity cost is offset by the costs of closing the facility.
       3.32.7 Domestic Demand For Pulp And Paper Products

       Market Pulp. The market impact model does not specify an exogenous demand function
for market pulps because that demand is derived from the paper supply decisions at the
integrated and paper mills. Therefore, once the paper and paperboard production decisions at
each mill have been made, the mill-specific, purchased input ratios for each market pulp will
determine the domestic demand for each market pulp.  Internal consumption of pulp is
determined by mill-specific, onsite input ratios for each pulp input. These on-site input ratios
                                          3-82

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 also form the basis for transmitting the variable compliance costs expressed per unit of pulp
 produced at the mill to per-unit variable compliance costs at the level of paper and paperboard
 products. We derived the mill-specific, purchased input ratios for each market pulp and the mill-
 specific,  onsite  ratios for each pulp input from technical production data reported in the National
 Census.  We assumed these ratios to be constant throughout the analysis, thereby restricting each
 mill to produce paper and paperboard products with the same combination of fiber sources, in
 the same relative amounts, both before and after imposing the regulations.

       The model assumes the integrated mills that met all pulp input needs through onsite
 production in 1989 will not be active on the markets for pulp and will continue to satisfy all pulp
 requirements internally after  imposing the regulation.  Thus, these mills are neither suppliers nor
 demanders in the markets for pulp. However, the model does account for the interaction of
 those integrated facilities that were active in the pulp markets during 1989, by specifying supply
 relationships for market pulp suppliers, or by specifying purchased pulp input ratios for market
 pulp demanders.

       Paper and Paperboard Products. The market impact model uses an exogenous demand
 function  for paper and paperboard products.  The function is consistent with a constant elasticity
 demand curve.  The function  was econometrically estimated, producing an elasticity of demand.
The demand elasticity measures the proportional change in quantity demanded given a
proportional change in price.   Economic theory suggests that the elasticity is negative (i.e., a rise
in price should  induce a: reduction in quantity demanded, all  else equal). The absolute value of a
product's demand elasticity measure is often compared to a benchmark value of 1. An absolute
value greater (less) than 1 indicates that demand is elastic (inelastic) with respect to price.
       3.3.2.8 Modeling the Foreign Sector

       The importance of including a foreign sector in the economic model is highlighted by the
significant level of international trade of products manufactured by facilities in the U.S. pulp and
paper industry. Section Two of this report provides detailed information on the extent of foreign
                                           3-83

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supply of pulp and paper products to the U.S. (imports) and foreign demand for U.S.-produced
pulp and paper products (exports).

       The market model specifies general functions for the foreign supply and demand for each
market pulp, paper, and paperboard product. These functions incorporate estimates of the
elasticities of foreign supply and foreign demand, which determine the responsiveness of foreign
trade flows to changes in domestic product prices.  These elasticities were numerically computed,
rather than econometrically estimated, because  domestic elasticity estimates are believed to
understate the price responsiveness of trade flows. Where foreign trade is a relatively minor
component of U.S. consumption or production,  elasticities imply that regulation-induced price
changes may generate large proportional changes in imports and exports.  But these changes may
not be so large in absolute value, given the small initial values of foreign trade. Price-taking in
world markets should dampen the price effects  of regulation in U.S. markets because
theoretically large potential import supplies are available at the "world" price, and U.S. producers
are not able to significantly raise the price of exports on world markets.
       3.3.3 Determining Market Equilibria

       The market impact model evaluates the supply and demand in each pulp, paper, and
paperboard product market. Recall that the market supply of pulp is the sum of supply from
U.S. mills plus foreign supply.  In similar fashion, the market  supply of paper and paperboard
products is the sum of supply from all paper and paperboard producers, including foreign
suppliers. Recall also that the market demand for pulp is the sum of derived demand for market
pulp across all U.S. mills plus foreign demand. In similar fashion, the market demand of paper
and paperboard products is the sum of demand from all paper and paperboard consumers,
including foreign demand.

       In the market impact model, each type of facility, integrated or nonintegrated, makes a
supply decision.  The model is  set into motion when facilities  face increased production  costs due
to compliance, which cause the facility-specific production responses.  The cumulative effect of
these responses leads to a change in the market price that all producers (affected and
                                          3-84

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unaffected) and consumers face, which leads to further responses by producers (affected and
unaffected) as well as consumers and thus new market prices, and so on. The new
postregulatory equilibria is the result of a series of iterations between producer and consumer
responses and market adjustments, until a stable market price arises where total market supply
equals total market demand.

       The process for determining equilibrium prices (and outputs) is modeled as a Walrasian
auctioneer. The auctioneer calls out a price for each product and evaluates the reactions by all
participants (producers and consumers, both foreign and domestic), comparing quantities
supplied and demanded to determine the next price that will guide the market closer to
equilibrium (i.e., market supply equal to market demand).  The model employs an algorithm to
simulate the auctioneer process and find a new equilibrium price and quantity for all 37 pulp and
paper product markets simultaneously. The model is governed by decision rules that ensure the
auctioneer process will converge to an equilibrium. The result of this approach is a vector of
post-compliance product prices that equilibrates  supply and demand for all product markets.
       3.3.4 Postregulatory Impact Estimates

       The market model equilibria results can be summarized as both market-level and facility-
level impacts.  Market-level results include adjustments in product prices, market-level
production quantity changes, changes in international trade flows, and changes in aggregate
economic welfare as measured by changes in consumer and producer surpluses.

       Facility-level impacts include an evaluation of the pre-tax postregulatory compliance cost,
product-line and facility closures, and changes in production, production costs, and EBIDT. In
addition, the model computes changes in employment attributable to the changes in output at
each mill. These output changes are due to product-line and facility closures as well as
adjustments in production at mills that continue to operate under regulation. Workers'
dislocation costs associated with industry-wide job losses are also calculated based on the one-
time willingness to pay to avoid an involuntary unemployment episode.
                                          3-85

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3.4    RELATIONSHIP BETWEEN FINANCIAL/ AND MARKET IMPACT ANALYSIS
       METHODOLOGIES
       The financial and market models provide related investigations of the potential impacts of
increased pollution control costs. The financial model, clearly the more conservative of the two
approaches, incorporates the following conservative assumptions and approaches:


       •      No cost pass-through.  The mill is not allowed to raise prices to recoup increased
              pollution  control costs. This is tantamount to assuming an inexhaustible supply of
              imports to keep domestic prices from rising.

       •      No growth.  The mills are assumed to be operating at or near capacity.  No
              growth can occur without the costs of expansion.

       •      Net income, rather than cash flow, to estimate earnings.

       •      Comparison of the net present value of future earnings against the salvage value
              to determine closure.

       •      Calculations of impacts only for those mills expected to incur pollution control
              costs.
The financial model focuses only on the facility.  Results from the financial model predict mill
closures and show how such closures will affect employment, revenue, and exports.


       In contrast, the market approach uses an  econometric model to estimate the impacts of
additional pollution control costs on the pulp, paper, and paperboard industry.  The market
model can be distinguished from the financial model based on the following:


       •      Facilities may incorporate price increases to cover added pollution control costs.

       •      A mill may adjust output along product lines to maximize profits.

       »      Nonpulp, paper, or paperboard revenues are included in earnings estimates.
                t
       •      Cash flow is used as  a measure of earnings.

       •      A mill is closed only if revenues do not exceed total avoidable costs (i.e., the
              salvage value of the mill is not estimated).
                                          3-86

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        •     All mills in the industry are included in the market model.
        »     Imports affect market-level price and quantity changes.

 Based on these differences, a mill is more likely to remain open in the market model, and the
 market model could show impacts for mills estimated to bear no costs for pollution control.  (For
 example, a paper producer might not be able to sustain production if the price of input pulp
 increases while the prices for the final product do not.) The price increases calculated in the
 market model cannot be incorporated in the financial model because they are based on mill
 closures and product line shifts that occur as the model moves toward equilibrium.   Employment
 impacts are estimated from mill closures and output changes in the market model.

       The results of the financial model and market model, then, will differ.  The financial
 model is likely to show consistently greater impacts from the regulations than the market model
 and possibly a different set of closure mills. Each approach  has its own strengths and
 weaknesses. Using both  models, however, yields the full range of possible impacts associated
 with the rulemaking.
3.5    REGULATORY FLEXIBILITY ANALYSIS METHODOLOGY

       The Regulatory Flexibility Act (RFA) came into effect on January 1, 1981 (EPA, 1992b).
A goal of the act is to establish a mechanism to provide policymakers with information on how
regulatory options1 affect small entities.  The intent is to ensure that the chosen regulatory
alternative does not have undue or disproportionate impacts on small entities.  The Agency has
developed guidelines for implementing the Regulatory Flexibility Act (EPA, 1992b).
       3.5.1 Definition of Small Entity

       RFA Section 601 states "For the purpose of this chapter...(3) the term 'small business'
has the same meaning as the term 'small business concern' under section 3 of the Small Business
Act, unless an agency, after consultation with the Office of Advocacy of the Small Business
                                          3-87

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Administration and after opportunity for public comment, establishes one or more definitions of
such terms what are appropriate to the activities of the agency	" (EPA, 1992b, Appendix A).
The U.S. Small Business Administration issues definitions of "small businesses" in Code of
Federal Regulations, Title 13, Part 121.  For pulp, paper, and paperboard mills (SIC codes 2611,
2621, and 2631, respectively), the standard is 750 employees.  A small entity, therefore, is defined
as a business entity with less than 750 employees.
       3.5.2 Alternate Definitions of Small Entity

       RFA Section 601 allows an agency to establish alternative definitions for a small entity.
The rulemaking focuses on individual facility performance with respect to meeting increased
pollution control requirements. For this reason, two sets of definitions are developed—one on a
company basis (for consistency with the Small Business Administration definition), and one on a
facility basis (in keeping with the basis for the ruleraaking).

       For two reasons, the  basis for the alternate definitions is the number of employees, both
production and nonproduction.17 The first reason is that the number of employees is the Small
Business Administration basis for defining small entities for this industry. The second is that
other ways to define a small  entity (e.g., assets or shipments) did not appear to provide any
advantage over the number of employees (see Section 2.4.2.1 for a more detailed discussion).

        The distribution of  the number of employees by facility indicates a substantial number
of facilities with 125 or fewer employees (Figure 2-10).  In keeping with the intent of the RFA, a
three-tiered subdivision was  developed for this rulemaking:

       •      Very small - 0 to 125 employees
       •      Small - 126 to 750 employees
       •      Large - more  than 750 employees.
    "If a facility closes, both production and nonproduction employees will lose their jobs; hence
the definition is based on all employees.
                                           3-88

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Taken together, the very small and small categories for the company correspond to the Small
Business Administration definition of a small business entity for the pulp and paper industry.
The additional definitions allow a more detailed examination of smaller entities.
       3.5.3  Financial Impact Analysis of Small Entities
           .1 Summaty Information for Small Entities - Facility Definition
       Table 3-19 indicates that 35 percent of the facilities fall in the very small category; nearly
half are in the small category; and the remaining 16 percent are in the large category. As
anticipated, when a facility is independently owned, there is a much greater likelihood for it to be
a very small facility. Nearly two-thirds of the independently-owned facilities are in the very small
category.  Only four percent of the independently-owned facilities are in the large category,  The
remaining mills are in the small category. In contrast, about half of the mills that are part of
multifacility organizations are in the small category, and nearly two of every five are large
facilities.

       Table 3-20 summarizes the distribution of employees, shipments, and exports among the
regulatory flexibility categories.  Large facilities represent only 16 percent of the mill population,
yet they account for over half the employees, 42 to 51 percent  of the shipments, and 49 percent
of the exports.  Very small facilities account for about 6 percent of employees, 4 to 6 percent of
shipments (value and tons, respectively),  but less than 2 percent of the value of exports.
       Table 3-21 examines the facility-level ratio analysis by size category.  The average gross
income margin for small facilities is negative for all 3 years in the survey.  In 1985, at least 25
percent of the mills showed negative gross income margins.  This dropped to at least 10 percent
of the mills for 1988 and 1989.  An investigation of outliers revealed such occurrences as a
facility that stated in the comments section it was a captive mill that transferred all its production
at cost while the actual data indicate that the transfer price did not cover costs, and a mill that
claimed only 10 percent of its revenues were from pulp, paper, or paperboard. The negative

                                           3-89

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TABLE 3-19

COUNTS OF INDEPENDENT AND MULTI-FACILITY HILLS
BY REGULATORY FLEXIBILITY CATEGORY - FACILITY DEFINITION
Multi-
Size Based on Independently Facility All
Employment Owned Percentage Group Percentage Mills Percentage
Very Small
(0 - 125 Employees)
Small
(126 - 750 Employees)
Large
(> 750 Employees)
Total
34 64 148 31 182 35 •
17 32 239 51 256 49
2 4 84 18 86 16
53 100 471 100 524 100 ,
D:\SHALLBUS\COMPANY\SIZE.OUT

Note:  Only 524 facilities are included because some mills are dummy mills,  have  changed
ownership since 1989 and therefore didn't have information for^the questionnaire,  have  begun
production since 1989, or had contractor-supplied labor.
                                                  3-90

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                                            3-91

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TABLE 3-21

BASELINE FACILITY-LEVEL RATIO ANALYSIS
REGULATORY FLEXIBILITY CATEGORIES - FACILITY DEFINITION
     Ratio
Category
                                                 Baseline Value
                                                   1985
                                                               1988
                                                                          1989
                                                                                     Percent
                                                                                    Variation
Mean
     Gross Income Margin
     Return on Assets
     Current Ratio
     Net Working Capital
     ($000)
Very Small
Small
Large
All

Very Small
Small
Large
All

Very Small
Small
Large
All

Very Small
Small
Large
All
     Net Working Capital/         Very Small
                    Total Assets Small
                               Large
                               All
Median

     Gross Income Margin




     Return on Assets




     Current Ratio
     Net Working Capital
     (5000)
Very Small
Small
Large
All

Very Small
Small
Large
All

Very Small
Small
Large
All

Very Small
Small
Large
All
3.1%
-0.2%
7.0%
2.1%
30.7%
9.6%
13.0%
17.0%
4.72
2.62
2.15
3.16
$1.195
$2.733
$19,098
$5.275
21.5%
15.8%
9.1%
16.4%
7.3%
-7.7%
18.4%
1.8%
29.7%
34.8%
22.6%
31.0%
3.46
2.51
2.03
2.72
$1,475
$4,916
$17,629
$5,948
17.7%
9.8%
6.9%
12.0%
7.4%
-11.1%
18.8%
0.3%
39.9%
30.3%
23.0%
32.3%
3.83
3.32
2.08
3.26
$1,037
$3,445
$19,716
$5,392
15.2%
7.7%
7.9%
10.3%
     Net Working Capital/         Very Small
                    Total Assets Small
                               Large
                               All
5.7%
5,4%
8.0%
5.7%
11 1%
78%
10,5%
95%
209
1.82
1 71
1 85
$667
$2.926
$13.593
$2.211
19 1%
99%
61%
1 1 0%
6.8%
14.6%
19.4%
1 1 ,6%
11.3%
20.6%
18.4%
17.3%
1.98
1.81
1 77
1 84
$709
$4.434
$17.652
$2.778
18 2%
10 2%
66%
98%
8.2%
13.2%
20.2%
12.3%
16.6%
18.1%
18.1%
17.5%
1.88
1.75
1.76
1.81
$628
$4.224
$19.084
$2,284
12.9%
8.7%
6.1%
8.8%
   59.0%
-4588.5%
   62.6%
   87.9%

   25.4%
   72.3%
   43.6%
   47.6%

   26.8%
   24.4%
    5.6%
   16.4%

   29.7%
   44.4%
   10.6%
   11.3%

   29.4%
   51.0%
   24.2%
   37.2%
   30.6%
   62.7%
   60.3%
   53.2%

   33.5%
   62.4%
   42.8%
   45.9%

    9.8%
    3.7%
    3.2%
    1.7%

   11.5%
   34.0%
   28.8%
   20.4%

   32.3%
   14.3%
    7.4%
   20.5%
Notes:  Includes independent, single-facility, and multi-facility entities.
There are 523 mills in the analysis,

D:\SMALLBUS\M RATIOS. WK3
                                                                                  05-Aug-93
                                                    3-92

-------
value seen for the average gross income margin is an example where data for the ratio analysis
will vary dramatically between the facility level and the business entity level. These data also
indicate that there will be a large number of mills that are projected to close before the addition
of incremental pollution control costs.

       The median gross income margin and median return on assets indicate that very small
facilities had more favorable business conditions in 1988 and 1989 than in 1985; the improvement
was less than was seen for small and large facilities. For small facilities, the median return on
assets nearly tripled from 1985 to 1988. The median current ratio remains stable for all
categories for all survey years. The median current ratio for very small facilities is consistently
slightly higher than for the other categories.  A very small facility may need a higher current
ratio in order to have a sufficient amount of working capital to finance day-to-day operations.
The distinction between the categories  is most apparent in the median amount of net working
capital.  Small facilities have about four times the amount of net working capital as very small
facilities while large facilities have between four to five times the net working capital as small
facilities.  Net working capital  forms the highest  percentage of total assets for very small facilities
and the smallest percentage for large facilities.
       333.2 Summary Information for Small Entities - Business Definition

       Table 3-22 indicates that 32 percent of the business entities fall in the very small category;
another 42 percent are in the small category; and the remaining 26 percent are in the large
category.  The distribution among size categories is the same for independent operations because
the facility and business entity coincide; nearly two-thirds of the independently-owned facilities
are in the very small category. In contrast, only one of every five non-independent  companies
are in the very small category. For non-independent businesses, 46 percent are in the small
category and the remaining 34 percent  are in the large category.  Using only the Small Business
Administration definition for small  entity, large entities account for 26 percent of the population.
       Table 3-23 summarizes the distribution of employees, shipments, and exports among the
regulatory flexibility categories on a company basis.  Large companies represent only 26 percent

                                           3-93

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TABLE 3-22

COUNTS OF INDEPENDENT AND MULTI-FACILITY MILLS
BY REGULATORY FLEXIBILITY CATEGORY - BUSINESS DEFINITION
Non-
Size Based on Independently Independently All
Employment Owned Percentage Owned Percentage Hills Percentage
Very Small
CO - 125 Employees)
Small
C126 - 750 Employees)
Large
(> 750 Employees)
Total
34 64 29 20 63 32

17 32 66 46 83 42

2 4 49 34 50 26

53 100 144 100 196 100
D:\SMALLBUS\COMPANY\SIZE.OUT

Note:  This analysis includes 196 companies.   Three companies  are not  included because they
have begun production since 1989 or had contractor-supplied  labor.
                                                  3-94

-------
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-------
of the population, yet they account for 86 percent of the employees, 76 to 88 percent of the
shipments, and 87 percent of the exports.

       Table 3-24 examines the ratio analysis by size category based on business entities.  The
patterns seen in the data are similar to those seen at the facility level (Table 3-20).  The average
net income margin for very small entities is negative in 1985, while large entities had a margin of
nearly 6 percent.  The data for all ratios indicate that the industry downturn had begun by the
end of 1989; 1988 tends to be the better year. This is consistent with the observations  of other
industry analysts (DeKing et al., 1990).

       The distinction between the size categories is most apparent when we compare the
median net working capital and net working capital-to-total assets.  Very small companies  have
about $1 million in net working capital, yet this forms between 25 to 40 percent of its total
assets. Small companies have about $5 to $9 million in net working capital, but this forms only
between  15 to 20 percent of its total assets. The median amount of net working capital for a
large company ranges from $60 to  $100 million over the survey period. Although this  is nearly
60 to 100 times the amount of net  working capital for a very small entity, it forms only 8 to 10
percent of the total assets for the company.  The median values for the other ratios—net  income
margin, return on assets, current ratio, debt-to-assets, and times interest earned—show far less
stratification among the categories.
       3.5.4 Market Impact Analysis of Small Entities

       The results of the market impact model can be used to evaluate the impact of the
 proposed regulations on groups of small and large  facilities and small and large companies.  The
 market impact model provides facility-level impacts that are mapped to company-level data to
 estimate impacts on companies.  For the purpose of evaluating market impact analysis results
 small facilities are defined as 126 to 750 employees, and very small facilities are defined as less
 than 125 employees. In addressing small business impacts at the company  level, the SBA size
 standards will be employed. Thus, the company-level analysis will consist of a large category,
 defined as greater than 750 employees, and a small category, defined as less than 750 employees.
                                           3-96

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  TABLE 3-24

  BASELINE BUSINESS ENTITY-LEVEL RATIO ANALYSIS
  REGULATORY FLEXIBILITY CATEGORIES - BUSINESS DEFINITION
Ratio
Mean
Net Income Margin



Return on Assets



Current Ratio



Net Working Capital
($000)


Net Working Capital/
Category

Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Total Assets Small


Debt/Asset Ratio



Times Interest Earned



Median
Net Income Margin



Return on Assets



Current Ratio



Net Working Capital
(SOOOj


Net Working Capital/
Large
All
Very Small
Small
Large
All
Very Small
Small
Large
All

Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Small
Large
All
Very Small
Total Assets Small


Debt/Asset Ratio



Times Interest Earned



Large
All
Very Small
Small
Large
All
Very Small
Small
Large
Alt
Baseline Parameter
1985 1988

-1.0%
1.2%
5.6%
1.8%
6.9%
1.5%
6.5%
4.6%
7.04
216
1.87
355
$2.825
$40,820
$100.924
$46,172
343%
163%
11.1%
20.3%
43.4%
580%
50.9%
51.5%
250
405
657
455

40%
43%
4 1%
42%
69%
54%
54%
58%
266
1 83
1 69
190
$971
$556S
$60427
$5584
398%
180%
103%
183%
357%
50 7%
51 6%
502%
5 3
66
63
6i

5.5%
6.2%
7.2%
6.2%
10,4%
9,0%
8.6%
9.3%
3.16
2.44
1.75
2.48
$2,714
$62,349
$165.886
$70,231
291%
197%
94%
20.0%
53.6%
61 1%
55.9%
57.2%
143
35 1
477
342

37%
46%
72%
53%
92%
68%
89%
85%
232
20i
1 b4
1 91
$89>.
So«.l
Sh& 230
S"090
298%
19 '!%
9 1%
17 V*
W 9%
f.?. •>.%
l?b%
M 2%
6 3
69
109
ob
1989

3.5%
4.7%
6.1%
4.7%
10.7%
6.3%
7.3%
8.0%
3.17
2.29
1.72
2.43
$2,416
$51,501
$155,766
$62,005
26.3%
174%
9.2%
18.2%
539%
62.7%
577%
584%
288
-151
228
21 1

38%
32%
64%
50%
84%
52%
6 7%
65%
20«
I 82
1 57
1 79
$103?
$b472
S10040C
$584-
K 1%
154%
8 1%
1J2%
M <•%
M ;%
4
-------
The terms facility, establishment, plant, and mill are synonymous in this analysis and refer to the
physical location where products are manufactured.  Likewise, the terms company and firm are
synonymous and refer to the legal business entity that owns one or more facilities.
       33.4.1 Facility-Level Analysis

       In the case of the pulp and paper industry, small businesses will probably incur an
economic impact because all facilities react to the regulation-driven changes in market prices
resulting in changes in facility-level revenues, costs,  and earnings before interest, depreciation,
and taxes (EBIDT).  The market impact model analysis generates  information that can be used
to assess these impacts.  Measures of economic impact on which an analysis at the facility-level is
based should reflect changes in operating status and employment, changes in revenues, costs, and
EBIDT, and the relative size of the regulatory costs to baseline revenues, costs, and EBIDT.

       The facility-level analysis includes the following impact measures:
              Percentage of small mills predicted to close with the regulation versus the
              percentage of large mills
              Distribution of predicted employment changes with the regulation across small
              and large mills
              Percentage change from baseline in product revenues,  total costs of production,
              and EBIDT for small versus large mills
              Annual compliance costs (annualized capital and annual operating) as a
              percentage of total revenues and total costs of production for small versus large
              mills, and
              Annual compliance costs (annualized capital and annual operating) as a
              percentage of EBIDT for small versus large mills.
       The baseline values for revenues, costs, and EBIDT at the facility level are determined
from the baseline data in the market impact model, and the percentage changes due to the
regulation are obtained after imposing the regulatory costs and allowing markets to adjust.
                                           3-98

-------
       Baseline Facility Size Distribution. Table 3-25 indicates that 85.2 percent of the facilities
fall in the small combination group, while the remaining 14.8 percent are in the large category.
Within the small combination group, small facilities account for 54 percent and very small
facilities the remaining 46 percent.  As expected, a facility is more likely to be in the small
combination group when it is independently owned and operated as opposed to when it is part of
a multifacility group.  Almost 97 percerit of the independently owned facilities are in the small
combination group, while only 3 percent are in the large category. Alternatively, roughly 83
percent of the mills that are part of multifacility groups are part of the small combination group,
and over 17 percent are categorized as large.

       Facility Employment. As shown in Table 3-26, industry production and non-production
employment estimates for 1989 are almost evenly divided across small combination  group and
large  facilities.  Small combination group facilities employ roughly 49 percent of industry
workers, while the remaining 51 percent of the industry's workforce is employed at large
facilities.  Within the small combination group, small facilities account for over 85 percent,  while
very small facilities account for the remaining 15 percent. Facilities that are part of a
multifacility group employ the vast majority of the estimated 217,628 production and non-
production employees, accounting for over 90 percent of this total. As expected, independently
owned and operated facilities account for a very small percentage, only 9 percent, of
employment. Employment changes  associated with regulating the industry are determined by the
facility-level responses in the market impact model.  The changes in employment result from
both mill closures and production changes at mills continuing to operate with the regulations.

       Product Revenues. Production Cost, and Earnings Before  Interest Depreciation  and
Taxes (EBIDT). Additional indicators of the  severity of the economic impact on small facilities
include the changes in product revenues, total costs of production, and EBIDT. All facilities in
the market impact  model react  to the regulation-driven changes in market prices—deciding
whether to produce and, if so, at what level.  These reactions to the market outcomes result in
changes in facility-level revenues, variable production costs, and EBIDT. Comparing the
distributional changes in facility-level revenues, costs, and EBIDT across small and large facilities
indicates whether any disproportional impact exists across these populations because of
regulation.
                                           3-99

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                                 TABLE 3-25

            INDEPENDENT AND MULTIFACILITY MILLS BY SIZE: 1989
                              BASELINE VALUES
Size based on employment
Small Combination Group
(<750)
Small (<750&> 125)
Very Small (<.125)
Large (>750)
Total
Independently
owned
Number
94
44
50
3
97
Percentage
96.9
45.4
51.5
3.1
100.0
Multifacility
group
Number Percentage
388
217
171
81
82.7
46.3
36.4
17.3
469 100.0
Total
Number
482
261
221
84
566
Percentage
85.2
46.1
39.1
14.8
100.0
Source: EPA survey.
                                   3-100

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                               TABLE 3-26

          EMPLOYMENT OF INDEPENDENT AND MULTIFACILITY MILLS
                      BY SIZE: 1989 BASELINE VALUES
Size based on employment
Small Combination Group (<750)
Small (<750& >125)
Very Small (< 125)
Large (>750)
Total
Independently
owned
Number Percentage
17,698 83.3
14,391 67.7
3,307 15.6
3,549 16.7
21,247 100.0
Multifacility
group
Number Percentage
88,701 45.2
76,109 38.8
12,592 6.4
107,680 54.8
196^81 100.0
Total
Number
106,399
90,500
15,899
111,229
217,628
Percentage
48.9
41.6
7.3
51.5
100.0
Source:  EPA survey.
                                  3-101

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       Annual Compliance Costs. The relative severity of the regulations can also be measured
by comparing the ratios of annual compliance costs to total revenues, total costs, and EBIDT
across small and large facilities. Although all facilities react to the regulation-driven market
changes, only a subset of the facilities in the pulp and paper industry incur direct annual costs of
compliance.  The significance of these costs to directly affected facilities can be measured in
terms of total revenues, total costs, and EBIDT. Comparing these ratios across small and large
facilities indicates whether any disproportional direct burden of compliance exists across these
populations.
       3.5.4.2 Company-Level Analysis

       A regulatory action to reduce pollutant discharges from facilities manufacturing pulp and
paper will potentially affect the business entities that own the regulated facilities.  Facilities, or
mills, comprise a site of land with plant and equipment that combine inputs (raw materials,
energy, and labor) to produce outputs (pulp, paper, and paperboard).  Companies, or firms, that
own these facilities are legal business  entities that have the capacity to conduct business
transactions and make business decisions that affect the facility.

       Potentially affected firms include entities that own facilities that manufacture pulp, paper,
and paperboard.  For the base year of 1989, the market  impact model identifies 214 companies
potentially affected by the regulation.  However, one firm lacked data necessary for inclusion in
the analysis.  Thus, the firm-level analysis includes 213 firms owning 565 facilities.

       The baseline financial profile was based on complete financial data from EPA's National
Census for 151 of the 213 companies included in the analysis, while the baseline financial profile
of the remaining  62 firms is supplemented or constructed using data from American Business
Information (ABI) and Dun and Bradstreet's (D&B's) Industry Norms and Key Business Ratios
(EPA, 1991; ABI, 1993;  Dun's, 1991).  These sources were incorporated because of incomplete
financial  data, i.e., missing balance sheet data, in the National Census for 41 companies  and
missing financial  data, neither income statement or balance sheet information, for 21 companies.
                                           3-102

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       The measures of economic impact on which the company-level analysis is based reflect
changes in the number of operating mills and employment, changes in profitability, and the
change in the likelihood of financial failure (bankruptcy, as measured by the Altman Z-score).

       The firm-level  analysis includes the following impact measures:
              Percentage of mills owned by small and large firms predicted to close with the
              regulation
              Distribution of predicted employment changes with the regulation across small
              and large firms
              Changes from baseline in key measures of profitability (return on sales, return on
              assets, and return on equity) for small versus large firms, and
              Changes from baseline in the likelihood of financial  failure or bankruptcy (as
              measured by Altman's Z'-score) for small versus large firms  (Altman, 1983).
       Companies In The Analysis.  Companies in this analysis include those owned directly by
the shareholders/owners and those owned by a "parent" company.  Figure 3-13 shows the chain of
ownership may be as simple as one facility owned by one company or as complex as multiple
facilities owned by subsidiary companies.

       Business entities that own pulp and paper manufacturing facilities will generally be one of
three types of entities:

       •      Sole proprietorships
       •      Partnerships, and
       •      Corporations.

Each type has its own legal and financial characteristics that may have a bearing on how firms
are affected by the regulatory alternatives.  Table 3-27 provides information of the legal form of
ownership of firms for the relevant SIC codes.
                                          3-103

-------

Parent Company
' h +.&, "~~ •"•»'• *
Other Companies
or
Legal Entities
* . _ ••„ . ' „

Subsidiary
Company
(Direct Owner)
' " • A ' ,-„..••-"
r 	 ~
Facility
IWliillljlplllullVl^WM^IIIW'IIIW^^
A
'T
-fft
Parent Company
» s v^y 4
[ t „ , ~ ' -
Subsidiary
Company
(Direct Owner)
^':B»?.j.,lV> .*;-> •^-.'^ft^'^.1 >^< >A« x x*
Facility
'^ Parent Company
jv V v i
3
h* I
1
•5 Facility |
B C
Figure 3-13. Chain of ownership.
                              3-104

-------





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        The 213 companies identified in the market impact model are listed in Table 2-31.  The
 number is firms is larger than the 135 reported in the 1987 Census of Manufacturing for "Pulp and
 Paper Mills" because it includes some firms listed under "Other Paper and Allied Products."

        Company-Level Employment and Size. To arrive at employment estimates for companies
 in the market impact model we aggregated facility-level employment to the firm level because the
 1990 National Census did not include company-level employment data.  However, for some firms
 this measure of employment does not accurately reflect their employment, and thus firm size,
 because they may own facilities outside of the pulp and paper industry.  To avoid
 misclassification, particularly in the case of incorrectly categorizing large firms as small, we
 incorporated employment data from ABI on parent companies included in the relevant SIC
 codes (i.e., 2611, 2621, and 2631).  Based on these data 150 firms, or 70.4 percent, are
 categorized as small, while the remaining 63 firms, or 29.6 percent, are in the large category.
 Small firms employ an average of only 193 workers. Large firms have a much higher number of
 employees across all operations-averaging 9,896 per firm.

       Firms may differ in size for one or both of the following reasons:

       •     First, pulp and paper facilities vary widely by size. All else being equal, firms with
              large facilities are larger than firms with small facilities.
       •     Second, firms vary in the number of facilities they own.  All else being equal,
              firms with more facilities arc larger than those with fewer facilities.

       Control economies are  typically facility related  rather than firm related.  For example, a
 firm with six uncontrolled facilities with an average annual receipt of $1 million  per  facility may
 face approximately six times the control capital requirements of a firm with one uncontrolled
 facility whose  receipts.total $6 million per year. Alternatively, two firms with the same number
 of facilities facing approximately the same control capital costs may be financially affected very
 differently if the facilities of one are larger than those of the other.

       Table 3-28 shows the average size of facility (based on  1989 total employment level)
represented in each company size  category.  As expected, larger firms own larger facilities on
average.  Table 3-29 shows the  distribution of firms bv the number of facilities owned.  A slight

                                          3-106

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                                   TABLE 3-28

                       AVERAGE SIZE OF FACILITY BY FIRM
                              SIZE CATEGORY: 1989s
        Firm size
   based on employment
         (1989)
Total employment
at facUities owned
Total number of
facilities owned
   Average
employment per
    facility
Small (< 750)
Large (>750)
Total, all firms
27,136
190,492
217,628
211
354
566
129
538
384
"Facility size is measured as total employment in 1989.

Source: EPA survey.
                                   TABLE 3-29

                     DISTRIBUTION OF FIRMS BY NUMBER OF
                             FACILITIES OWNED: 1989
                                Number of facilities owned per firm
Firm size based on employment

Small (< 750)
Large (> 750)
Total, all firms
1
116
19
135
2 to 3
26
13
39
OverS
8
31
39
Total
150
63
213
Source: EPA survey.
                                      3-107

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correlation appears to exist between the number of pulp and paper manufacturing facilities
owned and the size of the firm.  The average number of facilities owned by small firms is 1.4
(213 facilities  -5- 150 firms) as compared to an average of 5.6 facilities (354 facilities •*• 63 firms)
owned by large firms. However, nonpulp and paper facilities are not reflected in this
distribution.

       Issues  of Vertical and Horizontal Integration.  Vertical integration is a potentially
important dimension in firm-level impact analysis because the regulation  could affect a vertically
integrated firm on several levels. For example, the regulation may affect companies for whom
the manufacture of pulp and paper is not the company's primary focus but rather is an input into
the company's other production  processes  such  as construction, print media, and food  products.
A regulation that increases the cost of manufacturing pulp and paper for vertically integrated
firms will also affect the cost of  producing the primary products.  The market impacts  on
nonpulp  and paper products are not estimated in the market impact model analysis. Table 3-30
shows the range of industries represented  by firms that own pulp and paper facilities by SIC
code.

       Horizontal integration  is also a potentially important dimension in firm-level impact
analysis for either or both of two reasons:
              First, a diversified firm may own facilities in unaffected industries.  This type of
              diversification would help mitigate the firm-level financial impacts of the
              regulation.
              Second, a diversified firm could be indirectly as well as directly affected by the
              regulation. For example, if a firm  is diversified in manufacturing pollution control
              equipment (an unlikely scenario), the regulation could indirectly and favorably
              affect it.
       Figure 3-14 shows the share of total receipts from business activities other than pulp and
paper manufacturing for firms in each size category.  Firms in the large size category receive
slightly more than 50 percent of their revenues from other  activities.  Conversely, firms in the
small size category receive the vast majority of their revenues from business activities other than
pulp and paper manufacturing.

                                           3-108

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                                       TABLE 3-30

  SIC LISTINGS FOR FIRMS OWNING PULP AND PAPER MANUFACTURING FACILITIES


 SIC Code     Industry and product description
 2087
 2099
 2411
 2421
 2429
 2448
 2499
 2611
 2621
 2631
 2641
 2643
 2645
 2647
 2649
 2651
 2653
 2654
 2655
 2661
 2671
 2672
 2674
 2679
 2741
 2812
 2816
 2819
 2841
 2851
 2861
 2869
 2952
 3081
 3083
3087
3275
3296
3471
 Ravoring extracts & syrups, n.e.c.
 Food preparations,  n.e.c.
 Logging camps and logging contractors
 Sawmills & planing mills, general
 Special product sawmills, n.e.c.
 Wood pallets & skids
 Wood products, n.e.c.
 Pulp Mills
 Paper Mills, except  building paper
 Paperboard Mills
 Paper coating & glazing
 Bags, except textile  bags
 Die-cut paper & board
 Sanitary paper products
 Converted paper products, n.e.c.
 Folding paperboard boxes
 Corrugated & solid  fiber boxes
 Sanitary food containers
 Fiber cans, tubes, drums, & similar products
 Building paper and  board mills
 Paper  coated & laminated, packaging
 Coated & laminated paper, n.e.c.
 Uncoated paper & multiwall bags
 Converted paper &  paperboard  products
 Miscellaneous publishing
 Alkalies  & chlorine
 Inorganic pigments
 Industrial inorganic  chemicals, n.e.c.
 Soap & other detergents, except specialty cleaners
 Paint & allied products
 Gum & wood chemicals
 Industrial organic chemicals, n.e.c.
Asphalt felts &  coatings
Unsupported plastics film &  sheet
Laminated plastics plate, sheet, & profile shapes
Custom compounding of purchased plastics resins
Gypsum products
Mineral wool
Plating and polishing
Source:  EPA survey.
                                          3-109

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     Percentage of Total Receipts from EJusiness Activities Other than
     Pulp and Paper Manufacturing

    80 -r     78'8
    70 --

    60 --

    50 --

    40 --

    30 --

    20 --

    10 --

      0 --
                  57.6
52.3
               Small             Large             Total
                         Company Size Category
Figure 3-14. Total receipts from business activities other than pulp and
            paper manufacturing.
                               3-110

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        Computing Company-Level Impacts. Company-level impact results are generated by
 aggregating changes at the facility level and incorporating the changes into the 1989 baseline
 financial statements of each firm. The baseline financial profile was based on complete financial
 data from EPA's National Census for 151 of the 213 companies included in the analysis, while
 the baseline financial profile of the remaining 69 firms is supplemented or constructed using data
 from American Business Information (ABI, 1993) and Dun and Bradstreet's (D&B's) Industry
 Norms and Key Business Ratios (Dun's, 1991). These sources were incorporated because of
 incomplete financial data, i.e., missing balance sheet data, in the National Census for 41
 companies and missing financial data, neither income statement or balance sheet information, for
 21 companies.

       We made several adjustments to the financial statements of each firm to account for the
 regulation-induced changes at all facilities owned by the firm.  In the annual income statement,
 firm revenues and costs are both directly and indirectly affected because all facilities react to the
 adjustments in market prices associated with regulation.  We adjusted sales revenue by the
 aggregate change in product revenue  for facilities owned by the firm. We altered the costs of
 goods sold by the aggregate change in production costs across facilities owned by the firm. The
 change in production costs  includes both the annual compliance costs (operating and
 maintenance costs plus annual capital expenses) and variable cost changes due to output
 adjustments.

       In the balance sheet, changes occur only  to those firms directly affected by the regulation
and are determined.by the manner in which firms acquire the pollution control equipment.
Directly affected firms face three choices in funding the acquisition of capital equipment required
to comply with the regulations.  These choices include:

       •      Debt financing
       •      Equity financing,  or
       •      A mixture of debt and  equity financing.
                                          3-111

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       Debt financing involves obtaining additional funds from lenders who are not owners of
the firm: they include buyers of bonds, banks, or other lending institutions. Equity financing
involves obtaining additional funds from the owners of the firm: proprietors, partners, or
shareholders.  Each source differs in its exposure to risk, in its taxation, and its costs. In general,
debt financing is more risky for the firm than equity financing because of the legal obligation of
repayment, while borrowing debt can allow a firm to reduce its weighted average cost of capital
because of the deducibility of interest on debt for state and federal income tax purposes. The
outcome is that there exists a tradeoff associated with debt financing for each firm that depends
on their tax rates, their asset structures, and their inherent riskiness.

       Leverage  indicates the degree to which the firm's assets have been supplied by, and hence
are owned by, creditors versus owners.  Leverage should be in an acceptable range, indicating
that the firm is using enough debt financing to take advantage of the low cost of debt, but not so
much that current or potential creditors are uneasy about the ability of the firm to repay its debt.
The debt ratio (d) is a common measure of leverage that divides all debt, long and short term,  by
total assets.  Capital structure does not appear to have a significant impact on firm value over a
wide range of debt ratio values.  Consequently, we assume that the current capital structure,  as
measured by the  debt ratio, reflects the optimal capital structure for each firm. Thus, we use
each firm's debt ratio for 1989 to determine the amount of capital expenditures on pollution
control technology that will be debt financed.

       Thus, in the 'assets side of the balance sheet of affected firms, current assets  decline by  (1
- d) times the total installed capital cost (EK), while the value of property, plant, and equipment
increases by the total installed capital cost (i.e., the value of the pollution control equipment).
Thus, the overall  increase in a firm's total assets is equal to that fraction of the total installed
capital cost that is not paid out of current assets (i.e., d EK).

       The liabilities side of the balance sheet is affected because firms enter new legal
obligations to repay that fraction of the total installed capital cost that is  assumed to be debt
financed (i.e., d EK). Long-term debt, and thus total  liabilities, of the firm is increased by this
dollar amount.  Owner's equity, or net worth at these firms is unchanged  because of the
offsetting increases in both total assets and total liabilities.  However, working capital at each
                                            3-112

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affected firm, defined as current assets minus current liabilities, unambiguously falls because of
the decline in current assets.

       Comparison of the baseline and post-compliance financial profiles of firms in the U.S.
pulp and paper industry provides indicators of the potential disparity of economic impacts across
small and large firms. These indicators include the key measures of profitability (return on sales,
return on assets, and return on equity) and changes in the likelihood of financial  failure or
bankruptcy (as measured by Altman's Z'-score).

       Company-Level Profitability Measures. Profitability is the most comprehensive measure
of the firm's performance because it measures the combined effects of liquidity, asset
management, and debt management.  Analyzing profitability is useful because it helps evaluate
both the incentive and ability of firms in the pulp and paper industry to incur the capital and
operating costs required for compliance.  More profitable firms have more incentive than less
profitable firms to comply because the annual returns to doing business are greater.  Ir^the
extreme, a single-facility firm earning zero profit has  no incentive to comply with  a regulation
imposing any positive costs unless the entire cost of the regulation can be passed  along to
consumers. This same firm may also be less able to comply because its poor financial position
makes it difficult to obtain funds through either debt or equity financing.

       Several  ratios  are commonly used to measure profitability, including return on assets,
return on equity, and return on sales. For all these measures, higher values are unambiguously
preferred over lower values.  Table 3-31 shows the ratios used in the market impact analysis to
measure the financial viability of firms in terms of profitability.

       Baseline and with-regulation profitability are evaluated using comparative analysis of key
measures of a firm's profitability.  Comparative analysis is a widely accepted way  of summarizing
the profitability of a firm using ratios reported on the firm's financial statements. This
comparative analysis evaluates the profitability of potentially affected firms before and after
regulation by comparing the firm's key measures of profitability with specific industry benchmark
ratios reported in D&B's Industry Norms and Key Business Ratios.  Tables 3-32 through 3-34
                                           3-113

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                                   TABLE 3-31

                    KEY MEASURES OF FIRM PROFITABILITY
   Measure of Profitability
Formula for Calculation
Return on Sales
Return on Assets
Return on Equity
     Net Income
        Sales
     Net Income
     Total Assets
     Net Iricome
    Owner's Equity
                                    3-114

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                                TABLE 3-32




                    UPPER QUARTILE BENCHMARK RATIOS
Key measures of profitability
SIC
code.
2611
2621
2631
Source: Duns, 1991.
Return on
sales
0.108
0.086
0.081

Return on
assets
0.117
0.112
0.110
TABLE 3-33
Return on
equity
0.183
0.226
0.202

MEDIAN BENCHMARK RATIOS
Key measures of profitability
SIC
code.
2611
2621
2631
Source: Duns, 1991.

Return on
sales
0.096
0.049
0.032

LOWER
Return on
assets
0.097
0.065
0.078
TABLE 3-34
QUARTILE BENCHMARK RATIOS
Return on
equity
0.169
0.157
0.127


Key measures of profitability
SIC
code
2611
2621
2631
Return on
sales
0.077
0.021
0.016
Return on
assets
0.085
0.038
0.020
Return on
equity
0.154
0.096
0.084
oource:  uuns,
                                  3-115

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report the benchmark upper quartile, median, and lower quartile measures used to evaluate the
profitability of potentially affected firms in the pulp and paper industry (identified by SIC).

       In Tables 3-35 through 3-37, we compare the profitability measures computed for
potentially  affected firms to the benchmark ratios reported in Tables 3-32 through 3-34.  For the
base year of analysis, between 60 and 74 percent of the firms in the small size category and 74.6
to 79.4 percent of firms in the large size category have a profitability measure that is below the
industry upper quartile. Between 48 and 55.3 percent of the firms in the small size category and
between 41.3 and 54 percent of firms in the large size category have a  profitability measure
below the industry median  in 1989.  Further, between 32 and 37.3 percent of the firms
represented in the small category have a profitability measure below the industry lower quartile
in 1989.  Alternatively, 28.6 to 33.3 percent of firms in the large size category fall below the
benchmark lower quartile value in 1989.  Based on the  data contained in these figures, firms in
the large size category appear to be no more profitable on average than other firms in the
industry.

       After imposition of regulation, a reduction in overall profitability for each size category
would be seen as an increase in the percentage of firms below each benchmark measure.
Alternatively, an increase in overall profitability would  be indicated by a decrease in the
percentage of firms below each benchmark measure with regulation.

       Bankruptcy Analysis.  A facility, or establishment, is a site of land with a plant and
equipment that combine inputs like materials,  energy, and labor to produce outputs, like pulp,
paper, and paperboard. Firms are legal business entities that, in this context, own one or more
facilities. This distinction between facilities and firms is an important  one in discussing the
economic viability  of facilities and firms. In the market impact analysis the viability of the facility
is determined by economic criteria - close the mill  if marginal revenue (price) is below marginal
cost.  Alternatively, the viability of the firms as legal entities is conditional on their ability to
meet their  legal obligations.

       Altman draws the distinction between economic failure and bankruptcy. His definition  of
economic failure is consistent with the mill closure decision included in the market impact model.

                                           3-116

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                                TABLE 3-35
 PERCENTAGE OF FIRMS BELOW INDUSTRY BENCHMARK RATIOS IN BASELINE:
                            RETURN ON SALES
Percentage
less than
Benchmark ratios
Upper quartile
Median
Lower quartile
Small firms
Baseline (%)

74.0
55.3
32.0
Large firms
Baseline (%)

79.4
42.9
28.6
All firms
Baseline (%)

75.6
51.6
31.0
                                TABLE 3-36
 PERCENTAGE OF FIRMS BELOW INDUSTRY BENCHMARK RATIOS IN BASELINE:
                            RETURN ON ASSETS
Percentage
less than
                     Small firms
Baseline (%)
                    Large firms
Baseline (%)
                     All firms
Baseline (%)
Benchmark ratios
  Upper quartile
  Median
  Lower quartile
   70.0
   56.7
   37.3
   77.8
   54.0
   33.3
   72.3
   55.9
   36.2
                                  3-117

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                                 TABLE 3-37
 PERCENTAGE OF FIRMS BELOW INDUSTRY BENCHMARK RATIOS IN BASELINE:
                             RETURN ON EQUITY
Percentage
less than
                      Small firms
                     Large firms
                      All firms
Baseline (%)
Baseline (%)
Baseline (%)
Benchmark ratios
  Upper quartile
  Median
  Lower quartile
    60.0
    48.0
    35.3
    74.6
    41.3
    33.3
    64.3
    46.0
    34.7
                                   3-118

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Economic failure results from the inability of invested capital (i.e., the facility) to continually
cover its variable costs through revenue. Bankruptcy can be defined financially or legally, but
both definitions are closely related.  Financially, a business is bankrupt when the fair market
value of its total assets is below its total liabilities.  Legally, a business can be determined to be
bankrupt when it fails to earn profits sufficient to meet enforceable debts. In such cases, firms
may declare bankruptcy with a new owner taking over the operation of the physical assets (i.e.,
plant, equipment, and land).

       The objective of the company-level bankruptcy analysis is to determine the likely effect of
air and water pollution controls on the financial and legal viability of small and large firms within
the pulp and paper industry. Determining whether an increased likelihood of legal bankruptcy,
or business insolvency, will lead to reallocating resources  away from the  production of pulp and
paper or to reorganizing resources within the pulp and paper industry is outside the scope of this
analysis.

       A composite ratio of financial condition, called the Z-score, was  computed to characterize
the baseline and with-regulation financial conditions of potentially affected firms.  The Z-score,
developed specifically for manufacturing firms, is a multidiscriminant function used to assess
bankruptcy potential (Altman, 1983). The advantage of the Z-score model over traditional ratio
analysis is its simultaneous consideration of liquidity, asset management, debt management,
profitability, and market value. The function is given in Eq.  1:

       Z  = 1.2X, + 1.4X2 + 0.33X3 + 0.06X4 + 0.999X5   (1)
where
       Z
       Xt
       X,
       X3
       X4
overall index
working capital/total assets
retained earnings/total assets
earnings before interest and taxes/total assets
market value of equity/book value of total debt
sales/total assets.
       The market value component (X») uses stock price data; consequently, the Z-score is
only applicable to firms with publicly traded stock.  For this analysis, we used a modified
                                           3-119

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function substituting the book value of equity for the market value in X4 referred to as the Z'-
score, given in Eq. 2:

       Z'  =  0.717XJ + 0.847X2 + 3.107X3 + 0.42X4 + 0.998X5   (2)

where Z' is the overall  index and all other variables are as defined for Z above.  The modified
function allows us to investigate privately-held as well as publicly-held firms on an equal basis.

       Taken individually, each of the ratios given above is higher for firms in good financial
condition and lower for firms in poor financial condition. Consequently, the greater a firm's
bankruptcy potential, the lower its discriminant score. A Z-score below 1.81 indicates that
bankruptcy is  likely; a score above 2.99 indicates that bankruptcy is unlikely.  Z-scores between
1.81 and 2.99  are indeterminant.  Similarly, a Z'-score below 1.23 indicates that bankruptcy is
likely; a score above 2.90 indicates that bankruptcy is unlikely.  Z'-scores between 1.23 and 2.90
are indeterminant.
       Table 3-38 shows the 1989 baseline distribution of firms by Z'-score prediction. Financial
failure is likely for 7 percent of firms in the industry.  Predicted failure across firm size reveals
that 6 percent of the firms in the small size category, while 9.5 percent of the firms in the large
size category are likely to fail in the baseline. These predicted failure rates do not compare
favorably with average reported failure rates for the U.S. The 1990 failure rate averaged 0.92
percent for all manufacturing firms, 0.49 percent for all service firms, and  0.76 percent for, all
U.S. firms  (Dun's, 1991).

       A possible explanation for the high failure predictions for firms in  the pulp and paper
industry, as measured by the Altman Z'-score, is the capital intensive nature of the industry.
Capital expenditures per year for the industry reached $16.7 billion in 1990 and neared $12
billion in 1991 (Storat, 1992). These capital  expenditures are  necessary to retool existing plants
and construct new plants, as well as environmental compliance.  Almost 60 percent of the
industry's capacity exists in machinery that was either newly installed or extensively rebuilt during
the past ten years—resulting in almost 21 million  tons of new capacity since 1980 (Storat, 1992).
The capital outlays for pollution control technology to comply with existing government
                                            3-120

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                                     TABLE 3-38

                 BASELINE BANKRUPTCY PREDICTION BY FIRM SIZE

Z'-score prediction8
All companies
Bankruptcy likely
Indeterminant
Bankruptcy Unlikely
Firm size based on
Small (<750)
150
9
56
85
employment (1989)
Large (>750)
63
6
32
25

Total
213
15
88
110
'Bankruptcy prediction is based on Altman's Z'-score for manufacturing companies.  If a
company's Z'-score is < 1.23, the model predicts that bankruptcy is likely. If a company's
Z'-score is > 2.90, the model predicts that bankruptcy is unlikely.  Z'-scores between 1.23
and 2.90 fall in the indeterminant range, and the model makes no prediction for these
companies.

Source:  EPA survey.
                                         3-121

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 regulations and in response to public dioxin-related concerns have also increased over the past

 few years—exceeding $1 billion per year according to industry sources (Storat, 1992).


       The investment in capital, however, also brought along a huge level of debt for many

 firms in the industry.  The debt incurred over the past ten years is reflected in the financial

 statement, and the associated financial ratios, of each firm included this analysis.  Consequently,

 it is not surprising that the predicted  failure rates computed for these firms are significantly

 higher than 1990 rates for U.S. firms  in general.  However,  the industry should soon, if not

 already, receive the returns on these large investments and  reestablish financial strength as

 measured by Altman's Z'-score.
3.6    REFERENCES
ABI. 1993.  American Business Information, Inc. American business lists.  (Online database).
Omaha, Nebraska.

Altman, Edward.  1983.  Corporate financial distress.  New York:  John Wiley and Sons.

Brealy, Richard and Stewart Meyers.  1984.  Principles of corporate finance. New York:
McGraw-Hill Book Publishing Company.  Second Edition.

CCH.  1991a.  Commerce Clearing House, Inc. State  tax handbook. Chicago, IL.

CCH.  1991b.  Commerce Clearing House, Inc. 1991 master tax guide.  Chapter 12. Chicago,
IL.

CEA.  1993. Council of Economic Advisers.  Economic report of the president.  Washington,
DC. Tables B-56 and B-69.

DcKing, Noel, Regina McGrath. Debra Garcia, Rob Galin. and Will Mies.  U.S. paper industry
is prepared for cyclical slowdown this year. 1990. Pulp & Paper. January,  pp. 57-60.

DOC.  1991.  U.S. Department of Commerce.  Bureau of Census.  1987 census of
manufacturing, subject series: Type of organization. Washington, DC:  U.S. Government
Printing Office.

DOC.  1992.  Department of Commerce.  Regional multipliers:  A user handbook for the
regional input-output modeling system  (RIMS  II). Washington, DC: Bureau of Economic
Analysis,  U.S. DOC.
                                         3-122

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Dun's. 1991. Dun's Analytical Services.  Industry norms and key business ratios. Dun and
Bradstreet Credit Services.

ENR.  1993. Engineering News Report.  Construction cost index. March 29.  p. 34-35.

EPA. 1991. U.S. Environmental Protection Agency.  1990 national census of pulp, paper,1 and
paperboard manufacturing facilities.  Washington, DC. October, 31, 1991.

EPA. 1992a. U.S. Environmental Protection Agency. Total Cost Assessment: Accelerating
industrial pollution prevention through innovative project financial analysis. Washington, D.C.
Office of Pollution Prevention and Toxics.

EPA. 1992b. U.S. Environmental Protection Agency. EPA guidelines for implementing the
regulatory flexibility act. Washington, D.C. Office of Policy, Planning, and Evaluation.  April.

Fortune.  1991.  Fortune forecast.  June 3. pp. 22-23.

IRS.  1988. The Research Institute of America, Inc. .,The complete internal revenue code.  New
York, NY.  July edition.

Mies, Will, Debra Garcia, Noel DeKing, Robert Galin, Sophie Wilkinson, Mark Weintraub, and
Jim McLaren.  1992.  U.S. paper industry will benefit from economic revival this year.  Pulp &
Paper. January,  p. 52.

Pigler, Carmen C. 1993. RIMS Multipliers for the United States. Letter from Carmen C. Pigler,
U.S. Department of Commerce, Bureau of Economic Analysis, Washington, D.C. to Maureen F.
Kaplan, Eastern  Research  Group, Inc. Lexington, MA. 1 September.

S&P. 1992. Standard & Poor's Industry Surveys:  Basic analysis. Building & forest products:
includes paper.  160 (20) sec. 1.  May 14.

Storat, Richard D. 1992.  The U.S. pulp,  paper, and paperboard industry: A profile. Paper
presented at the  U.S. Environmental Protection Agency International Symposium on Pollution
Prevention in the Manufacture of Pulp and Paper. Washington, DC. August  17-19.
                                         3-123

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                                  SECTION FOUR
          REGULATORY ALTERNATIVES AND COMPLIANCE COSTS
       Effluent guidelines and Maximum Achievable Control Technology (MACT) standards are
technology-based regulations.  While the facility that is the source of discharge or emission need
not install any specific pollution control technology, the regulatory requirements must be based
on a technology that can achieve the specified limits. The Development Document and
Background Information Document detail the technology basis for effluent guidelines and
MACT standards. Section 4.1 presents a summary of the technologies considered as the basis for
regulatory requirements.  Section 4.2 summarizes the compliance costs associated with the
regulatory requirements.
4.1    COMPLIANCE OPTIONS AND REGULATORY ALTERNATIVES

       For the purpose of establishing effluent limitations guidelines and emission standards for
hazardous air pollutants, an industry may be subcategorized based on manufacturing process
and/or other distinguishing characteristics.  The pulp, paper, and paperboard industry is divided
into 12 subcategories that incur additional pollution control requirements under this rulemaking.
Table 4-1 lists the subcategories and references the regulatory requirements for each of them.
The compliance components for a given facility, therefore, depend on which regulations are
applicable to that facility. While subcategorization is, in some cases, also appropriate for MACT
standards, the air controls for the pulp and paper industry do not vary by suboategory.

       Each set of regulatory requirements  (also called compliance  components) includes
options, which are briefly described in Section 4.1.1. For the Best Available Technology (BAT)
and Pretreatment Standards for Existing Sources (PSES) compliance component, the options
vary by subcategory.  The Clean Water Act requires effluent guidelines based on BAT to be
                                         4-1

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              TABLE 4-1




SUBCATEGORIES AND REGULATORY COVERAGE
Effluent Subcategory
Dissolving Kraft
Bleached Papergrade Kraft
and Soda
Unbleached Kraft
Semichemical
Dissolving Sulfite
Papergrade Sulfite
Mechanical Pulp
Non-wood Chemical
Secondary Fiber, Deink
Secondary Fiber,
Non-deink
Fine and Lightweight Papers
from Purchased Pulp
Tissue, Filter, Nonwoven, and
Paperboard from Purchased
Pulp
Number of Mills
Number of
Mills in this
Subcategory
3
88
58
21
5
11
57
12
43
342
115
169

Clean
Air Act
MACT
X
X
X
X
X
X






161
Clean Water Act
BAT&
PSES
X
X
X
X
X
X






160
BPT/
BCT
X
X
X
X
X
X
X
X
X
X
X
X
325
BMP
X
X
X
X
X
X

X




172
                  4-2

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 economically achievable. Section Five presents the economic impacts associated with the costs
 presented in Section Four.

       Integrated regulatory alternatives are built by choosing an option for each of the
 following compliance components:

       •     Wastewater Treatment Improvements (BPT or BCT)
       •     Best Management Practices (BMP)
       •     Air Controls  (MACT)
       •     Process Changes (BAT and PSES)

 The integrated regulatory alternatives developed by the Agency for this rule*naking are discussed
 in Section 4.1.2.
       4.1.1  Description of Compliance Components
       4.1.1.1 Best Practicable Control Technology Currently Available (BPT) and Best Conventional
              Pollutant Control Technology (BCT)
       BPT and BCT effluent standards are for the control of conventional pollutants, including
biochemical oxygen demand (BODS), pH, total suspended solids (TSS), and oil and grease.1 The
economic considerations for effluent limitations based on BPT include a comparison of costs to
effluent reduction benefits.  If the effluent limitations are based on BCT, where BCT is more
stringent than BPT, the standard must pass a two-part "cost-reasonableness" test—the cost per
pound to meet the standard cannot exceed a specific value, and the ratio of the cost of moving
from BPT to BCT to the cost of meeting BPT cannot exceed a specific value (FR, 1986).  Thus,
   1While the Clean Water Act does not specify that BPT be limited to conventional pollutants, the
existing BPT limitations for this  industry and  the  proposed revised BPT limitations cover
conventional pollutants only.
                                          4-3

-------
the economic impact analysis must examine the BPT or BCT costs separately from the costs of
the regulatory alternative.

       The BCT cost test and its applicability to the proposed regulations are presented in EPA,
1993. Two technology options for conventional pollutant control are analyzed in this report;
both reflect various improvements to wastewater treatment such as additional aerators or longer
detention times for secondary treatment.  For the purposes of this analysis, the costs and options
are referred to as BPT/BCT or as BPT. The actual choice of treatment improvement for
estimating costs was a site-specific judgment based on the facility's treatment in place and the
regulatory option to be met.

       Two BPT/BCT options are analyzed:

       •     Treatment to meet the effluent performance achieved by the average of the best
              performing 90 percent of the facilities (Option 1).
       •     Treatment to meet the effluent performance achieved by the average of the best
              performing 50 percent of the facilities (Option 2).

BPT/BCT requirements' apply to all 12 subcategories.
       4.1.1.2 Best Management Practices (BMP)

       BMP focuses on the prevention and control of spills from pulping and chemical recovery
 areas. Pulping liquors contain nonchlorinated compounds that are toxic to aquatic life, are a
 source of hazardous  air pollutants (e.g., methanol) and odors, and contain biological and
 chemical oxygen-demanding material and color. Pulping liquor spills increase the organic and
 toxic load sent to biological treatment, thereby reducing its effectiveness and efficiency.

       There is only one option for BMP—they either are in place or absent.  In contrast to
 BPT/BCT effluent standards or BAT/PSES effluent guidelines, which do not require the
                                           4-4

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installation of specific control technologies, BMP must be instituted as described in the
regulation.

       BMP requirements are applicable only to the seven subcategories that produce chemical
pulps (see Table 4-1).  For the purpose of evaluating economic achievability of best management
practices, BMP costs are combined with BAT/PSES costs for the subcategories with process
changes.
       4.1.1.3 Maximum Achievable Control Technology (MACT)

       Air emission controls consider vents, open processes, and condensate wastewaters located
in either the pulping area or the bleaching area.  The requirements can include adding hoods
and vents in open process areas, routing vents to scrubbers and/or combustion devices, and steam
stripping of condensate wastewaters to remove volatile hazardous air pollutants.  Table 4-2
summarizes the baseline  air emission controls, the MACT floor, and more stringent options.
Shading indicates that the emission point will be controlled by the option.  The control levels do
not differ by subcategory.
       4.1.1.4 Best Available Technology/Process Changes (BAT and PSES)

       Facilities are characterized not only by subcategory, but also by discharge status:  direct
or indirect.  BAT applies to direct dischargers; PSES applies to indirect dischargers. Both BAT
and PSES control nonconventional and toxic pollutants. Process  changes to pulping and
bleaching operations provide the technology basis for pollution control and apply to
approximately 103 mills in four subcategories  (dissolving kraft, dissolving sulfite, bleached
papergrade kraft and soda, and papergradc sulfite). Each subcategory includes several BAT and
PSES options. The subcategories and the tables  describing the options are:

       •      Dissolving kraft (Table 4-3)
       •      Bleached papergrade kraft and soda (Table 4-4)
                                           4-5

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                            TABLE 4-2

                      AIR CONTROL OPTIONS
Emission Point
Percent
Controlled at
Baseline
Air Control Option
Existing Sources
Floor
1
2
Pulping Area Sources Vented to a Combustion Device
Digester Blow -t- Noncondensible Gases
Digester Relief + Turpentine Recovery
Evaporator
Foam Breaker Tank
Weak Black Liquor Storage
Knotter
Washer
Decker/Screens
Oxygen Delignification
82
80
80
11
11
7
7
4
3 of 12 units









'

















Bleaching Area Stages Vented to a Scrubber
1st C and D Bleach Stages
plus, 1st and 2nd
E-Stage and 2nd D-Stage
plus, 1st H-Stage
79
20
15


" '•"--: ?;•'•;•'



X
X
; X'
Wastewater Streams Steam Stripped
Evaporator "Foul" Condensate
Turpentine Decanter Condensate
Digester Blow Condensate
Evaporator "Clean" Condensate
Bleach Plant Effluent
26
22
12
0
0















"X" means option includes venting the scrubber to a combustion device.
"Foul" means >. 100 ppmw HAP and "Clean" means < 100 ppmw HAP.
                                4-6

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                                     TABLE 4-3

                       PROCESS CHANGE OPTIONS FOR THE
                        DISSOLVING KRAFT SUBCATEGORY
Option
1
2
3
Abbreviated Description
70% C1O2
OD + 70% C1O2
OD + 100% C1O2
Description
Substitution of chlorine dioxide for
chlorine at a rate of 70%
Oxygen delignification, substitution of
chlorine dioxide for chlorine at a rate of
70%, and COD control
Oxygen delignification, complete
substitution of chlorine dioxide for
chlorine, and COD control
All options include:
             Adequate wood chip size control
             Eliminating dioxin precursor defoamers
             Improving pulp washing
             Eliminating hypochlorite
             High shear mixing pulp
             Enhancing extraction in bleaching (with oxygen or peroxide)
                                        4-7

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                                    TABLE 4-4
                      PROCESS CHANGE OPTIONS FOR THE
            BLEACHED PAPERGRADE KRAFT AND SODA SUBCATEGORY
Option
1
2
3
4
5
Abbreviated Description
Split C12
70% C1O2
OD or Ext. Cook + 70%
C1O2
OD or Ext. Cook + 100%
C1O2
OD and Ext. Cook + 100%
C1O2
Description
Split addition of chlorine
Substitution of chlorine dioxide for
chlorine at a rate of 70%
Oxygen delignification or extended
delignification, substitution of chlorine
dioxide for chlorine at a rate of 70%,
and COD control
Oxygen delignification or extended
delignification, complete substitution of
chlorine dioxide for chlorine, and COD
control
Oxygen delignification and extended
cooking, complete substitution of
chlorine dioxide for chlorine, and COD
control
All options include:
            Adequate wood chip size control
            Eliminating dioxin precursor defoamers
            Improving pulp washing
            Eliminating hypochlorite
            High shear mixing pulp
            Enhancing extraction in bleaching (with oxygen or peroxide)
                                      4-8

-------
       •      Dissolving sulfite (Table 4-5)
       •      Papergrade sulfite (Table 4-6)

       Process changes also include closing the pulping area screen room for the control of
Chemical Oxygen Demand (COD). Screen room closure is the only process change considered
for the unbleached kraft, semichemical, and nonwood chemical subcategories.
       4.1.2   Integrated Regulatory Alternatives

       Seven decisions are needed to form an integrated regulatory alternative:

       a      Process change for dissolving kraft (BAT/PSES)
       B      Process change for bleached papergrade kraft and soda (BAT/PSES)
       B      Process change for dissolving sulfite (BAT/PSES)
       m      Process change for papergrade sulfite (BAT/PSES)
       H      Air controls for all subcategories (MACT)
       •      Best management practices for all subcategories (BMP)
       B      Wastewater treatment improvements for all subcategories (BPT)

Many combinations of these seven decisions are possible to form regulatory alternatives.  Table
4-7 summarizes a subset of the regulatory alternatives to which the Agency devoted most of its
analysis.
4.2    COMPLIANCE COSTS

       There are several ways to describe the costs associated with the regulation. One is the
compliance cost incurred by industry.  Industry compliance cost is a measure of what the industry
would actually have to pay to comply with the regulation. As such, it amortizes the capital costs
                                          4-9

-------
                                  TABLE 4-5

    PROCESS CHANGE OPTIONS FOR THE DISSOLVING SULFITE SUBCATEGORY
Option
1
2
Abbreviated Description
OD and 100% C1O2
TCP
Description
Oxygen delignification and complete
substitution of chlorine dioxide for
chlorine
Totally chlorine-free bleaching using
oxygen delignification, ozone and/or
peroxide
Both options include:
            Adequate wood chip size control
            Eliminating dioxin precursor defoamers
                                     4-10

-------
                                  TABLE 4-6

   PROCESS CHANGE OPTIONS FOR THE PAPERGRADE SULFITE SUBCATEGORIES
Option
1
2
Abbreviated Description
OD and 100% C1O2
TCP
Description
Oxygen delignification, complete
substitution of chlorine dioxide for
chlorine, and COD control
Totally chlorine-free bleaching using
oxygen delignification or extraction
followed by peroxide, and COD control
Both options include:
            Adequate wood chip size control
            Eliminating dioxin precursor defoamers
            Eliminating hypochlorite
                                     4-11

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over the equipment lifetime, includes the cost of money used to purchase the equipment,
includes the annual cost of operating and maintaining the equipment, and considers tax savings
via depreciation and higher operating costs.  The industry compliance cost is sometimes called
the private cost. (See Section 3.1.1 for a more detailed description of calculating annualized
costs.) If a business can reduce the taxes it owes by depreciation, however, the federal
government bears the cost of the lost tax revenues.  The business can raise its prices to recover
the cost of additional pollution control; higher prices become a cost to consumers. A second
cost, the social cost of the regulation, considers these and other types of costs due to the
regulation. Social cost is discussed in more detail in Section 4.2.2.  Throughout this section, all
costs are reported in terms of 1991 dollars.
       4.2.1  Industry Compliance Costs

       Industry compliance costs are calculated by summing the annualized cost for a given
option or regulatory alternative over all  affected facilities.  Since the industry compliance cost
reflects what the business would actually have to pay to meet the increased pollution
requirements, it is an appropriate measure with which to evaluate  economic impacts.  Due to the
requirement to evaluate economic achievability of effluent guidelines and standards, industry
compliance costs are examined separately for BPT/BCT, BAT/PSES, and the integrated
regulatory alternatives.  Costs associated with BMP are assigned to BAT/PSES costs for
subcategories affected by process changes.  Impacts associated with the regulatory costs are
summarized in Section Five.
       4.2.1.1  BPT Costs

       Table 4-8 summarizes capital, operating and maintenance (o&m), and annualized costs
for incremental BPT control. BPT requirements  are applicable to approximately 325 mills. The
annualized industry compliance costs are $45 million for Option 1 and $65 million  for Option 2.
                                          4-15

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TABLE 4-8

SUMMARY OF BPT COSTS
THOUSANDS OF 1991 DOLLARS

1
2
CAPITAL COST
$202,409
$336.641
O&M EXPENSE
$44,342
$59,400
ANNUALIZED COST
$44.590
$65,409
Notes: Factor for Converting $1989 to $1991:
    The annualized costs include cost savings that may be
    generated at some mills.
    The costs above include BPT costs for all mills.
BPT Is applicable to 325 mills.

S:\ECON\PULP2\EIA\SEC_4\TABL48.WK3
1.0477
                                        4-16

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       4.2.1.2 Process Change Costs (BAT/PSES)

       Costs considered under BAT/PSES include the costs for process change, best
management practices, COD control, and wastewater treatment for indirect dischargers, as
appropriate.  BAT/PSES costs are summarized by subcategory in Tables 4-9 through 4-13.

       The annualized compliance costs for dissolving kraft mills range from $2 million to $15
million, depending on the option (Table 4-9).  The annualized cost for Option 2 is $11.9 million.
For dissolving sulfite, the annualized compliance costs range from $5 million to $15 million
(Table 4-10). For bleached papergrade kraft and soda, the annualized costs  range from $122
million to $641 million (Table 4-11).  For Option 4, the cost is $303 million.  For papergrade
sulfite, the annualized costs range from $27 million to $46 million (Table 4-12).

       There are 22 mills in the unbleached kraft subcategory that have production in one of the
first four subcategories (dissolving kraft, dissolving sulfite, bleached papergrade kraft and soda,
and papergrade sulfite). To avoid double-counting the BMP and COD control costs, the mills
are not included in the costs shown in Table 4-13. The annualized compliance cost  for the
remaining 36 mills is $6 million.

       There are two mills in the semichemical subcategory that also  have production in one of
the four subcategories listed above.  All process change, BMP, and COD control costs for those
mills already have been included in the other subcategory.  They are not included in the costs for
the semichemical subcategory to avoid double-counting. The annualized compliance cost for the
remaining 19 mills is $7 million (Table 4-13).

       Table 4-13 also summarizes the cost for BMP for the nonwood chemical pulping
subcategory.  The annualized compliance cost for the 12 mills is $336  thousand.
                                          4-17

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TABLE 4-9

SUMMARY OF COSTS BY SUBCATEGORY : DISSOLVING KRAFT
THOUSANDS OF 1991 DOLLARS
CAPITAL COST O&M EXPENSE ANNUALIZED COST
1
2
3
$65,839
$138,784
$143,937
($8,457)
($2,489)
$1 ,653
$1,726
$11,900
$14,711
Notes: Factor for Converting $1989 to $1991:                 1.0477
     The annualized costs include cost savings that may be generated at some mills.
     There are 3 mills in the dissolving kraft subcategory.
TABLE 4-10

SUMMARY OF COSTS BY SUBCATEGORY : DISSOLVING SULFITE
THOUSANDS OF 1991 DOLLARS
OPTION
1
2
CAPITAL COST
$110,051
$86,859
O&M EXPENSE ANNUALIZED COST
($5,141) $4,943
$14,936 $14,829
Notes: Factor for Converting $1989 to $1991:
    The annualized costs include cost savings that may be
    generated at some mills.
    There are 5 mills in this subcategory.

B:\TABL49.WK4
1.0477
                                        4-18

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TABLE 4-11

SUMMARY OF COSTS BY SUBCATEGORY : BLEACHED PAPERGRADE KRAFT
THOUSANDS OF 1991 DOLLARS
OPTION CAPITAL COST O&M EXPENSE ANNUALIZED COST
1 $815,009
2 $1,253.170
3 $2,162,296
4 $2,300,850
5 $4,899,088
$80,628
$40,858
$61,289
$152,665
$315,512
$122,172
$139,694
$237,193
$302,571
$640,576
Notes: Factor for Converting $1989 to $1991:                    1.0477
     The annualized costs include cost savings that may be generated at some mills.

     There are 88 mills in the bleached papergrade kraft subcategory;
     BAT/PSES applies to 87 mills.
TABLE 4-12

SUMMARY OF COSTS BY SUBCATEGORY : PAPERGRADE SULFITE
THOUSANDS OF 1991 DOLLARS
  OPTION
CAPITAL COST
$279,290
$115,408
O&M EXPENSE
$32,844
$26,547
ANNUALIZED COST
$46,216
$26,726
Notes: Factor for Converting $1989 to $1991:                    1.0477
    The annualized costs include cost savings that may be generated
    at some mills.
    There are 11 mills in this subcategory.

S:\ECON\PULP2\EIA\SEC_4\TABL411 .WK4
                                        4-19

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TABLE 4-13

SUMMARY OF COSTS FOR THREE SUBCATEGORIES :
UNBLEACHED  KRAFT, SEMICHEMICAL, AND NONWOOD CHEMICAL
THOUSANDS OF 1991 DOLLARS
 SUBCATEGORY   CAPITAL COST  O&M EXPENSE  ANNUALIZED COST
Unbleached Kraft
Sernlchemlcal
Norwood Chemcal
$99,122
$43.928
$3,000
($6.307)
$5.389
$120
$6.004
$7,149
$336
Notes: Factor for Converting $1989 to $1991:                       1.0477
    The annualized costs include cost savings that may be generated at some mills.
    There are 58 mills in the unbleached papergrade kraft subcategory; costs for 22 mills
    are counted in another subcategory
    There are 21 mills in the semichemical subcategory; 2 mills whose costs are
    counted in another subcategory.
    There are 12 mills in the nonwood chemical subcategory.

S:\ECON\PULP2\EIA\SEC_4\TABL413.WK3
                                       4-20

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       43.1.3 Integrated Regulatory Alternative Costs

       Table 4-14 summarizes the capital, o&m, and annualized cost for the regulatory
alternatives.  The annualized industry compliance costs range from $173 million to $657 million,
with Alternative 26 costing $592 million.  In the industry profile, Table 2-27 lists the expenditures
on environmental protection for 1988 to 1990 as $572 million to $1.3 billion per year.  These
constituted between 11 to 16 percent of the total expenditures for new plants and equipment for
the 1988 to 1990 period. The annualized costs for the regulatory alternatives, then, are within
the range of the expenditures seen in recent years. In 1989, the capital investment in the
industry totaled about $68 billion (Table 2-26).  Capital investment for the regulatory alternatives
ranged from $775 million to $4.3 billion, or from about 1 to 6 percent of the existing investment
at the end of 1989. Capital expenditures for Alternative 26, for example,  are $3.9 billion, or
about one-half the expenditures for 1990 (Table 2-27).

       Table 4-15 summarizes the BAT/PSES and BPT costs as a percentage of the total cost for
the regulatory alternatives. The process change costs form between 51 and 62 percent of the cost
of the regulatory alternative.  BPT costs form an additional 10 to  12 percent of the regulatory
cost.
       4.2.2  Approximations of Social Cost

       One way of evaluating the merit and efficiency of social decisions, like the one to
internalize the ill effects of pollution on human health and the environment through regulation,
is to compare the social costs of regulation to the social benefits.  The social costs of regulation
are the opportunity costs borne by society for employing our scarce resources in pursuit of
pollution control. The social .costs of the pulp and paper regulations have been estimated two
ways. The most theoretically complete way uses various results from the market impact  model to
estimate social costs.  The less burdensome way uses the engineering estimate of control costs,
but this estimate is a second-best approximation.
                                           4-21

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TABLE 4-14

SUMMARY OF POLLUTION CONTROL COSTS ASSOCIATED WITH
REGULATORY ALTERNATIVES
(THOUSANDS OF 1991 DOLLARS)
Regulatory
Alternative
2
3
4
5
11
16
17
18
22
23
24
25
26
Capital Cost
$775,481
$779,559
$884,787
$1.161.872
$3,708,235
$3,742,111
$3,847,339
$4,126,487
$3,846,775
$3,880,651
$3,985,879
$4,265.027
$3,903,850
O&M Expense Annualized Cost
$174,370
$174,618
$186,972
$208,907
$322,353
$324,414
$336,767
$358,417
$413,723
$415,784
$428,137
$449.787
$395,708
$173,494
$173,960
$190,842
$229,365
$531.706
$536,092
$552,974
$591,619
$597,078
$601,465
$618,346
$656,991
$591,580
343 mills were analyzed to calculate pollution control costs of regulatory alternatives.

S:\ECON\PULP2\EIA\SEC_4\TABL414.WK3
                                    4-22

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       4.22.1 Market Model Social Cost Estimates

       The social costs of regulation include both monetary and nonmonetary outlays made by
society. Monetary outlays include private-sector compliance costs, government administrative
costs, and various adjustment costs. Non-monetary outlays that are often assigned a monetary
value include losses in  consumers' or producers' surpluses in product markets, discomfort or
inconvenience, loss of time, and slowing the rate of innovation.

       Table 4-16  shows the estimates of social cost derived from the market impact model for
the integrated Regulatory Alternatives 3,16, 23, 24, 25, and 26. Alternatives 3,16, 23, and 26
contain the MACT floor level of air add-on control with increasingly  stringent process
modification requirements. Alternatives 24 and 25 contain increasingly stringent air add-on
controls on top of the process modification options selected for Alternative 23.  The estimates
include producer surplus loss, consumer surplus loss, annualized worker dislocation costs, and
government and private administrative costs.

       In a market environment, consumers and producers of pulp and paper products derive
welfare from market transactions. The difference  between the maximum  price consumers are
willing to pay for pulp and paper products and the price they actually pay is referred to as
consumer surplus.  Similarly, the difference  between the minimum price producers are willing to
accept for pulp and paper products and the  price they actually receive is referred to as producer
surplus. Because equilibrium prices and quantities  change in each market affected by pulp and
paper regulations, there are corresponding changes in consumer and producer surplus.

       Worker dislocation costs are estimated based on incremental willingness-to-pay measures
for job dislocations in a hedonic wage framework.  This estimate conceptually approximates the
onetime willingness to pay to avoid an involuntary  unemployment episode. Theoretically, the
estimate includes all worker-borne costs net of any off-setting pecuniary or nonpecuniary
"benefits" of unemployment (e.g., unemployment compensation, leisure time enjoyment).  The
hedonic displacement cost estimate is a net  present value valuation.   For the paper and allied
products sector, the implied one-time statistical cost (expressed as a net present value) of an
involuntary layoff is $67,323 (1991 dollars).  This value is multiplied by the total number  of
                                          4-24

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                 TABLE 4-16

ANNUAL SOCIAL COST ESTIMATES: MARKET MODEL
          (MILLIONS OF 1991 DOLLARS)
Social Cost Category
Consumer Surplus Loss
Producer Surplus Loss
Worker Displacement
Costs
Government & Private
Administrative Costs
(MACT only)
Total Social Cost
Alt. 3
161.4
114.9
4.7
2.5
283.5
Alt 16
493.2
301.0
24.3
2.5
820.9
Alt. 23
497.7
403.7
24.6
2.5
928.5
Alt. 24
499.0
428.0
24.6
2.5
954.2
Alt. 25
499.2
483.5
24.7
2.5
1,010.0
Alt. 26
477.2
415.7
24.6
2.5
920.1
                    4-25

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displaced workers estimated by the market impact model to calculate the net present value of the
worker displacement cost.  This cost is then annualized. For Regulatory Alternative 26, worker
displacement costs are estimated at $24.6 million.

       Government administrative costs include the cost to federal and state governments to
review facility compliance reports and otherwise ensure and oversee compliance with the
proposed standards. An estimate of these costs is not available at the time of this publication.

       The annual social cost for Regulatory Alternative 26 is  approximately $920 million.
       4.22.2 Social Cost Estimates Using Engineering Costs

       The social cost of the regulation can be approximated by the pretax annual engineering
cost. The capital cost of the rule (TCI) is annualized  over its expected life (15 years) at the
OMB-approved social discount rate (10 percent at the time of this writing).  The annual o&m is
then added to the annualized capital cost to arrive at the total annual social cost approximation.
Table 4-17 shows the estimates of social cost derived  with this method for Regulatory
Alternatives 3, 16, 23, 24, 25, and 26.  The social cost, using engineering costs, for Regulatory
Alternative 26 is estimated at $909 million.
43    REFERENCES
FR. 1986. U.S. Environmental Protection Agency.  40 CFR Parts 405 et al. Best conventional
pollutant control technology; effluents limitations guidelines; final rule.  Federal Register.
51(131):24974-25002. July 9.
EPA. 1993. U.S. Environmental Protection Agency.  BCT cost test for the proposed effluent
limitations for the pulp, paper, and papcrboard industry. Washington, DC:  EPA Office of
Water.
                                          4-26

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                   TABLE 4-17

ANNUAL SOCIAL COST ESTIMATES: ENGINEERING COST
           (MILLIONS OF 1991 DOLLARS)
Engineering Cost
Category
Total Capital
Investment
Annual O&M
Total Social Cost
Approximation
Alt. 3
779.6
174.6
277.1
Alt. 16
3,708.2
324.4
811.9
Alt. 23
3,880.7
415.8
926.0
Alt. 24
3,985.9
428.1
952.1
Alt. 25
4,265.0
449.8
1,010.5
Alt. 26
3,903.9
395.7
909.0
                     4-27

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                                    SECTION FIVE
                               ECONOMIC IMPACTS
       The costs associated with incremental pollution control are discussed in Section Four.
The impacts of these costs were evaluated with the financial and market models presented in
Section Three. The impacts estimated by the financial impact model are given in Section 5.1, the
impacts projected by the market model are given in Section 5.2, and a comparison of results
from both models is discussed in Section 5.3. The analysis  focuses on facilities that are estimated
to incur costs to comply with the regulation. Of the estimated 565 pulp, paper, and paperboard
facilities in the United States, the proposed regulations are applicable to approximately 343
facilities.  Of these, about 300 facilities are anticipated to incur costs; about 265 facilities—nearly
half—are  anticipated to incur no costs.
5.1    FINANCIAL IMPACT ANALYSIS RESULTS

       5.1.1  Closure Analysis

       If the present value of the future earnings for a facility after the imposition of
incremental pollution control costs is less than the salvage value of the facility, the facility is
projected to close.  (Section 3.2.1 discusses the methods used for estimating future earnings and
salvage value.) The closure analysis is conducted for each facility under several cost
scenarios—under each regulatory alternative; under BAT/PSES requirements (if appropriate);
and under  costs for wastewater treatment upgrades (BPT costs).


       5.1.1.1  Closures Due to BPT Costs

       There are 325 facilities to which BPT is applicable and for which wastewater treatment
upgrade costs were estimated.  Some of these mills will not have to upgrade their equipment to
meet the new limitations; these mills are assigned $0 costs (see Table 4-8 for total BPT costs).
                                            5-1

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 Of these, 223 are in the closure analysis.1   One facility closes under BPT Option 1, where the
 facility must meet the effluent treatment performance obtained by the best performing 90
 percent of the subcategory.  Three facilities close under BPT Option 2, where the facility must
 meet the effluent treatment performance obtained by the best performing 50 percent of the
 subcategory. These impacts are summarized with additional information in Section 5.1.2.1.
        5.1.7.2 Closures Due To BAT/PSES and BMP Costs

        Process change descriptions are given by subcategory in Tables 4-3 through 4-6. Costs
 are given by subcategory in Tables 4-9 through 4-13.  Impacts associated with facility closure are
 shown by subcategory in Section 5.1.2.2 tables.

        Dissolving Kraft:  There are three facilities in this subcategory.  There are no closures
 under any of the process change costs shown in Table 4-9.

        Dissolving Sulfite;  There are five facilities in this subcategory; four are included in the
 closure analysis.  One mill is projected to close under Option 1 (oxygen delignification and 100%
 chlorine dioxide substitution).  Two mills are projected to close under the TCP (totally chlorine
 free) option.

        Bleached Papergrade Kraft and Soda: There  are 88 facilities in this subcategory; 75 are
 in the closure analysis. There are two closures projected with Option 1 (split addition of
 chlorine) and Option 2 (70% substitution); three closures projected with Option 3 and Option 4
 (oxygen delignification or extended cooking with 70% or 100% chlorine dioxide substitution,
 respectively); and nine closures projected with Option 5 (oxygen delignification and extended
 cooking with 100% chlorine dioxide substitution).
    'A facility can be excluded from the closure analysis for several reasons:  it may be too new to
be in the data base (i.e., it went into operation after 1989), there may be insufficient data held at
the facility level to perform the analysis, or it may be a baseline closure.
                                            5-2

-------
       Papergrade Sulfite:  There are 11 facilities in this subcaiegory; 10 are in the closure
analysis. There are five closures projected with Option 1 (oxygen delignification and 100%
chlorine dioxide substitution) and three projected with Option 2 (TCP).

       Unbleached Kraft, Semichemieal. and Nonwood Chemical:  There is only one option for
each subcategory. There are no closures projected with the option for each of these
subcategories.
       5.1.1.3  Closures Due to Regulatory Alternative Costs

       The regulatory alternatives are described in Table 4-7 and the costs are listed in Table
4-14. There are 343 facilities for which costs under this rulemaking were estimated; the closure
analysis examined 237 facilities. There are three closures projected with Alternatives 2 through
5. Fourteen closures are projected with Alternatives  11 through 23.  Fifteen closures are
projected for Alternatives 24 and 25. Thirteen closures, the lowest number for an alternative
involving process changes, are projected for Alternative 26.
       5.1.2  Additional Economic Impacts

       As explained in Section 3.2, the financial model projects losses in shipments, exports, and
jobs associated with facility closure.  These impacts are summarized by subcategory and by
option. This section presents the impacts associated with the closures summarized in Section
5.1.1.  In some cases,  certain results  are not reported in the summary tables because data
aggregation is inadequate to protect confidential business information.  These results are
identified by  "ND" (not disclosed)  entries in the table.  For comparison, the industry-wide totals
for the number of mills, shipments (tonnage and value), exports, and jobs are given in the left-
                                            5-3

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hand column in each table.2  All dollar values shown in Tables 5-1 through 5-6 are in terms of
1989 dollars, as in the industry profile (Section Two).
       5.1.2.1 Impacts Associated with BPT Costs

       The costs associated with BPT Option 1 lead to a single closure among all facilities
analyzed, leading to an estimated $13 million loss in shipments (of which $1 million is exports),
and about 100 jobs (Table 5-1).  Option 2 results in three closures that lead to a $217 million
loss in shipments, and about 1,100 jobs.
       5.12.2 Impacts Associated with BAT/PSES Costs

       Dissolving Kraft: There are no closures caused by any of the pollution control options
considered for the dissolving kraft subcategory.  Hence, there are no associated impacts.

       Dissolving Sulfite: The costs associated with implementing Option 1 (oxygen
delignification and 100 percent chlorine dioxide substitution) lead to a single projected mill
closure for this subcategory  (Table 5-2).  The impacts with these closures are not reported in
Table 5-2 to protect confidential data.  The costs associated  with implementing Option 2 (TCP)
lead to two mill closures.  For perspective, the loss in shipments is less than 0.5 percent of total
industry shipments and about 3 percent of total  exports.

       Bleached Papergrade Kraft and Soda:  Table 5-3 lists the closures and impacts associated
with the pollution control options analyzed for the bleached papergrade kraft and soda
subcategory.  The impacts fall into three groups: Option I/Option 2 (two closures); Option
3/Option 4 (three closures); and Option 5 (nine closures). The impacts  associated with Options
    •The industry totals reflect all facilities that could be categorized for the regulatory flexibility
analysis. The totals for shipments and exports may be slightly smaller than those given in Section
Two because a small number of mills had zero employees (i.e., contract labor) or did not state the
number of employees.
                                            5-4

-------
TABLE 5-1

IMPACTS ASSOCIATED WITH
BPT COSTS
1989 DATA
         Industry Total
Option 1
 Option 2
        Number of Mills
       Closures
                 565
   Number of Employees
       Loss in Employees*
              220,491
    100
   1,100
       Shipment (Tons)
       Loss in Shipment Tonnage
           86,711,752
  5,752
 266,240
      Shipments ($000)
       Loss in Shipments ($000)
          $58,529,186
$13,026
$216,612
         Exports ($000)
       Loss in Exports ($000)
           $5,853,950
   $966
  $1,599
  Rounded to nearest 100 employees.
                                                 5-5

-------
TABLE 5-2

IMPACTS ASSOCIATED WITH
BAT/PSES COSTS: DISSOLVING SULFITE
1989 DATA
        Industry Total
   Option 1
Option 2
       Number of Mills
       Closures
               565
 Number of Employees
   Loss in Employees
            220,491
        ND
    ND
     Shipments (Tons)
Loss in Shipment Tonnage
          86,711,752
        ND
    ND
     Shipments ($000)
Loss in Shipments ($000)
        $58.529.186
        ND
    ND
        Export ($000)
 Loss in Exports ($000)
         $5.853,950
        ND
    ND
                                               5-6

-------
TABLE 5-3

IMPACTS ASSOCIATED WITH
BAT/PSES COSTS: BLEACHED PAPERGRADE KRAFT AND SODA
1989 DATA
Industry Total
Option 1 Option 2 Option 3
Option 4
Options

Number of Mills
565
Number of Employees
220,491
Shipments (Tons)
86,711,752
Shipments ($000)
$58,529,186
Export ($000)
$5,853,950
Closures
234
Loss in Employees*
3,700 5,100 5.800
Loss in Shipment Tonnage
757.133 1,083,421 1,393,607
Loss in Shipment ($000)
$853,719 $1,146.540 $1,360,066
Loss in Exports ($000)
$1.262 $2.679 $81.204

4

5,800

1,393,607

$1,360,066

$81^04

9

12,700

3.685,380

$3,271.996

$264,234
 Rounded to nearest 100 employees.
                                               5-7

-------
3 and 4 include a loss of about 5,800 jobs and $1.4 billion in shipments, representing about 2.5
percent of current production levels in the industry. Less than 6 percent of the shipments
projected to be lost under Options 3 and 4 are exports.  Moving from Option 4 to Option 5
nearly triples the impacts in terms of closures, employment, shipments, and exports. Projected
impacts under Option 5 include losses of more than 5.5 percent of total industry production
($3.27 billion).

       Papergrade Sulfite: The impacts for the papergrade sulfite category are summarized in
Table 5-4. For the papergrade sulfite subcategory, there are five closures under Option 1
(oxygen delignification and 100 percent chlorine dioxide substitution).  Under Option 1, there are
3,900 jobs projected to be lost along with over $766 million in shipments, $3.6 million of which
constitutes export sales.  Under Option 2 (TCP), losses are projected at 2,600 jobs and $475
million in shipments, including $1.4 million in exports.  For this subcategory, a totally chlorine-
free process (Option 2) is associated with smaller impacts  (e.g., 1,200 fewer jobs lost and 40
percent lower loss in the value of shipments and exports) than an elemental-chlorine-free
production process (Option 1).

       Unbleached Kraft, Semichemical, and Nonwood Chemical: There are no closures
                                                                                   l
associated with best management practices, COD control, and wastewater treatment for indirect
dischargers (where applicable) for these subcategories.  Hence, there are no associated impacts.
       5.7.2.3 Impacts Associated with Regulatory Alternative Costs

       Table 5-5 summarizes the impacts associated with the regulatory alternative costs. The
impacts fall into three groups:

       •      Alternatives 2 through 5 (3 closures)
       •      Alternatives 11 through 23 (14 closures)3
   3Thc alternatives analyzed in this report are not numbered sequentially. For example, there are
no Alternatives 6 through 9.
                                            5-8

-------
TABLE 5-4

IMPACTS ASSOCIATED WITH
BAT/PSES COSTS: PAPERGRADE SULFITE
1989 DATA
        Industry Total
                         Option 1
 Option 2
       Number of Mills
                            Closures
                565
  Number of Employees
                        Loss in Employees*
            220,491
                           3,900
   2,600
     Shipments (Tons)
                     Loss in Shipment Tonnage
          86,711,752
                         791,600
 506,535
                           Loss in Shipments ($OOOT
Shipments ($000)
         $58,529,186
                        $766,791
$475,372
        Export ($000)
                       Loss in Exports ($000)
          $5,853,950
                          $3,612
  $1,405
  Rounded to nearest 100 employees.
                                                5-9

-------
TABLE 5-6

IMPACTS ASSOCIATED WITH
INTEGRATED ALTERNATIVE COSTS
10BS DATA
Industry Total
Alternatives
2 Through 5
AHomatlvos
11 Through 23
AKomouvBt
24 Through 25
Atterrauv*
26

Number of Mats
565
Number of Employees
220.491
Shipments (Tons)
86.711,752
Shipments ($000)
$58.529.186
EXDOrt (JOOO)
$5,853.950

3 '

1.900

736.104

$459.700

$2.207
Closures
14
Loss In Employees*
11.100
Loss In Shipments (tons)
3.029.161
Loss In Shipments ($000)
$2,543,508
Loss In Exports ($000)
$285,658

15

12,500

3,590,501

$2.937.776

$371,528

13

10,700

2,869,346

$2,426,580

$191.784
 Roundod to nearest 100 employees.
                                                 5-10

-------
       •      Alternatives 24 and 25 (15 closures)
       •      Alternative 26 (13 closures)

Alternative 26 has the smallest amount of impacts for an alternative with process changes. The
impacts include approximately 10,700 jobs lost.  Losses associated with the 13 closures include
2.9 million tons of pulp, paper, and paperboard (worth $2.4 billion dollars), including $192
million in exports. This is approximately 5 percent of the jobs, 3 to 4 percent of the shipments
(tonnage and value), and 3 percent of the exports associated with the pulp, paper, and
paperboard industry. The reader should keep in mind that the financial model includes several
conservative assumptions such as no  cost pass-through (i.e., the facility cannot raise prices to
recoup increased costs), no growth, no additional revenue sources for the facilities included in
the estimate of earnings, and the use of net income (rather than cash flow) to project future
earnings (see Section 3.2 for details). The estimated impacts presented in Section 5.1 are likely
to represent upper-bound estimates.

       Total impacts on employment and output, both direct and indirect, are estimated with
final-demand national-level input-output multipliers from the U.S. Department of Commerce's
Regional Input-Output Modeling System (RIMS II; Pigler 1993; see Section 3.2.3.2, Table 3-16).
Beginning with the $2.4 billion dollars in lost shipments estimated for Alternative 26, Table 5-6
subdivides these losses into pulp, paper, and paperboard. The top half of Table 5-6 uses  the
final-demand multiplier for employment for each category to estimate total employment losses
associated with Alternative 26. The  estimated 67,100 jobs lost is inclusive of direct jobs lost; that
is, the 10,700 jobs lost shown in Table 5-5 should not be added to this figure.  For perspective,
this is approximately one-tenth of  1 percent  of the estimated 90.5 million people employed in the
private sector in the United States during 1989 (DOL, 1992.) Table 5-6 also includes an  estimate
of the total loss in output associated with Alternative  26. The final-demand multiplier for output
represents the total dollar change  in output  for each dollar change in industry output. The  $2.4
billion loss in shipments due to projected facility closures ripples through the economy to become
an estimated $8 billion loss in output.  For comparison, the  1989 gross domestic product was
$5,251 billion (CEA, 1993).  The loss is approximately two-tenths of 1  percent of the gross
domestic product for 1989.
                                            5-11

-------
TABLE 5-6

TOTAL OUTPUT IMPACTS OF LOSS OF
SHIPMENTS IN PULP, PAPER, AND PAPERBOARD INDUSTRY
BASED ON CLOSURES FROM ALTERNATIVE 26
Production Category
Loss In Shipments ($000. 1989)
RIMS II Employment Multiplier
Total Employment Loss
RIMS II Output Multiplier
Total Output Impacts ($000,1989)
Pulp
$343,288
29.7
10,196
$4
$1,207.790
Paper
$1,889.829
27.2
51,403
3.2303
$6,104.715
Paperboard
$193,463
28.2
5,456
3.3589
$649,823
Total
$2,426,580

67,055

$7,962,328
* Employment multiplier represents the amount of jobs lost for every $1,000,000 reduction in output.

Source: Pigler, 1993.
                                             5-12

-------
       The loss in federal and state revenues was also estimated for the regulatory alternatives
(Table 5-7). This is the difference in the annualized cost before and after tax shields are
considered (see Section 3.23.3 for details).  The revenues that the industry saves by reducing its
taxes result in revenue losses to the federal and state governments. The values presented in
Table 5-7 represent the annualized value of these lost tax revenues over the 16-year period
during which the equipment is purchased, installed, depreciated, and operated. The annualized
losses include not only the loss of the tax revenues but also the interest that these revenues  could
have earned during this period.  The loss to the federal and state governments is about $233 to
$299 million per year for Alternatives 11 through 26. The loss associated with Alternative 26 is
$268 million per year.

       The national average state tax rate of 6.75 percent is used in the cost annualization model
in conjunction with a 34 percent federal tax rate  (see Section 3.1). The loss in state revenues,
therefore, ranges from $38 to $50 million per year. This loss, in turn, is distributed among the 42
states with pulp and paper operations (see Section 2.4).

       Table 5-8 presents a summary of the results from  the facility-level financial ratio analysis.
The left-hand side of the table lists the baseline values for 1985, 1988, and 1989. These years
indicate  recent low and high points in the business cycle.  The percent variation from the
maximum to minimum values for those three years is shown in the next column. The percent
variation provides a measure  of the fluctuation in financial ratios due to the business cycle.  As
discussed in Section 3.2.2, the regulatory costs are added  to the  1989 financial data and the  ratios
are recalculated.  The post-regulatory ratios are presented in the remainder of Table 5-8. The
results shown in Table 5-8 are the average (calculated as  the arithmetic mean) and median
change in gross income margin, return on  assets, and current ratio.  The calculation and
interpretation of each ratio is discussed in Section 3.2.2.  For net working capital and net
working capital-to-total assets, the results are reported as the change in the mean and median
values.  As anticipated, the mean values show greater fluctuations. This is because the mean is
sensitive to a few outlying values. The median values are more stable and are more indicative of
what happens to a "typical" mill.  Most of the impacts are within the  range seen in the business
cycle. The exceptions are the ratios that involve net working capital. The changes in net
working capital appear to extend beyond the envelope defined by the business cycle, but this may
                                             5-13

-------
TABLE 6-7

LOSS IN FEDERAL AND STATE REVENUES
FROM REGULATORY ALTERNATIVES
Regulatory
Alternative
2
3
4
5
11
16
17
18
22
23
24
25
26
Annualized Loss in
Federal and State Revenues
($000.1991)
$91,057
$91,268
$99,140
$115,693
$232,962
$234.743
$242,615
$259,120
$273,003
$274,783
$282.656
$299,160
$267,541
                                         5-14

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indicate that the facility must use sources of money beyond working capital to finance the
pollution control equipment.

       Table 5-9 presents a summary of the results of the company-level financial ratio analysis.
The complete balance sheets and income statements available at this level of the corporate
hierarchy make it possible to include debt-to-asset and times-interest-earned ratios in the
                      i
analysis. The debt-to-asset ratio is used to determine to what degree assets of a company are
financed through debt. The times-interest-earned ratio examines the ratio of cash flow to
interest payments to determine how much additional interest burden a company can absorb.  For
net income margin, return on assets, times-interest-earned, and net working capital ratios, the
changes induced by the cost of the regulatory alternatives are within the same range seen in the
business cycle.  For the current ratio, debt-to-assets, and net working capital-to-total assets ratios,
                                                                                    i
the means lie slightly beyond the range set  by the business cycle, but the medians are within the
range. This is attributable to the  fact that closures may result in'significant variations in the
financial ratios.  These outliers tend to skew the mean while only slightly affecting the median.
For example, when a company with poor financial ratios suffers a worsening of financial
condition, it remains in the lower half of the company population. The company(ies) in the 50th
percentile stay in the 50th percentile with their previous financial ratios; there is merely a
reordering of rank among the lower-ranked companies.
5.2    MARKET MODEL IMPACT RESULTS

       Results for the market impact model were generated for all the integrated regulatory
alternatives that were considered by the Agency as the potential basis for the proposed standards.
This section presents the market impact model results for six alternatives:  Alternatives 3, 16, 23,
24. 25. and 26.  Alternatives 3, 16, 23, and 26 include the MACT floor options, with varying
levels of process modification option stringency.  Alternative 3 does not employ any process
modification options.  Alternatives 24 and 25 employ MACT options more stringent than the
floor with the process modification options of Alternative 23. The results for the six integrated
alternatives from the market impact model are anticipated to span the range of impact severity of
all evaluated alternatives.
                                           5-16

-------
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        5.2.1 Changes in Facility Costs

        The starting point for estimating post-regulatory market equilibria in the market impact
model is the imposition of regulatory control costs. The market impact model requires two kinds
of compliance costs for each mill directly affected by the regulation.  The first is the average
increase in variable production costs per ton of pulp that is used as an input to final product
production. The second is the estimated total annualized capital cost of the regulation.  This
represents the fixed cost a facility will incur if it stays open.  It is calculated on a pre-tax basis.
Table 5-10 shows the production-weighted average mill-specific pulp  production variable cost
increases for each of the 17 pulp input types.  The number of affected mills in the market model
producing each of the pulp types, as either inputs to final product production or for sale as
market pulp, is also shown in Table 5-10.

       Mills producing pulp types 2 (bleached kraft),  3 (unbleached kraft), 14 (bleached
secondary fiber), and 15 (unbleached secondary fiber) are affected most frequently by variable
production cost increases.  For each alternative, pulp type 4 (bleached sulfite) experiences the
largest production-weighted average variable cost increase, and the variable cost increase
generally rises as the  stringency of the integrated regulatory alternative increases.

       Table 5-11 shows the nationwide total annualized capital cost for each alternative.  It is
calculated on a pre-tax basis  for only the capital cost;  hence the numbers are different than the
compliance costs shown in Table 4-14.  The total annualized capital cost is calculated using the
mill-specific cost-of-capital estimates given  in the National Census. Table 5-11 also  shows the
number of facilities in the market model directly affected by capital costs, and the average,
maximum, and minimum annualized capital cost for each alternative.
       53.3,  Market Price and Quantity Impacts
       The increases in mill-level production costs begin the market adjustment process.  The
equilibrium outcome for each alternative consists of a vector of market-level product prices and

                                           5-18

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^

oo
en
o

^— 1
§
Tl-
1— t

O
s

3

§



T- 4
oo
CO
d



•«*•
1-4
f-
T-4
O


00
en
m

9
CM


CM
O\

3

Ov

3



Ov
8



o\
8
d


o
vO

s?
0


d
^

CM
en
o

„.

§



•*
CM
S



"*"
8
o


o
^

                           5-19

-------
                                  TABLE 5-11

       NATIONWIDE TOTAL PRE-TAX ANNUA1LIZED CAPITAL COST INCREASE
                               (millions of $1989)

Total Annualized
Capital Cost
Number of Affected
Mills
Facility Average
Facility Maximum
Facility Median
Facility Minimum
Alt.
3
141.0
159
0.89
4.14
0.65
0.05
Alt.
16
652.7
299
2.18
19.10
0.57
*
Alt.
23
676.8
299
2.26
19.56
0.58
*
Alt.
24
695.2
299
2.36
19.78
0.59
*
Alt.
25
739.5
299
2.52
20.63
0.61
*
Alt.
26
676.8
299
2.26
19.56
0.58
*
"Less than $10,000
                                     5-20

-------
facility-level production quantities at which total market supply and total consumer demand are
equal.
       5.23.1 Product Price Impacts

       Tables 5-12 through 5-17 show the equilibrium market price adjustments computed for 27
of the 37 modeled product market categories, and three composite categories that index all
market pulps, paper products and paperboard products. The tables include the baseline price
and the absolute and percentage change in price with the regulatory alternative. For each
alternative, the largest percentage change in market price is for uncoated free sheet (e.g., copy
and writing paper). For Alternatives 16, 23, 24, 25, and 26  many of the market pulp products
experience price declines due to the decrease in the demand for pulp by integrated mills.
       5.22.2 Domestic Production Impacts

       Tables 5-12 through 5-17 also show the equilibrium domestic production level
adjustments that result for 27 of the 37 product market categories. Nearly all of the production
level changes are minor, with the exception of bleached sulfite market pulp for Alternatives 16,
23, 24, 25, and 26 which is projected to decline by over 3 percent.
       5.22.3 Import and Export Impacts

       Tables 5-18 through 5-23 show the equilibrium import and export value adjustments, and
Tables 5-24 through 5-29 show the equilibrium import and export quantity adjustments that
result for 26 of the 37 modeled product categories.

       Export Value. Of the five most  important exports in terms of value, none of the export
declines for Alternative 3 is significant.  For the other alternatives, the most significant export
decline among the most important five products is nearly 8 percent for newsprint.  The most
                                          5-21

-------
                                     TABLE 5-12
  PRICE AND QUANTITY ADJUSTMENTS (1989): SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 3
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoatcd groundwood paper
day coated printing
Uncoated free sheet
Bleached bristols
Unbleached kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Scmichcmical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Uncrboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
Base P
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,111.30
816.70
656.33
843.14
395.55
361.50
381.52
629.15
392.85
338.32
543.04
721.33
719.37
. 700.25
686.05
1,196.29
432.66
AP
0.23
-0.04
-0.13
0.22
0.25
0.16
0.01
0.10
0.02
2.18
6.65
0.52
0.05
0.40
0.10
0.20
2.62
030
0.15
0.17
0.55
0.05
0.00
0.09
0.72
0.21
0.43
039
0.03
0.27
%AP
*
*
*
*
*
#
*
*
*
41
41
4>
*
*
*
*
»
*
*
*
41
*
4>
*
*
*
41
4>
*
4t
TOTAL ALL PRODUCTS
BaseQ
1,470
9,207
320
359
120
117
11493
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
0
-25
-1
0
0
0
-27
-1
0
-63
20
-1
-1
-1
0
0
-31
-16
-2
2
0
0
0
-1
-5
-2
-1
0
0
-27
-85
%AQ
*
*
*
*
*
*
*
4>
*
4t
*
4>
*
*
4>
4>
*
4>
*
*
*
*
4>
*
4>
4i
4i
*
*
*
*
P=price (SAon)  Q=domestic production (000 ton/yr)      A="change in"
Totals and percent changes might not be exact because of rounding.
*=less than 1%
                                        5-22

-------
                                       TABLE 5-13
   PRICE AND QUANTITY ADJUSTMENTS (1989): SELECTED PRODUCT CATEGORIES
                                 Regulatory Alternative 16
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
BaseP
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,11130
816.70
656.33
843.14
395.55
361.50
381.52
629.15
39i85
338.32
543.04
721.33
719.37
700.25
686.05
1,196.29
43X66
AP
0.62
-1.00
-0.06
0.88
0.21
-7.84
-0.72
0.90
0.11
2.03
25.57
0.83
0.23
6.85
13.91
033
7.89
0.25
1.00
3.61
9.58
0.04
0.22
0.10
0.23
-0.11
-0.06
-0.12
0.04
1.07
%AP
*
*
«
*
*
-1.9
*
*
*
*
*
*
4
*
1.7
»
*
*
*
*
L5
*
*
a
*
*
*
*
*
•
TOTAL ALL PRODUCTS
Base Q
1,470
9,207
320
359
120
117
11493
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
-2
-22
-1
-11
0
-2
-39
-52
0
-54
-92
-2
-1
-13
2
-1
-218
-13
0
-31
0
0
0
-2
-1
1
0
0
0
-45
-302
%AQ
*
*
*
-3.2
-
-1.4
*
*
*
*
*
*
*
*
1.2
*
*
*
*
*
*
*
*
- +
*
*
*
*
*
*
*
P=price ($Aon)  Q=domestic production (000 ton/yr)       A="change in"
Totals and percent changes might not be exact because of rounding.
"=less than 1%
                                          5-23

-------
                                      TABLE 5-14
  PRICE AND QUANTITY ADJUSTMENTS (1989): SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 23
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
day coated printing
Uncoated free sheet
Bleached bristols
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Seraichemical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Lincrboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products •
TOTAL PAPERBOARD PRODUCTS
BaseP
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,11130
816.70
656.33
843.14
395.55
361.50
381.52
629.15
39X85
338.32
543.04
721.33
719.37
700.25
686.05
1.196.29
432.66
AP
0.62
-1.00
-0.06
0.88
0.21
-7.84
-0.72
0.90
0.11
2.14
25.57
1.51
0.23
6.85
14.00
0.47
7.93
0.27
0.99
3.62
9.58
0.04
0.22
0.21
0.67
0.06
030
0.15
0.04
1.13
%AP
*
*
*
*
•
-1.9
*
*
*
*
2.8
*
*
*
1.7
*
*
*
*
*
1.5
*
*
*
+
*
*
*
*
*
TOTAL ALL PRODUCTS
BaseQ
1,470
9,207
320
359
120
117
1L593
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
-2
-29
-1
-11
0
-2
-45
-53
0
-60
-96
-4
-1
-14
2
-1
-234
-14
0
-31
0
0
0
-3
-6
-1
-1
0
0
-58
-337
%AQ
*
*
*
-3.2
*
-1.4
*
*
*
*
*
*
*
*
1.2
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
P=price ($Aon)  Q=domestic production (000 ton/yr)       A="change
Totals and percent changes might not be exact because of rounding.
*=less than 1%
                                         5-24

-------
                                      TABLE 5-15
  PRICE AND QUANTITY ADJUSTMENTS (1989):  SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 24
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
Base P
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,11130
816.70
656.33
843.14
395.55
361.50
381.52
629.15
392.85
338.32
543.04
721.33
719.37
700.25
686.05
1,196.29
43X66
AP
0.62
-1.01
-0.06
0.88
0.21
-7.84
-0.73
0.90
0.11
2.14
25.57
1.53
0.20
6.65
14.00
0.47
7.95
0.27
0.90
3.63
9.58
0.04
0.22
0.21
0.87
0.18
0.45
030
0.04
1.14
%AP
*
*
*
*
*
-1.9
*
41
*
*
2.8.
*
*
*
*
*
*
4>
*
*
1.5
*
«
#
«
*
0
0
*
*
TOTAL ALL PRODUCTS
Base Q
1,470
9,207
320
359
120
117
11493
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
-2
-29
-1
-11
0
-2
-46
-53
0
-60
-96
-4
-1
-15
2
-1
-234
-15
-1
-31
0
0
0
-3
-6
-1
-1
0
0
-59
-340
%AQ
*
*
*
-3.2
*
-1.4
*
*
+
*
*
*
*
*
1.2
*
*
*
*
*
*
4>
*
*
*
*
*
*
*
*
*
P=price (SAon)  Q=domestic production (000 ton/yr)      A="change
Totals and percent changes might not be exact because of rounding.
in"
     'sless than 1%
                                          5-25

-------
                                      TABLE S-16
   PRICE AND QUANTITY ADJUSTMENTS (1989):  SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 25
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
day coated printing
Uncoated free sheet
Bleached bristols
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Scmichemical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
BaseP
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,1 11 JO
816.70
656.33
843.14
395.55
361.50
381.52
629.15
392.85
338.32
543.04
721.33
719.37
700.25
686.05
1.196.29
432.66
AP
0.62
-1.01
-0.06
0.88
0.21
-7.84
-0.73
0.89
0.11
2.19
25.57
1.61
0.20
6.61
14.00
0.52
7.95
0.27
0.88
3.61
9.58
0.04
0.22
0.24
0.97
0.18
0.50
0.30
0.04
1.14
%AP
*
*
*
*
*
-1.9
*
*
*
*
2.8
*
*
*
1.7
*
1.0
*
*
*
1.5
*
*
*
*
*
*
*
*
*
TOTAL ALL PRODUCTS
Base Q
1,470
9,207
320
359
120
117
11493
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
-2
-30
-1
-11
0
-2
-46
-54
0
-60
-97
-4
-1
-15
2
-1
-235
-15
-1
-31
0
0
0
-4
-6
-1
-1
0
0
-61
-350
%AQ
*
*
*
-3.2
*
-1.4
*
*
+
*
*
*
*
*
1.1
*
*
*
*
*
*
*
*
*
4>
*
*
*
*
*
*
P=price (SAon)  Q=doraestic production (000 ton/yr)       A="change in"
Totals and percent changes might not be exact because of rounding.
"=1685 than 1%
                                         5-26

-------
                                     TABLE 5-17

  PRICE AND QUANTITY ADJUSTMENTS (1989):  SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 26
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichernical paperboard
Recycled paperboard
Wet machine board
Construction paper
Insulating board
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
Base P
735.33
646.49
384.37
556.77
444.13
416.84
635.03
490.09
693.14
970.31
928.35
838.09
548.33
1,11130
816.70
656.33
843.14
395.55
361.50
381.52
629.15
39X85
338.32
543.04
721.33
719.37
700.25
686.05
1.196.29
432.66
AP
0.23
-1.49
-0.12
0.84
0.18
-7.91
-1.15
0.76
0.11
2.09
25.15
1.58
0.07
5.85
13.75
0.47
7.67
0.28
0.40
3.62
9.85
0.05
0.18
0.21
0.97
0.13
0.50
030
0.01
1.07
%AP
*
*
*
*
*
-1.9
*
*
*
*
2.1
*
*
*
1.7
*
*
*
*
*
1.6
*
*
*
*
*
*
*
*
*
TOTAL ALL PRODUCTS
Base Q
1,470
9,207
320
359
120
117
11^93
5,678
2,090
9,157
11341
779
2,943
5392
157
93
40,247
19375
5,927
8,796
80
667
92
376
2395
1,205
453
219
227
40,607
92,447
AQ
0
-30
-1
-11
0
-2
-44
-54
0
-58
-97
-4
-1
-18
2
-1
-235
-14
-3
-31
0
0
0
-3
-6
-1
-1
0
0
-59
-220
%AQ
+
*
*
-3.1
*
-1.5
*
*
*
*
*
*
*
*
1.2
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
#
P=price (SAon)  Q=domestic production (000 ton/yr)       A="change in"   *=less than 1%
Totals and percent changes might not be exact because of rounding.
                                         5-27

-------
                                     TABLE 5-18
                   FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 3
                                  (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
day coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unb! kraft packaging paperboard
Semichcmical paperboard
Recycled paperboard
Construction paper
Hnerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseSX
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
11Z9
39.2
84.1
16.7
23.0
13
27.2
1,148.2
974.3
113
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1,809.4
6,864.5
A$X
-0.6
-0.9
-0.4
-1.9
0
-0.1
-1.2
-2.7
0
-6.4
-6.7
-0.6
-0.3
0
0
0
-0.2
-16.1
-4.1
0
-0.3
0
-0.7
-1.2
-0.8
0
0
0
-7.4
-24.7
%A$X
*
*
*
-1.0
*
*
*
*
4>
-3.9
-5.9
-1.4
*
*
#
*
*
-1.4
*
. *
*
*
*
*
*
*
*
*
*
*
Base$I
208.9
2,426.4
33.4
199.5
274.5
0
3,142.6
4,191.9
903.9
751.0
0
495
1,215.4
131.2
134.2
1.9
1.6
7,6393
653
42.7
63.0
743
6.6
8.8
8.7
8.5
83
233
326.2
11,108.2
A$I
0.1
-0.3
-0.3
0.6
1.7
0
1.8
1.2
0.1
12.9
0
0.1
1.4
0
0.1
0
0
22.9
0.1
0
0.1
0
0
0.4
0.1
0.2
0.2
0
1.8
265
%A$I
*
*
-1.0
*
*
*
*
*
*
1.7
*
*
*
*
*
*
*
*
*
*
*
*
*
4.6
1.1
2.7
2.5
*
*
*
SX^export value        $I=import value
Totals and percent changes might not be exact
     A="change in"
because of rounding.
•=less than 1%
                                         5-28

-------
                                     TABLE 5-19
                   FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 16
                                  (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semicbemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseSX
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
112.9
39.2
84.1
16.7
23.0
73
27.2
1,148.2
974.3
11.3
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1,809.4
6,864.5
A$X
-1.8
223
0.2
-7.2
0
3.2
16.8
-23.5
-0.2
-6.0
-23.4
-0.9
-1.9
-0.1
0.1
-4.2
-0.3
-59.5
-3.5
-0.2
-5.4
0
-0.8
-0.4
0.4
0
0
0
-9.7
-25.9
%A$X
*
*
*
-4.0
*
18.6
*
-7.7
*
-3.7
-20.8
-2.3
-2.3
*
*
-57.1
-1.2
-5.2
*
-1.6
-7.6
*
*
*
*
*
*
*
*
*
BaseSI
208.9
2,426.4
33.4
199.5
274.5
0
3,142.6
4,191.9
903.9
751.0
0
49.5
1,215.4
131.2
134.2
1.9
1.6
7,6393
653
42.7
63.0
743
6.6
8.8
8.7
8.5
83
233
326.2
11,108.2
A$I
03
-7.5
-0.2
2.2
1.4
0
-3.7
113
0.4
12.0
0
0.2
9.4
0.2
1.2
0.5
0
43.2
0.1
03
1.5
0
0
0
0
0
-0.1
0.1
1.8
41.3
%A$I
*
*
*
1.1
*
*
*
*
*
1.6
*
*
*
*
*
28.0
*
*
*
*
2.5
*
*
.1.5
*
*
*
*
*
*
$X=export value        $I=import value
Totals and percent changes might not be exact
     A="change in"
because of rounding.
*=less than 1%
                                         5-29

-------
                                      TABLE 5-20
                    FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                          SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 23
                                   (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Scmichcmical paperboard
Recycled paperboard
Construction paper
Lincrboard
Folding canon board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
Base$X
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
11Z9
39.2
84.1
16.7
23.0
73
27.2
1,148.2
974.3
11.3
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1,809.4
6.864.5
A$X
-1.8
22.2
0.2
-7.2
0
3.2
16.7
-23.5
-0.2
-6.3
-23.4
-1.6
-1.9
-0.1
0.1
-4.2
-0.4
-60.8
-3.7
-0.2
-5.4
0
-1.7
-1.1
-0.2
0
0
0
-12.5
-56.6
%A$X
*
*
*
-4.0
*
18.6
#
*
-7.7
*
-3.9
-20.8
-4.2
-2.3
*
*
-57.3
-1.6
-5.3
*
-1.6
-7.6
*
-1.1
*
*
*
*
*
*
*
Base $1
208.9
2,426.4
33.4
199.5
274.5
0
3,142.6
4,191.9
903.9
751.0
0
49.5
1,215.4
131.2
134.2
1.9
1.6
7,639.3
65.3
42.7
63.0
743
6.6
8.8
8.7
8.5
83
233
326.2
11,108.2
A$I
03
-7.5
-0.2
2.2
1.4
0
-3.7
113
0.4
12.6
0
0.4
9.4
0.2
1.2
0.5
0
44.0
0.1
0.3
1.5
0
0.1
0.4
0
0.2
0.1
0.1
2.9
43.2
%A$I
*
*
*
1.1
*
*
*
*
*
1.7
*
*
*
*
*
28.2
1.1
*
*
*
2.5
*
13
4.3
*
1.9
1.0
*
*
*
SX=export value        SI=import value
Totals and percent changes might not be exact
           A="change
because of rounding.
in"
*=less than 1%
                                         5-30

-------
                                     TABLE 5-21
                   FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 24
                                  (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseSX
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
11X9
39.2
84.1
16.7
23.0
73
27.2
1.148.2
974.3
113
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1309.4
6364.5
A$X
-1.8
22.6
0.2
-7.2
0
32
17.0
-23.5
-0.2
-6.3
-23.4
-1.7
-1.9
-0.1
0.1
-4.2
-0.4
-60.8
-3.7
-0.2
-5.4
0
-1.7
-1.5
-0.7
0
0
0
-13.3
-57.1
%A$X
*
*
*
-4.0
#
18.6
*
-7.7
*
-3.9
-20.8
-4.2
-2.3
*
*
-57.3
-1.6
-5.3
*
-1.4
-7.6
*
-1.1
-1.1
*
*
*
*
*
*
Base$I
208.9
2,426.4
33.4
199.5
274.5
0
3,14Z6
4,191.9
903.9
751.0
0
49.5
1,215.4
131.2
134.2
1.9
1.6
7,6393
653
42.7
63.0
743
6.6
8.8
8.7
8.5
83
233
326.2
11,108.2
A$I
03
-7.6
-0.2
2.2
1.4
0
-3.8
113
0.4
12.6
0
0.4
9.4
0.2
1.2
0.5
0
44.4
0.1
0.2
1.6
0
0.1
0.5
0.1
0.2
0.2
0.1
33
43.9
%A$I
*
*
*
1.1
*
*
*
*
1.7
1.7
*
*
*
*
*
28.2
1.1
*
*
*
2.5
*
1.3
5.6
*
2.8
1.9
*
1.0
*
$X=export value              $I=import
Totals and percent changes might not be exact
value
because of rounding.
A="change in"
                                     •=less than 1%
                                         5-31

-------
                                      TABLE 5-22
                    FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                          SELECTED PRODUCT CATEGORIES
                                Regulatory Alternative 25
                                   (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoatcd groundwood paper
day coated printing
Uncoatcd free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Scmichemica] paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
Base$X
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
112.9
39.2
84.1
16.7
23.0
7.3
27.2
1,148.2
974.3
113
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1,809.4
6364.5
A$X
-1.8
22.6
0.2
-7.2
0
3.2
17.0
-23.3
-0.2
-6.5
-23.4
-1.7
-1.9
-0.1
0.1
-4.2
-0.5
-60.8
-3.7
-0.2
-5.4
0
-1.9
-1.6
-0.7
0
0
0
-13.7
-57.5
%A$X
*
*
*
-4.0
*
18.6
*
-7.6
*
-3.9
-20.8
-4.4
-2.3
*
*
-57.3
-1.8
-5.3
*
-1.4
-7.6
*
-1.3
-1.2
*
*
*
*
*
*
Base $1
208.9
2,426.4
33.4
199.5
274.5
0
3,142.6
4,191.9
903.9
751.0
0
49.5
1,215.4
131.2
134.2
1.9
1.6
7,6393
653
42.7
63.0
743
6.6
8.8
8.7
8.5
8.3
233
326.2
11,108.2
A$I
03
-7.6
-0.2
2.2
1.4
0
-3.8
11.2
0.4
12.9
0
0.4
9.4
0.2
1.2
0.5
0
44.6
0.1
0.2
1.5
0
0.1
0.5
0.1
03
0.2
0.1
3.5
443
%A$I
*
*
*
1.1
*
*
*
*
*
1.7
*
*
*
*
*
28.2
1.2
*
*
*
2.5
*
1.4
6.3
*
3.1
1.9
*
1.1
*
SX=export value               $I=irnport
Totals and percent changes might not'-be exact
value
because of rounding.
A="change in"
*=less than
                                         5-32

-------
                                   TABLE 5-23
                  FOREIGN TRADE VALUE ADJUSTMENTS (1989):
                        SELECTED PRODUCT CATEGORIES
                              Regulatory Alternative 26
                                 (millions of $1989)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
Base$X
614.8
3,024.0
69.8
181.1
0
173
3,906.9
306.2
61.0
163.5
112.9
39.2
84.1
16.7
23.0
73
27.2
1,148.2
974.3
113
70.6
13.1
153.7
139.8
380.7
7.2
7.1
15.2
1,809.4
6,864.5
A$X
-0.6
333
0.4
-6.9
0
33
295
-20.0
-0.2
-6.2
-23.1
-1.7
-1.8
0
0.1
-4.1
-0.4
-56.6
-3.9
-0.1
-5.4
0
-1.7
-1.6
-0.5
0
0
0
-13.4
-40.5
%A$X
*
1.1
«
-3.8
0
18.8
*
-6.5
4
-3.8
-20.5
-4.4
-2.1
*
*
-56.7
-1.6
-4.9
*
*
-7.6
*
-1.1
-1.2
*
*
*
*
*
*
BaseSI
208.9
2,426.4
33.4
199.5
274.5
0
3,142.6
4,191.9
903.9
751.0
0
495
1,215.4
131.2
134.2
1.9
1.6
7,6393
653
42.7
63.0
743
6.6
8.8
8.7
85
8.3
233
326.2
11,108.2
A$I
0.1
-11.2
-0.3
2.1
1.2
0
-8.1
95
0.4
123
0
0.4
8.9
0.1
1.0
05
0
41.1
0.1
0.1
1.5
0
0.1
0.5
0.1
03
0.2
0
33
363
%A$I
*
*
*
1.1
*
*
*
*
*
1.6
*
*
*
*
*
27.6
1.1
*
*
*
2.5
*
1.3
63
*
3.1
1.9
*
1.0
*
$X=export value              $1=import
Totals and percent changes might not be exact
value
because of rounding.
A="change
                                                                       '=less than 1%
                                        5-33

-------
                                      TABLE 5-24
                   FOREIGN TRADE QUANTITY ADJUSTMENTS (1989):
                          SELECTED PRODUCT CATEGORIES
                                 Regulatory Alternative 3
                                      (000 tonii/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Sernichernical paperboard
Recycled paperboard
Construction paper
Lincrboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseX
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1391
2,463
31
185
33
283
194
529
10
10
13
3,807
11,260
AX
-1
2
1
-3
0
0
-2
-6
0
-7
-8
-1
0
0
0
o •
0
-24
-12
0
-1
0
-1
-2
-1
0
0
0
-18
-44
%AX
*
*
*
-1.1
*
*
*
*
*
-4.1
-6.6
-1.5
*
*
*
*
*
-1.7
*
*
*
*
*
-1.0
*
*
*
*
*
*
Basel
284
3,753
87
358
618
0
5,100
8,553
1304
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
0
-1
1
4
0
3
1
0
11
0
0
0
0
0
0
0
15
0
0
0
0
0
1
0
0
0
0
3
21
%AI
*
*
-1.0
*
*
*
*
*
*
1.5
*
*
*
*
*
*
*
4!
*
*
*
*
*
4.5
1.1
*
2.4
*
+
*
X » export quantity     I = import quantity
Totals and percent changes might not be exact
     A = "change in"
because of rounding.
= less than 1%
                                         5-34

-------
                                    TABLE 5-25
                 FOREIGN TRADE QUANTITY ADJUSTMENTS (1989):
                        SELECTED PRODUCT CATEGORIES
                              Regulatory Alternative 16
                                    (000 tons/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Unerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseX
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1391
2,463
31
185
33
283
194
529
10
10
13
3,807
11,260
AX
-3
42
1
-13
0
9
35
-49
0
-7
-28
-1
-1
0
0
-5
-1
-94
-10
-1
-16
0
-2
-1
1
0
0
0
-28
-87
%AX
*
*
*
-4.1
*
20.9
*
-7.8
*
-3.9
-22.9
-2.4
-2,6
*
*
-57.8
-1.2
-6.7
*
-1.9
-8.5
*
*
*
*
«
*
*
*
*
Basel
284
3,753
87
358
618
0
5,100
8^53
1^04
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
-6
0
3
3
0
0
7
0
11
0
0
2
0
0
1
0
25
.0
0
2
0
0
0
0
0
0
0
3
28
%AI
*
*
*
1.0
*
*
*
*
*
1.4
*
*
*
*
*
25.8
*
*
41
*
1.5
*
*
1.4
4>
*
*
*
*
*
X = export quantity     I = import quantity
Totals and percent changes might not be exact
     A = "change in"
because of rounding.
= less than 1%
                                        5-35

-------
                                     TABLE 5-26
                  FOREIGN TRADE QUANTITY ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 23
                                     (000 tons/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoatcd groundwood paper
Clay coated printing
Uncoatcd free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Scraichcmical paperboard
Recycled paperboard
Construction paper
Lincrboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseX
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1391
2,463
31
185
33
283
194
529
10
10
13
3,807
11 .260
AX
-3
42
1
-13
, 0
9
34
-49
0
-7
-28
-2
-1
0
0
-5
-1
-95
-11
-1
-16
0
-3
-2
0
0
0
0
-33
-94
%AX
*
*
*
-4.1
*
20.9
*
-7.8
*
-4.1
-22.9
*
*
*
*
-58.1
-1.7
-6.8
*
-1.8
-8.5
*
-1.1
*
*
*
*
*
*
* .
Basel
284
3,753
87
3581
618
0
5,100
8453
1304
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
-6
0
3
3
0
0
7
0
11
0
0
2
0
0
1
0
26
0
0
2
0
0
1
0
0
0
0
4
30
%AI
*
*
*
1.0
*
*
*
*
*
1.5
*
*
*
*
*
26.0
1.0
* ,
*
*
1.5
*
1.2
4.2
*
1.8
*
*
*
*
X = export quantity     I = import quantity
Totals and percent changes may not be exact due
   A = "change in"
to rounding.
= less than 1%
                                         5-36

-------
                                     TABLE 5-27
                 FOREIGN TRADE QUANTITY ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 24
                                     (000 tons/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
Base X
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1391
2,463
31
185
33
283
194
529
10
10
13
3307
11,260
AX
-3
42
1
-13
0
9
35
-49
0
-7
-28
-2
-1
0
0
-5
-1
-95
-11
-1
-16
0
-3
-2
-1
0
0
0
-34
-94
%AX
*
*
*
-4.1
*
20.9
*
-7.8
#
-4.1
-22.9
-4.4
-2.6
*
*
-58.1
-1.7
-6.9
*
-1.7
-8.5
«
-1.1
-1.2
*
e
*
«
*
*
Base I
284
3,753
87
358
618
0
5,100
8453
1304
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
-6
0
3
3
0
0
7
0
11
0
0
2
0
0
1
0
26
0
0
2
0
0
1
0
0
0
0
5
31
%AI
*
*
*
1.0
*
*
*
*
*
1.5
*
*
*
*
*
26.0
1.0
*
*
*
1.5
*
1.2
5.5
*
*
*
*
*
*
X = export quantity     I = import quantity
Totals and percent changes may not be exact due
   A = "change in"
to rounding.
= less than 1%
                                         5-37

-------
                                     TABLE 5-28
                  FOREIGN TRADE QUANTITY ADJUSTMENTS (1989);
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 25
                                    (000 tons/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
day coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk carton board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseX
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1391
2,463
31
185
33
283
194
529
10
10
13
3,807
11,260
AX
-3
42
1
-13
0
9
35
-49
0
-7
-28
-2
-1
0
0
-5
-1
-95
-11
-1
-16
0
-4
-3
-1
0
0
0
-35
-95
%AX
*
+
*
-4.1
*
20.9
*
-7.8
*
-4.2
-22.9
-4.6
-2.6
*
*
-58.1
-1.9
-6.8
*
-1.6
-8.5
*
-1.3
-1.3
*
*
*
*
*
*
Base I
284
3,753
87
358
618
0
5,100
8,553
1304
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
-6
0
3
3
0
0
7
0
12
0
0
2
0
0
1
0
26
0
0
2
0
0
1
0
0
0
0
5
31
*AI
*
*
*
1.0
*
*
*
*
*
1.5
*
*
*
*
*
26.0
1.1
*
*
+
1.5
*
1.4
6.1
*
3.1
1.9
*
*
*
X — export quantity     I = import quantity     A = "change in"
Totals and percent changes might not be exact because of rounding.
= less than 1%
                                        5-38

-------
                                     TABLE 5-29
                  FOREIGN TRADE QUANTITY ADJUSTMENTS (1989):
                         SELECTED PRODUCT CATEGORIES
                               Regulatory Alternative 26
                                     (000 tons/yr)
Product Category
Special alpha and dissolving pulp
Bleached kraft <
Unbleached kraft
Bleached sulfite
Bleached secondary
Unbleached secondary
MARKET PULP TOTAL
Newsprint
Uncoated groundwood paper
Clay coated printing
Uncoated free sheet
Bleached bristols
Cotton fiber writing paper
Unbl kraft packaging paper
Tissue
Wrapping
Shipping sack, unbl/bl sulfite
TOTAL PAPER PRODUCTS
Unbl kraft packaging paperboard
Semichemical paperboard
Recycled paperboard
Construction paper
Linerboard
Folding carton board
Milk canon board
Heavyweight cup/container
Plate, dish, and tray stock
Molded pulp products
TOTAL PAPERBOARD PRODUCTS
TOTAL ALL PRODUCTS
BaseX
836
4,678
181
325
0
41
6,062
625
88
169
122
47
41
30
21
9
42
1,391
2,463
31
185
33
283
194
529
10
10
13
3,807
11.260
AX
-1
62
1
-13
0
9
58
-42
0
-7
-27
-2
-1
0
0
-5
-1
-87
-12
0
-16
0
-3
-3
-1
0
0
0
-34
-63
%AX
*
1.3
*
-3.9
*
21.1
1.0
-6.7
*
-4:0
-22.6
-4.5
-2.5
*
*
-57.4
-1.7
-6.3
*
*
-8.5
*
-1.1
-1.3
*
*
*
*
*
*
Base I
284
3,753
87
358
618
0
5,100
8^53
1304
774
0
59
596
239
121
2
2
11,811
165
118
165
189
12
12
12
12
12
19
743
17,654
AI
0
-9
-1
3
3
0
-4
6
0
11
0
0
2
0
0
1
0
24
0
0
2
0
0
1
0
0
0
0
5
25
%AI
*
*
*
*
*
*
*
*
*
1.4
*
*
*
*
*
25.5
1.0
*
*
*
1.5
*
1.2
6.1
*
3.1
1.9
*
*
*
X = export quantity     I = import quantity      A = "change in"
Totals and percent changes might not be exact because of rounding.
= less than 1%
                                        5-39

-------
significant decline overall is for wrapping paper; the more stringent alternatives experience a
large 57 percent decline. However, wrapping paper contributes very little to the U.S. total export
value of pulp, paper, and paperboard products. Uncoated free sheet also experiences a notable
decline of 21 percent for the more stringent alternatives.

       Import Value. Three product categories (bleached kraft, newsprint, and cotton fiber
writing paper) comprised more than 70 percent of total export value in 1989. None of these
categories is shown to be significantly affected by any of the regulatory alternatives.  Of the
lesser valued products, the most notable changes in import value are the 6 percent increase for
folding carton board and the 28 percent increase in wrapping paper.

       Import and Export Quantity. The results for import and export quantity generally mimic
the results for import and export value.  The largest percent declines in export quantity occur for
wrapping paper and uncoated free sheet. The largest percent increases in import quantity occur
for wrapping paper and  folding carton board.
       5.2-3  Facility and Product Line Closures

       The estimated number of pulp and paper facility closures and product line closures are
shown by facility type in Table 5-30. The more stringent alternatives are estimated to result in
11 possible mill closures and 14 total product-line closures. The majority of the closures occur at
paper or paperboard mills that buy market pulp to produce paper products.
       5.2.4  Employment Impacts

       The estimated employment impacts are shown in Tables 5-31 and 5-32. The market
impact model is capable of estimating employment changes in two ways.  The first results from
facility closure, where all production and non-production employees at closure facilities are
dislocated. The second results from production level changes at facilities that continue
                                           5-40

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                 TABLE 5-32




EMPLOYMENT IMPACTS: POTENTIAL JOB CREATION

Facility Type
Pulp Mills
Paper/Paperboard Mills
Integrated Mills
Total

3
1
441
202
644
Regulatory
16
3
565
350
918
Alternative
23
3
565
308
876

24
3
571
307
881

25
3
570
303
876

26
3
570
300
873
                    5-43

-------
 operations after regulation.  Higher mill production levels require more production workers and
 lower mill production levels require fewer workers.

       Table 5-31 shows the estimated number of employees dislocated due to closure and
 reduced production levels.4  The majority of job losses occur at integrated mills  even though
 paper or paperboard mills incur the majority of facility closures. This is because integrated mills
 generally  employ a greater number of employees than non-integrated mills.

       Table 5-32 shows the estimated number of potential  jobs created by increases in
 production levels at some mills.  This estimate assumes that the mills that increase output are
 currently operating at their maximum worker-to-output ratio.  To the extent they are not, the
 number of potential jobs created may be less. The majority of the potential new jobs are created
 at non-integrated paper or paperboard mills.
       5.2.5  Consumer and Producer Surplus Changes

       The estimated social welfare impacts as measured by changes in consumer and producer
surplus are shown in Tables 5-33 through 5-38. Because  of higher prices and lower equilibrium
quantities consumed, both U.S. and foreign consumers experience losses in consumer surplus.
Because foreign producers increase output to U.S. markets in response to higher U.S. market
prices, foreign producers experience increases in producer surplus. U.S. producers generally
experience losses in producer surplus due to the reduced earnings that result from increased
pollution abatement costs.

       For the more stringent regulatory alternatives, the majority of total welfare loss is
attributable to losses in U.S. consumer surplus. However, as the alternatives become more
stringent, U.S. producers share a greater portion of the total welfare loss burden because product
prices, and hence producer revenues, do not keep pace with the increases in  regulatory
compliance costs.
   *The estimates of baseline employment are discussed in Section 2.3 and Section 3.3.2.1.
                                          5-44

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                                                         5-50

-------
5.3    RELATIONSHIP BETWEEN FINANCIAL MODEL AND MARKET MODEL RESULTS

       The overall results of the financial and market models are consistent and complementary.
There are differences in the details, as expected from the differences in modeling assumptions
arid approaches (described in more detail in Section 3.4). Both models indicate minor declines
to domestic production levels in the range of 4 percent or less.  Exports show a similar decline,
although the market  model indicates that the declines may be concentrated in a small set of
product categories.

       For Alternative 26, the  models estimate that about 11 to 13 facilities will close. The
financial model contains the conservative assumption that no facility can pass the increased costs
of pollution control to purchasers through higher prices. The facilities that close with the
financial model, then, are the larger mills that incur the cost of process changes  and air pollution
control requirements. The financial model estimates that 10,700 jobs are lost with the 13
closures. The market model assumes that incremental  pollution control costs will be passed
through in accordance with what  the market will bear.  The closures projected by the market
model include smaller facilities that produce products with prices that do not increase enough to
offset the addition of pollution  control costs, the changes in input prices, or reduced
consumption demand. The market model estimates nearly 2,800 job losses associated with the 11
facility closures and product  line  closures for these alternatives.
5.4    REFERENCES
CEA.  1993. Council of Economic Advisers.  Economic report of the president.  Washington,
DC. Table B-l.
DOL.  1992. Department of Labor.  Monthly labor review 115(1 ):82. Washington, DC: U.S.
DOL, Bureau of Labor Statistics.
Pigler, Carmen C. 1993. RIMS multipliers for the-  United States. Letter from Carmen C. Pigler,
U.S. Department of Commerce, Bureau of Economic Analysis. Washington, D.C. to Maur.een F.
Kaplan, Eastern Research Group, Inc.  Lexington. MA. 1 September.
                                          5-51

-------

-------
                                    SECTION SIX
                           SMALL BUSINESS IMPACTS
       An analysis of impacts on small business entities was performed, in part, to comply with
the analysis requirements of the Regulatory Flexibility Act (RFA) and to provide information on
how regulatory options affect small entities. The small business analysis focuses on whether
regulatory alternatives have undue or disproportionate impacts on small entities. Section 3.5
discusses various definitions for small entities.

       Several definitions are used in this analysis.  The financial model analysis uses a three-
tiered subdivision for both companies and facilities:

       •     Very small:  0 to  125 employees
       •     Small: 126 to 750 employees
       »     Large: More than 750 employees

The market model uses the same subdivisions plus a combination group of facilities and
companies with  fewer than 750 employees.
6.1     FINANCIAL IMPACT ANALYSIS RESULTS

       The impacts shown in Section 5.1 are split into size categories based on facility and
                                                                •»
company employment. The results are examined several ways—under costs for wastewater
treatment upgrades (BPT costs), under each BAT/PSES option (as applicable), and under each
regulatory alternative. The definitions for the options and regulatory alternatives are shown in
Section 4.1.  In some cases, certain results are not reported in the summary tables because data
aggregation is inadequate to protect confidential business information. These results are
identified by "ND" (not disclosed) entries  in the table.
   V
                                          6-1

-------
        6.1.1 Impacts from BPT Costs

        Tables 6-1 and 6-2 present the impacts from BPT costs on very small, small, and large
 entities. Table 6-1 use? a facility basis for the categorization, and Table 6-2 uses a company basis
 for the categorization. This pairing of tables is used throughout Section 6.1.  The percentages
 shown in each table refer to the percent of impact in the size category for that option and
 parameter.1

        Approximately 300 facilities are  anticipated to incur costs of wastewater treatment
 upgrades.  The impacts do not change regardless of whether a facility basis or company basis is
 used for the definition.  One very small  facility, which belongs to a very small company, is
 projected to close under  either option for wastewater treatment upgrades. Two small facilities
 that belong to small companies also are projected to close under BPT Option 2. Three facilities
 out of 300  represent only 1 percent of the entire population estimated to incur costs and only 0.5
 percent of the entire population of pulp, paper, and paperboard facilities in the United States.
 This is a very small overall percentage of closure, and the result that no large facilities close with
 these costs is not indicative of undue impacts on small facilities or companies.
       6.1.2  Impacts from BAT/PSES Costs

       6.12.1 Dissolving Kraft

       Since BAT/PSES costs are not projected to close facilities  in the dissolving kraft
subcategory, there are no impacts projected  for small facilities.
    'For example, three facilities—two small and one very small—are projected to close under BPT
Option 2 (Tables 6-1 and 6-2).  Of the closures. 33 percent are in the very small category and 67
percent are in the small category.
                                            6-2

-------
TABLE 6-1

REGULATORY FLEXIBILITY ANALYSIS
BPT COSTS
FACILITY-LEVEL 1989 DATA
 Category
                                              Option 1
                                                                      Option 2
Number of Mills
Count
Percent*
Closures
Count
Percent-
Count
Percent*
Very Small
Small
Large
Total
    182
    256
                     524
 34.7%
 48.9%
 16.4%
100.0%
  1    100.0%
  0      0.0%
  0      0.0%
  1    100.0%
    1     33.3%
    2     66.7%
    0      0.0%
    3     33.3%
Number of Employees
Count Percent*
Loss in Employees**
Count
Percent* Count
Percent*
Very Small
Small
Large
Total
 13.630
 91.966
114,895
220.491
  6.2%
 41.7%
 52.1%
100.0%
100    1000%
  0      00%
  0      0.0%
100    100.0%
  100      9.1%
 1000     90.9%
   0      0.0%
1.100    100.0%
Shipments (Tons)
Count Percent*

Count
Loss in Shipment Tonnage
Percent* Count

Percent*
Very Small      4,919,637         5.7%          5,752    1000%         5.752      2.2%
Small          45,372.710        52.3%             0      00%       260.488     97.8%
Large          36,419,405        42.0%             0      0.0%            0      00%
Total          86,711,752       100.0%          5,752    1000%       266.240      2.2%
Shipments ($000)
Count
Percent*
Loss in Shipments ($000)
Count
Percent"
Count
Percent*
Very Small     $2,521,977         4.3%
Small         $26,412,033        45.1%
Large         $29.595.176        50.6%
Total         $58.529,186       100.0%
                            $13.026    1000%       $13.026      6.0%
                                $0      00%      $203.586     940%
                                SO      00%           SO      00%
                            $13.026    1000%      $216.612      60%
Export ($000)

Very Small
Small
Large
Total
Count
$99.493
$2.891.979
$2.862.478
$5.853.950
Percent*
17%
494%
489%
100.0%
Loss in Exports ($000)
Count
$966
$0
$0
$966
Percent'
1000%
00%
00%
1000%
Count

$966
$633

SO
$1.599
Percent*
604%
396%
00%
1000%
Note:
          (*) Percent of impact in size category
          (H Rounded to nearest 100 employees
                                                               6-3

-------
TABLE 6-2

REGULATORY FLEXIBILITY ANALYSIS
•TT COSTS-
COMPANY-LEVEL 1989 DATA
 Cataeoiy
                                             Option 1
                                                                 Option 2
Number of Mills
Count
Percent*
Closures
Count
Percent-
Count
Percent*
Very Small
Small
Large
Total
                     63       32.1%
                     83       42,3%
                     50       25.5%
                    196      100.0%
    1    100.0%
    0      0.0%
    0      0.0%
    1    100.0%
1     33.3%
2     66.7%
0      0.0%
3    100.0%
Number of Employees
Count Percent*
Loss in Employees**
Count
Percent* Count
Percent*
Very Small
Small
La roc
Total
                   4.197        1.9%
                  27.010       12.2%
                 189.284       85.8%
                 220.491      100.0%
  100    100.0%       100     9.1%
   0      00%      1000    90.9%
   0      0.0%         0     0.0%
  100    100,0%      1.100    100.0%
Shipments (Tons)
Count Percent*
Loss in Shipment Tonnage
Count Percent* Count Percent*
V«y Smalt
Small
ToUl
               1.361.956        1.6%
               9.369.963       10.8%
              75.979.833       87.6%
              86.711.752      100,0%
5,752    100.0%     5.752     2.2%
   0      0.0%   260.488    97.8%
   0      00%         0     0.0%
5,752    100.0%   266.240    100.0%
Shipments (SOOO)
Count
Percent*
Loss in Shipments ($000)
Count
Percent* Count
Percent*
Very Small       $695.040        1.2%
Small          S5.748.242        98%
Laroe         $52.065.904       89 0%
Total         $58.529.186      1000%
                                         S13.026    1000%    S13.026      6.0%
                                             SO      00%   $203.586     940%
                                             $0      00%        SO      00%
                                         S13.026    1000%   5216.612    1000%
Export (SOOO)
Count Percent*
Loss in Exports (SOOO)
Count
Percent* Count
Percent*
Very Small        $39.508        07%
Small            $756,824       129%
Laroe          $5.057.618       864%
Total          $5.853.950      100 0%
                                           $966    1000%      $966     604%
                                             $0     00%      $633     396%
                                             SO     00%        SO      00%
                                           $966    1000%     $1.599    1000%
Note
          (*) Percent of impact in size cateoory
          (**) Rounded to nearest 100 employees
                                                              6-4

-------
       6.12.2 Dissolving Suffite

       Tables 6-3 and 6-4 are an outline of the impacts of process change costs for dissolving
sulfite facilities and companies.  The impacts associated with closures of dissolving sulfite
facilities are not reported to protect confidential data.  The overall loss in shipments for this
subcategory is less than 0.5 percent of total industry shipments and about 3 percent of total
exports.
       6.12.3 Bleached Papergrade Kraft and Soda

       Tables 6-5 and 6-6 list the impacts for facilities and companies in the bleached
papergrade kraft and soda subcategory.  For Option 1, the mill closures are evenly split between
small and large facilities and companies. Large entities (both facilities and companies), however,
experience 80 percent or more of the loss in employees, shipments (tonnage and value), and
exports.  For Option 2, two-thirds of the closures and 80 percent or more of the losses belong to
the large facilities and companies.  For Options 3 and 4, there is an additional closure, which is a
small facility that belongs to a large company.  Large entities, by either definition, experience a
disproportionate share of the impacts. For Option 5, on a facility basis, the large entities have:

       •      16 percent of the facilities, 78 percent of the closures
       •      50 percent of the employees, 90 percent of the job losses
       •      40 to 50 percent of shipments and exports,  70  to 90 percent of the losses

On a company basis,  large entities bear the  larger impacts (90 to 96 percent of the losses).
                                            6-5

-------
 TABLE SO

 REGULATORY FLEXIBILITY ANALYSIS
 BAT/PSES PROCESS CHANGE COSTS: DISSOLVING SULFITE
 FACILITY-LEVEL 1083 DATA
 Cat»flory
                                          Option 1
                                                               Option 2
Number of Mills

Very Small
Small
La roe
Total

VwySmaB
Small
Uige
Total

Very Small
Small
Large
Total

Very Small
Smart
Large
Total

Very Small
Smal
La rpc
Total
Court
182
256
66
524
Percent*
34.7%
48.9%
16.4%
100.0%
Number of Employees
Count
13.630
91.966
114.895
220.491
Percent*
6.2%
41.7%
52.1%
100.0%
Shipments (Tons)
Count
4.919.637
45.372.710
36.419.405
86.711.752
Percent*
5,7%
52.3%
42.0%
100,0%
Shipments (SOOO)
Count
S2.521.977
$26.412.033
S29.595.176
S58.529.186
Percent*
4,3%
451%
506%
1000%
Export (SOOO)
Count
$99.493
S2.891.979
S2.862.478
S5.853.950
Percent*
17%
494%
48.9%
1000%
Closures
Count Percent* Count
ND NO
ND ND
ND ND
1 100.0%
Percent*
ND ND
ND ND
ND ND
2 100.0%
Loss in Employees"
Count Percent* Count
ND ND
ND ND
ND ND
ND 100.0%'
Percent*
ND ND
ND ND
ND ND
ND 100.0%
Loss in Shipment Tonnaoe
Count Percent* Count
ND ND
ND ND
ND ND
ND 100 0%
Loss in Shipments (SOOO)
Count Percent* Count
ND ND
NO ND
ND ND
ND 1000%
Percent*
ND ND
ND ND
ND ND
ND 100,0%

Percent*
ND ND
ND ND
ND ND
ND 1000%
Loss in Exports (SOOO)
Count Percent* Count
ND ND
ND ND
ND ND
ND 100 0%
Percent*
ND ND
ND ND
ND ND
ND 1000%
Note
            Rounded to nearest 100 employees
                                                         6-6

-------
TABLE 6-4

REGULATORY FLEXIBILITY ANALYSIS
BAT/PSES PROCESS CHANGE COSTS: DISSOLVING SULRTE
COMPANY-LEVEL 1989 DATA
 Category
                                            Option 1
                                                     Option 2
Number of Mills
Count
Percent*
Closures
Count
Percent*
Count
Percent*
Very Small
Small
Large
Total
       63
       83
       50
      196
 32.1%
 42,3%
 25.5%
100.0%
ND       ND
ND       ND
ND       ND
 1    100,0%
ND       ND
ND       ND
ND       ND
 2    100.0%
               Number of Employees
                                                    Loss in Employees*'
              Count
                           Percent*
                                         Count
                                                   Percent*
                                                                Count
                                                                          Percent*
Very Small
Small
Large
Total
    4,197
   27,010
   189,284
   220,491
  1.9%
 12.2%
 85.8%
100.0%
ND       ND
ND       ND
ND       ND
ND   100.0%
ND       ND
ND       ND
ND       ND
ND   100.0%
                 Shipments (Tons)
                                                 Loss In Shipment Tonnage
                                                   Percent*
                                                               Count
                                                                          Percent*
Very Small
Small
Large
Total
 1,361,956
 9.369.963
75,979,833
86,711.752
  1.6%
 10.8%
 87.6%
100.0%
ND        ND
ND        ND
ND        ND
ND    1000%
ND        ND
ND        ND
ND        ND
ND    100.0%
Shipments ($000)
Count
Percent*
Loss in Shipments ($000)
Count
Percent*
Count
Percent*
Very Small       $695.040         1.2%
Small          $5,748.242         9.8%
Large         $52.085,904        89 0%
Total         $58.529.186       100.0%
                                 ND       ND
                                 ND       ND
                                 ND       ND
                                 ND   100 0%
                                        ND       ND
                                        ND       ND
                                        ND       ND
                                        ND   100,0%
                   Export (SOOO)
                                                   Loss in Exports (SOOO)
                           Percent*
                                         Count
                                                   Percent'
                                                               Count
                                                                          Percent*
Very Small        $39.508        0.7%
Small           $756.824        12.9%
Large          $5.057.618        86 4%
Total          $5.853.950       100 0%
                                 ND       ND
                                 ND       ND
                                 ND       ND
                                 ND   100 0%
                                        ND       ND
                                        ND       ND
                                        ND       ND
                                        ND   100 0%
Note
          (*)  Percent of impact in size category
          (~) Rounded to nearest 100 employees
                                                             6-7

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        6.12.4  Papergrade Sulfite

        Tables  6-7 and 6-8 list the impacts for facilities and companies in the papergrade sulfite
subcategory. On a facility basis, under Option 1, small entities have more closures and larger
losses of export revenues, but smaller impacts in the loss of jobs, total shipment tonnage, and
total shipment value. Option 2 has larger impacts on large facilities (although the details are not
reported). On a company level, large entities bear a greater proportion of impacts, although the
details  are not reported in Table 6-8.
       6.12.5  Unbleached Papergrade Kraft, Semichemical, and Nonwood Chemical

       No closures are projected for the costs associated with the options for these
subcategories.  There are therefore no impacts on small facilities or companies.
       6.13  Impacts from Regulatory Alternative Costs

       Tables 6-9 and 6-10 list the impacts for the regulatory alternatives. The impacts for the
regulatory alternatives cluster into four groups based on the number of projected mill closures.

       For Alternatives 2 through 5, the impacts generally fall on small  facilities that are owned
by large companies.  With the exception of the loss in exports (where losses occur only for the
large companies), the impacts look roughly proportional to the distribution of closures. Given
the small  number of closures (three of approximately 300 facilities), the distribution shows no
clustering by size category.
       The three remaining groups of alternatives have 13 to 15 projected mill closures. The
distribution of these projected closures among the size categories is comparable for Alternatives
11 through 26.  There appear to be no disproportionate impacts on smaller facilities or
companies. Very small  facilities and companies show proportionately fewer impacts than other
size entities.
                                           6-10

-------
TABLE 6-7

REGULATORY FLEXIBILITY ANALYSIS
BAT/PSES PROCESS CHANGE COSTS: PAPERORADE SULFITE
FACILITY-LEVEL 1989 DATA
 Category
                         Option 1
                                    Option 2
Number of Mills
Count
Percent*
Closures
Count
Percent*
Count
Percent*
Very Small
Small
Large
Total
182
256
 86
524
 34.7%
 48.9%
 16.4%
100.0%
0      0.0%
3     60.0%
2     40.0%
5    100.0%
0      0.0%
1     33.0%
2     66.7%
3    100.0%
Number of Em
Count
ployees
Percent*
Loss in Employees**
Count
Percent*
Count
Percent*
Very Small       13,630        6.2%           0     0.0%         0      0.0%
Small            91.966       41.7%       1,700    43.6%        ND       ND
Large           114,895       52.1%       2,100    538%        ND       ND
Total           220,491      100.0%       3,900    100.0%      2.600    100.0%
Shipments (Tons)
Count Percent*
Loss in Shipment Tonnage
Count
Percent* Count Percent*
Very Small    4,919.637        5.7%           0     0.0%         0      0.0%
Small        45.372.710       52.3%     357,026    45.1%        ND       ND
Large        36.419.405       42.0%     434,574    54.9%        ND       ND
Total        86.711.752      100.0%     791.600   100.0%    506.535    1000%
Shipments ($000)
Count Percent*
Loss in Shipments ($000)
Count
Percent* Count
Percent*
Very Small   $2.521.977
Small       $26.412.033
Large       $29.595.176
Total       $58.529.186
           4.3%          $0
          45.1%    $366.062
          506%    $400.729
         100.0%    $766,791
                       0.0%        $0      00%
                      47.7%       ND       ND
                      523%       ND       ND
                     1OO.O%   $475.372    100 0%

Very Small
Small
Large
Total
Export ($000)
Count
$99.493
$2.891.979
$2.862,478
$5.853.950
Percent*
1 7%
494%
489%
1000%
Loss in Exports ($000)
Count

$0
$2.207
$1
405
$3.612
Percent*
00%
61 1%
389%
1000%
Count
$0
ND
ND
$1.405
Percent*
00%
ND
ND
1000%
Note
          (*) Percent of impact in size category
          (**) Rounded to nearest 100 employees
                                                           6-11

-------
TABLE 6-8

REGULATORY FLEXIBILITY ANALYSIS
BAT/PSES PROCESS CHANGE COSTS: PAPERGRADE SULFITE
COMPANY-LEVEL 1969 DATA
category
Option 1 |

Number of Mills

Very Small
Small
Large
Tout
Count
182
256
86
524
Percent*
34.7%
48.9%
16.4%
100.0%
Number at Employees

Very Small
Small
La roc
ToUl


Very Small
Small
Uige
ToUl


Very Small
Small
Large
ToUl
Count
13.630
91.966
114.895
220,491
Percent*
6.2%
41.7%
52.1%
100.0%
Shipments (Tons)
Count
4.919.637
45.372.710
36.419.405
86.711.752
Percent*
5.7%
52.3%
42.0%
100.0%
Shipments ($000)
Count
S2.521.977
S26.412.033
S29.595.176
S58.529.186
Percent*
4,3%
45.1%
50.6%
100,0%
Export ($000)

VetySmail
Small
Large
Total
Count
S99.493
52.891^979
S2.862.478
SS.853.950
Percent*
1,7%
494%
489%
1000%
Option 2

Closures
Count
0
ND
ND
5
Percent*
0.0%
ND
ND
100.0%
Count
0
ND
ND
3
Percent*
0.0%
• ND
ND
100.0%
Loss in Employees"
Count
0
ND
ND
3.900
Percent*
0,0%
ND
ND
100,0%
Loss in Shipment
Count
0
ND
ND
791.600
Percent*
00%
ND
ND
1000%
Count
0
ND
ND
2,600
Tonnage
Count
0
ND
ND
506.535
Percent*
0.0%
ND
ND
100.0%

Percent*
00%
ND
ND
100.0%
Loss in Shipments ($000)
Count
SO
ND
ND
S766.791
Percent'
00%
ND
ND
1000%
Count
SO
ND
ND
$475.372
Percent*
0.0%
ND
ND
1000%
Loss in Exports ($000)
Count
$0
ND
ND
S3.612
Percent*
00%
ND
ND
1000%
Count
SO
ND
ND
$1.405
Percent*
00%
ND
ND
1000%
Note
         {*) Percent of impact in size category
         ("^ Rounded to nearest 100 employees.
                                                         6-12

-------




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       On a facility basis, large facilities account for 16 percent of the population, but about
one-third of the closures.  Large facilities account for nearly half of the jobs, shipments, and
exports, and bear about half the impacts in job loss and loss in shipment tonnage and value.
Small facilities  show higher proportional impacts in the loss of export revenues.

       On a company basis, large companies form about 25 percent of the population.  They
bear 50 to 60 percent of the impacts in terms of the number of closures.  Large companies
account for approximately 80 to 90 percent of the number of employees and shipments in the
industry population; impacts to large companies account for about 80 percent of the losses for
these parameters.  Large companies incur 40 to 70 percent of the loss in exports, depending on
the alternative.
       Tables 6-11 through 6-14 summarize the results of the financial ratio analysis at the
facility level. Table 6-11 has all mills in the analysis; results for very small, small, and large
facilities are shown in Tables 6-12 through 6-14.  Large facilities show greater impacts in their
financial ratios than either the small or very small facilities.

       Tables 6-15 through 6-18 list the financial ratio analysis on a company basis. Based on
the average change in financial ratios, very small companies show the  greatest impact  for
Alternatives 5 though 26. Mean values, however, are sensitive to  outliers and there is one
closure in the very small category. Hence, the larger impacts seen for the average change in
                       i
financial ratios can be a reflection of the single closure. Median values are more representative
of the impacts to "typical" facilities.   The median change in financial ratios for very small
companies is generally well within the range seen for the business cycle. The exception is net
working capital-to-total  assets.  Regulatory costs can affect this ratio by reducing the numerator
(net working capital) and increasing the denominator (total assets).  The fluctuation in this ratio
could indicate that very small firms  are likely to need sources of money other than or  in addition
to working capital to finance the pollution control expenditures.

       Based on the median change in financial  ratios, large companies are projected to incur
more significant financial impact than small companies. This result is consistent with  the data

                                            6-15

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                                                                                                     I

-------
that large facilities with chemical pulping operations bear a substantial portion of the cost of
pollution control.
6.2    MARKET IMPACT ANALYSIS RESULTS

       Given the similarity of results seen with the financial model analysis and market model
analysis of impacts in Section Five, the market model analysis for this section focuses on
Regulatory Alternative 26.
       6.2.1  Facility-Level Results

       6.2.1.1 Closure Distribution

       Facility closures associated with regulating the industry are estimated by the market
impact model for each size category. Table 6-19 shows that just over 2 percent of the facilities in
the small combination group are predicted to close due to regulation, while just over 1 percent of
                                                                                   i
the facilities in the.large combination group discontinue operations.  Within the small
combination group, facility closures  are almost evenly divided across the small and very small
subgroups. Of those facilities projected to close by the market impact model, almost two-thirds
are independently owned and operated with the remaining one-third part of a multifacility group.
       6.2.13 Employment Changes

       Production and non-production worker employment changes associated with regulating
the industry are also estimated by the market impact model. The changes in employment result
from both mill closures and production changes at mills continuing to operate with the
regulations. Table 6-20 shows that small combination group facilities, as a whole, incur a 0.9
percent loss in employment due to regulation, while large facilities  are also predicted to lose less
than 1 percent of their employment.  Within the small combination category, small facilities are
                                            6-24

-------
                           TABLE 6-19

CLOSURES OF INDEPENDENT AND MULTIFACHITY MILLS BY SIZE: VALUES WITH
                    REGULATORY ALTERNATIVE 26


Size based
on employment
Small
Combination
Group (<750)

Small (<750 &
>125)
Very Small (j<125)
Large (>750)
Total
Independently Owned


Number
4



1

3
0
4

Percent
Change
-4.2



-2.3

-6.0
0.0
-4.1
Multifacility


Group
Percent
Number Change
6



3

3
1
7
-1.5



-1.4
,
-1.8
-1.2
-1.5
Total


Number
10



4

6
1
11

Percent
Change
-2.1



-1.5

-2.7
-1.2
-1.9
                               6-25

-------
                             TABLE 6-20

CHANGES IN EMPLOYMENT OF INDEPENDENT AND MULTIFACILTTY MILLS BY SIZE:
                            VALUES WITH
                     REGULATORY ALTERNATIVE 26

Size based
on employment
Small Combination
Group (<750)
Small (<750 &
>125)
Very Small (<125)
Large (>750)
Total
Independently
Owned
Number
-273
-237
-37
2
-271
Percent
Change
-1.5
-1.6
-1.1
0.1
-1.3
Multifacility
Group,
Percent
Number Change
-647
-652
5
-984
-1,631
-0.7
-0.9
-0.0
-0.9
-0.8
Total
Number
-921
-889
-32
-982
-1,902
Percent
Change
-0.9
-1.0
-0.2
-0.9
-0.9
                               6-26

-------
predicted to lose 1 percent of their baseline employment, but very small facilities only incur a
loss of 0.2 percent.  The largest employment loss, over 50 percent of the predicted decline, is
realized by large facilities that are part of a multifacility group, while large independently owned
and operated facilities, as a group, realize a slight net increase in employment.
       6.2.1.3 Product Revenues, Total Costs of Production, and EBIDT

       Additional indicators of the severity of the economic impact on small facilities include the
changes in product revenues, total costs of production, and EBIDT as estimated by the market
impact model.  Table 6-21 provides the changes in facility-level  revenues, costs, and EBIDT by
size, for mills that continue to operate with the regulation.
       6.2.1.4 Annual Compliance Costs

       The relative severity of the regulations can also be measured by comparing the ratios of
annual compliance costs to total revenues, total costs, and EBIDT across small and large
facilities.  Table 6-22 shows the ratio of facility-level annual compliance costs to total revenues,
total costs, and EBIDT by size, for facilities  that continue to operate after regulation.
       6.2.2  Company-Level Results

       6.22.1 Closure Distribution

       The distribution of facility closures across small and large firms is presented in
Table 6-23. The absolute number of facility closures estimated by the market impact model is
almost evenly split across small and  large firms with 6 facilities closing that are owned by small
firms and 5 facility closures for large firms.  In terms of percentage change from baseline, small
firms incur two times the facility closures of large firms—a 2.8 percent loss at small firms versus
a 1.4 percent loss at large firms.
                                            6-27

-------
                                 TABLE 6-21

                CHANGES IN FACILITY-LEVEL REVENUES, COSTS,
                      AND EBIDT BY SIZE: VALUES WITH
                        REGULATORY ALTERNATIVE 26

Facility size based on employment
Small Combination Group (<750)
Mean
Minimum
Maximum
Small (<750 & >125)
Mean
Minimum
Maximum
Very Small (<125)
Mean
Minimum
Maximum
Large (>750)
Mean
Minimum
Maximum
Total
Mean
Minimum
Maximum
Percentage
Total
revenues

2.4
-11.4
118.2
2.4
-11.4
118.2
0.8
-3.8
8.0

1.2
-1.0
17.4

2.1
-11.4
118.2
change
Total
costs

11.5
-7.8
3,940.9
11.8
-7.8
3,940.9
1.5
-2.2
7.9

2.6
-0.1
20.6

9.6
-7.8
3,940.9

EBDOT

6.5
-99.8
296.2
6.7
-99.8
296.2
-0.6
-37.0
44.8

-2.3
-28.0
35.8

4.7
-99.8
296.2
'Earnings before interest, depreciation, and taxes.
                                    6-28

-------
                              TABLE 6-22

  RATIO OF FACILITY-LEVEL ANNUAL COMPLIANCE COSTS TO TOTAL REVENUES,
                    TOTAL COSTS, AND EBIDT BY SIZE:
                VALUES WITH REGULATORY ALTERNATIVE 26
Facility size based on employment
Small Combination Group (<750)
Mean
Minimum
Maximum
Small (<750 & >125)
Mean
Minimum
Maximum
Very Small (^125)
Mean
Minimum
Maximum
Large (>750) '
Mean
•Minimum
Maximum
Total
Mean
Minimum
Maximum
Ratio of annual
Total
revenues

0.5
-0.2
15.5

0.5
-0.2
15.5

0.7
0.0
5.0

1.4
0.0
5.4

0.7
-0.2
15.5
compliance
Total
costs

0.7
-0.3
25.5

0.7
-0.3
25.5

0.9
0.0
7.3

2.0
0.0
7.4

1.0
-0.3
25.5
costs to
EBIDT1

4.1
-1.7
324.3

4.0
-1.7
324.3

6.9
0.0
74.3

6.8
0.0
53.5

4.5
-1.7
324.3
'Earnings before interest, depreciation, and taxes.
                                  6-29

-------
                                    TABLE 6-23

                  FACILITY CLOSURES BY FIRM SIZE CATEGORY:"
                          REGULATORY ALTERNATIVE 26
Firm size based on
employment (1989)
Small (<750)
Large (>750)
Total, all firmsb
Operating facilities
Baseline With regulation
211 205
354 349
565 554
Facility closures
6
5
11
'Facility closures result from the market impact model.
bExcludes one mill in the facility-level analysis since owned by company excluded from firm-level
analysis due to lack of necessary data.
                                     6-30

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       6.22.2 Employment Loss

       The distribution of employment changes across small and large firms is presented in
Table 6-24. Firm-level employment changes are calculated as the sum of net employment
changes at facilities owned by the firm. The facility-level employment changes associated with
the regulations are estimates from the market impact model.
       63,2.3 Profitability Impacts

       Several ratios are commonly used to measure company profitability, including return on
assets, return on equity, and return on sales.  For all these measures, higher values are
unambiguously preferred over lower values. In Tables 6-25 through 6-27, we compare the
profitability measures computed for potentially affected firms to the benchmark ratios reported
in Section 3.5.4.2, Tables 3-32 through 3-34. The tables indicate that the changes due to
regulation vary across both firm size and profitability measure.  In the case of the return to sales,
the percentage of firms below the upper quartile increases for both size categories, the
percentage below the median increases for large firms and declines for small firms, and the
percentage below the lower quartile benchmark declines for both  small and large firms.  This
result reflects a general  decline in profitability (as measured by the return on sales) across all
large firms above the median benchmark and small firms above the upper quartile benchmark,
while  also indicating a general  increase across all firms below the median benchmark.

       Alternatively, in  the cases of the return on assets and the return on equity, the percentage
of firms below the benchmark levels increases and decreases across small and large firms.  For
the return on assets, the percentage of small firms below each benchmark level declines, while it
increases in each case for large firms.  This indicates an overall increase in profitability, as
measured by  the return  on assets, for small firms and an overall decline in the profitability for
large firms due to imposition of the regulations. For the return on equity, the percentage of
small  firms below each benchmark  level also declines, but the percentage of large firms below the
upper quartile and median benchmarks increases and below the lower quartile level it decreases.
This indicates an overall increase in profitability, as measured by the return on equity, for small
                                           6-31

-------
                                  TABLE 6-24

               CHANGE IN EMPLOYMENT BY FIRM SIZE CATEGORY:*
                         REGULATORY ALTERNATIVE 26
Firm size based on
employment (1989)
Small (<750)
Large (>750)
Total, all firms
Total employment
Baseline With regulation
28,989 28,624
623,455 622,706
652,444 651,330
Change in
employment
-365
-1,537
-1,902
'Firm-level employment changes are the sum of employment changes at facilities owned by the
firm. The facility-level employment changes result from the market impact model.
                                     6-32

-------














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6-35

-------
firms and a general decline in profitability for large firms at the higher tail of the distribution
along with a general increase for large firms at the lower tail of the distribution.

       The previous observations are supported by the summary statistics for the measures of
profitability shown in Table 6-28. The summary statistics include the mean, minimum, and
maximum values for each measure in baseline and with regulation across small, large, and all
firms in the industry. A comparison of the values in baseline and after imposition of the
regulations provides more detail on the distributional changes in these profitability measures
across firms.

       As Table 6-28 illustrates, the mean return on sales slightly declines for all firms after
imposition of the regulation.  This finding is also true for small firms, while the mean return on
sales for large firms increases by an inconsiderable amount. Further, the mean return on assets
increase  for all firms with regulation, fueled by the increase in the mean return for small firms
from 8.8 to 9.4 percent. Alternatively, the mean return on assets for large firms slightly declines
from 5.57 to 5.40 percent. As measured across all firms, the post-regulation mean return on
equity increases from the  baseline level of 20.4 to 22.3 percent.  As a group, small firms realize
an increase in the mean return on equity, while the mean return on equity for large firms very
slightly decreases.  Overall, a disproportionate impact on small firms is not evident from the
profitability analysis.
       6.22.4 Bankruptcy Analysis

       Table 6-29 provides the with-regulation bankruptcy prediction by firm size. This can be
compared to the baseline prediction shown in Table 3-38.  Under regulation, the likelihood of
financial failure for small firms is not affected.  However, the likelihood of financial failure for
large firms declines because one large firm moved into the indeterminate  range after regulation.
The number of firms in the indeterminate range increases by nine firms. Two-thirds of these
firms are small, six out of nine. As seen in Table 6-29, regulation  reduces the number of firms
for which bankruptcy was unlikely in baseline by 7.3 percent, or eight firms.  Nearly two-thirds of
these firms are small, five out of eight. Small firms, as a group, incur a 20 percent reduction in
                                           6-36

-------
                 TABLE 6-28

   SUMMARY STATISTICS FOR KEY MEASURES OF
PROFITABILITY IN BASELINE AND WITH REGULATION
           BY FIRM SIZE CATEGORY:
         REGULATORY ALTERNATIVE 26
Measure of
Profitability/
Summary Statistics
Return on sales
Mean
Minimum
Maximum
Return on assets
Mean
Minimum
Maximum
Return on equity
Mean
Minimum
Maximum
Baseline
Small
firms

5.39
-21.55
28.51

8.80
-47.07
62.35

25.58
-179.83
664.00
Large
firms All firms

5.23 5.34
-77.92
17.36

5.57 7.84
-149.27
24.55

8.40 20.40
-262.42
88.91
With
Small
firms

5.34
-46.53
28.98

9.37
-45.56
60.60

28.31
-185.71
662.91
regulation
Large
firms All

5.21
-68.32
17.36

5.40
-140.37
26.15

8.27
-246.77
94.77

firms

5.30



8.20



22.30


                    6-37

-------
                                     TABLE 6-29

                   WITH-REGULATION BANKRUPTCY PREDICTION
                                   BY FIRM SIZE:
                           REGULATORY ALTERNATIVE 26
 All Companies

  Bankruptcy
   Likely
                            Firm Size Based on Employment
                                       (1989)
Z'-Score
Prediction*
Small
(<750)
Percent
Change
Large
(>750)
Percent
Change
Percent
Total Change
0.0
-16.7
14
-6.7
Indeterminant
Bankruptcy
Unlikely
59
82

5.4
-3.5

38
20

18.8
-20.0

97
102

10.2
-7.3

•Bankruptcy prediction is based on Altman's Z'-score for manufacturing companies. If a
company's Z'-score is < 1.23, the model predicts that bankruptcy is likely. If a company's Z'-
score is > 2.90, the model predicts that bankruptcy is unlikely.  Z'-scores between 1.23 and 2.90
fall in the indeterminant range, and the model makes no prediction for these companies.
                                       6-38

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the number unlikely to become bankrupt, while the large category shows only a 3.5 percent
decline after imposition of the regulation.
63    SUMMARY AND CONCLUSIONS

       The financial and market model analyses use different methods to examine the impacts
on small entities. The financial model compares the number of closures and the losses in jobs,
shipments (tonnage and value), and exports and changes in financial ratios.  The market model
also examines the number of closures and job losses, and includes an analysis of profitability and
bankruptcy impacts.

       Both approaches provide consistent results.  Using the number of employees  at a
company to define size (as used by the Small Business Administration), small entities are not
more severely affected than large entities.  Very small companies show the least amount of
impacts and, as indicated by  the market model analysis,  large companies generally are more
severely affected than small ones.  Using the number of employees at a facility to define size
provides a more conservative analysis.  In the financial model, only one very small facility that is
also a very small company is adversely affected by the regulatory alternatives. There is one
parameter (exports) where small facilities show greater proportional impacts but there are several
parameters where large facilities show greater proportional impacts (closures, shipments, and
employment).

       In general, there is no consistent pattern of disproportionate impacts on small entities.
The  results indicate the regulatory alternatives do not cause a significant impact  on a substantial
number of small entities.  This conclusion is reached for all definitions of small  entity used in
both analytical models.
                                           6-39

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                                   APPENDIX A;
              MARKET IMPACT METHODOLOGY AND MODEL
A.1    INTRODUCTION AND OVERVIEW OF APPROACH

       The U.S. Environmental Protection Agency's (EPA's) Office of Air and Radiation
(OAR) and Office of Water (OW) are developing regulations to control the release of air and
water pollutants that result from manufacturing pulp and paper. The OAR contributes to the
regulatory development effort by providing analyses and supporting documents that describe the
likely economic and financial effects of the proposed guidelines on the regulated community and
other entities of interest.

       Generally, when evaluating the economic impact of regulations, the EPA may consider
estimates of the impact on the following types of variables for the economic impact analysis:

       •     Facility-level impacts:
             —     costs (capital and annual operating)
             —     closures                                   *
             —     employment
             —     production
       •     Market-level impacts for selected products:
             —     product price changes
             —     production changes
             —     consumption changes
             —     changes in imports
             —     changes in exports

       Further, the Agency must also consider the requirements of E.O. 12291.  That Order
requires a Regulatory Impact Analysis (RIA), which is essentially a benefit-cost  analysis,  of all
"major" regulations. The Order defines "major" as any regulation having annual costs of over
$100 million, causing significant  changes in costs or prices, or resulting in significant market
                                         A-l

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disruptions. Also, under the Regulatory Flexibility Act the Agency must provide a Regulatory
Flexibility Analysis (RFA) of the effects on small entities if a "substantial" number of these
entities are significantly affected. If an RFA is prepared, the Agency must also make a special
effort to design the regulation to address the effects of the regulation on small entities.

       The total number of mills directly and indirectly affected by these regulations depends on
the policy options  considered, but the number will be some subset of the U.S. mills included in
the EPA's 1990 National Census of Pulp, Paper,  and Paperboard Manufacturing Facilities.1

       The key challenge facing the designer of the analytical approach for addressing the
economic impact of regulations on the pulp and paper industry is how to integrate facility-level
impacts with the market(s) for their outputs in  a realistic and conceptually correct manner.  This
task is complicated by the complex production relationships and the degree of product
differentiation that characterize the pulp and paper manufacturing  industry.  Despite these
complexities, we developed an economic model that assesses product market responses for 37
markets and facility-level impacts on 338 directly and 228 indirectly affected mills within the U.S.
pulp and paper industry.

       The model is a multidimensional Lotus  spreadsheet incorporating various  data sources to
provide an empirical characterization  of the  U.S. pulp and paper industry and product markets
for a base year of  1989. This base year of analysis was chosen because it is the last year for
which facility-specific production and technical data were available  from the 1990 National
Census and for which supporting economic data were readily available.  The model analyzes
market adjustments for 31 paper and paperboard product markets and 6 market pulps.
Integrated facilities and paper-making facilities  constitute those facilities supplying final paper
and paperboard products, while the pulp mills and those integrated mills  involved in the market
for pulp, cither as  a supplier or dcmandcr, constitute those facilities included in the model for
market pulps.  The model also includes a foreign trade sector with  imports and exports for each
paper and paperboard product and market pulp.
       The exogenous shock to the economic model is the imposition of the regulations and the
corresponding control costs (i.e., the installed capital and per-unit output operating and

                                           A-2

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maintenance [O&M] exists of the regulatory alternative).  We annualized the installed capital
costs of the controls for each facility using firm-specific costs of capital from the 1990 National
Census of Pulp, Paper, and Paperboard Manufacturing Facilities.  The annualized installed capital
costs enter the model at the facility-level, while the per-unit output O&M costs enter at the
product-level for all facilities affected by the regulatory alternative.

       We obtained model parameters and supporting data from the EPA's 1990 National
Census of Pulp, Paper, and Paperboard Manufacturing Facilities, industry data sources, and
econometric estimation.  Specification and parameterization of facility-specific, upward-sloping
supply curves for each product allow the model to take facility-specific reactions to the regulatory
costs (shifts in facility-level supply curves aggregated to the market level) and determine new
equilibria in all product markets.  Facilities may cease to produce  a particular product by closing
a product line, which is determined  by the shutdown point on the supply curve, or they may stop
production altogether by closing the entire facility, which is determined by comparing total
revenues and total costs (including regulatory control costs) at the facility level.

       We incorporated a competitive market structure to compute the equilibrium prices and
quantities of all commodities in the system. Demand for the "final" commodities in the system-
that is, commodities whose demand is exogenous-is expressed in equation form.  Domestic .
demand elasticities are econometrically estimated for all paper and paperboard products.
Domestic demand  for market pulp is derived  from paper and paperboard production decisions
via fixed input coefficients or purchased input ratios, which determine the amount of market
pulp needed to produce paper or paperboard  at each facility.  Similarly, import supply and
export demand are expressed in equation form with derived estimates of import supply and
export demand elasticities.  The model analyzes market adjustments for 31 paper and paperboard
product markets and for 6 market pulps by employing a process of tatonnement whereby prices
approach equilibrium  through successive correction via a Walrasian auctioneer.  To our
knowledge  this empirical model is the  only one that integrates the facility and market in a
conceptually correct manner that addresses multiple products and  derived demand relationships.
       The major outputs of this model arc market-level adjustments in price and quantity for
all affected products as well as facility-level adjustments in production, including product-line or

                                           A-3

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facility closures.  We estimated impacts on foreign trade through comparing baseline and with-
regulation levels of exports and imports of affected products.  We used the market adjustments
in price and quantity to calculate the changes in the aggregate economic welfare using applied
welfare economics principles.  The net change in economic welfare associated with the regulation
is measured by consumer and producer surplus changes.

       In addition, we also computed the changes in employment attributable to the change in
output from mills. The change in output results from both changes in production at the affected
facilities and facility and product-line closures.  We computed worker dislocation costs given the
industry employment losses based on the method  outlined in Anderson and Chandran.2
A.2    FEATURES OF THE PULP AND PAPER INDUSTRY

       For this analysis, a paper or paperboard product is formed by two processes:  pulping-
bleaching and papermaking.  As seen in Figure A-l, pulpwood is the raw material input into the
pulping process, which results in pulp that may or may not be bleached depending on its final
end use.  Chemical pulping and bleaching processes and secondary wastewater treatment are the
three major processes the regulations will affect. Air and water pollutants resulting specifically
from wood preparation or papermaking processes are not addressed by the regulations or this
analysis;  however, this analysis is capable of including these activities.
       A.2.1  Pulp Production Processes

       Pulp can be manufactured by a variety of processes that separate the wood into its cell
components.  Important pulping processes are

       •      Chemical
       »      Semichemical
       •      Mechanical
                                          A-4

-------
                   Pulpwood
                Pulping Process
     Unbleached
         Pulp
                                                Secondary Fibers
                                                   i
                               Bleaching Process
Bleached
  Pulp
 Bleached
Secondary
   Fiber
Unbleached
 Secondary
   Fiber
                         Papermaking Process
                             Paper Product
Figure A-l Paper production process
                                   A-5

-------
        •      Thermomechanical, chemimechanical, and cheraithermomechanical
        »      Bleaching and brightening

 Each process imbues the final product with special characteristics according to the relative
 balance of the components remaining in the pulp. The characteristics affect the quality of the
 pulp, thus dictating its end use and, in turn, influence the quality of the paper or board
 produced. In addition, pulps may or  may not undergo a further bleaching or brightening process
 after manufacturing.
       A3..1.1 Chemical Pulping Method

       Chemical pulping methods involve a chemical reaction between the lignin and the active
 chemicals in the pulping liquor. Kraft (or sulfate) and sulfite are two chemical processes that use
 different chemicals and produce pulps with slightly different characteristics.  Kraft pulping first
 cooks the chips in a mixture of sodium hydroxide and sodium sulfide (white liquor); the
 procedure is halted before the pulp is completely delignified. The mixture is then separated into
 vapor, liquid, and pulp. Next the pulp is washed and may be bleached. Finally, chemical and by-
 product recovery is employed to convert used chemicals, tall oil, and turpentine into reusable
 inputs or products.  Both hardwoods and softwoods can be used in the kraft process, and it
 produces a very strong pulp that can be combined with weaker pulps.

       The sulfite pulping process is similar to the kraft process in that both processes use
sulfur-based chemicals to remove lignin from the wood. The difference between sulfite  and kraft
pulping is that the. alkaline  white liquor is replaced with an acidic  liquor made of sulfurous acid
and the bisulfate ion. Fiber furnishes used in this process include  softwoods such as spruce, fir,
and hemlock.  The primary advantage of the sulfite method is that it produces a pulp with a
lower residual lignin content.  As a result, sulfite pulp is easier to  bleach and requires fewer
bleaching steps, making it better suited for papermaking applications.  However, the lower
residual lignin content causes sulfite pulp to be weaker than kraft  pulp because the  chemical
recovery stage of the sulfite process is less thorough than that of the kraft process.
                                          A-6

-------
       The economic feasibility of chemical recovery is ultimately determined by the cost of the
initial compounds. Calcium (limestone)-based reactions do not generally involve recovery phases
because the cost of recovery exceeds the cost of purchasing new calcium.  On the other hand,
magnesium-based reactions are followed by recovery because magnesium recovery is less costly
than acquiring fresh magnesium.
       A.2.1.2 Semichemical Method

       Semichemical pulping combines aspects of chemical and mechanical treatment to pulp
hardwoods.  Chips are first softened and partially delignified by using chemicals and steam and
then pulped by mechanical action.  The primary method of Semichemical pulping is the neutral
sulfite method. In this method, wood chips are cooked in a neutral solution of sodium sulfite
and either sodium carbonate or sodium hydroxide.  The extent of chemical delignification is
determined by the length of cooking and chemical concentration.  After partial chemical
delignification, the furnish is then subjected to further nonpressurized mechanical delignification.
       A.2.1.3 Meqhanical Methods

       Mechanical pulping involves either shredding unchipped pulpwood with a grindstone or
fiberizing wood chips with a specially designed refiner.  Mechanical pulping is used primarily for
softwoods, although variations of the mechanical process have been devised to allow mechanical
pulping of hardwoods.  The mechanical pulping process simply rips loose the bond that lignin
creates, but the lignin remains attached to the cellulosic fibers. As a result, mechanical pulp is
highly opaque, making it suitable for uses such as newsprint.  However, mechanical pulp
produces low strength paper that yellows easily, and the process is highly energy intensive.  Two
variations of mechanical pulping are commonly used:  stone groundwood and refiner
groundwood.

       The stone groundwood process mechanically grinds bolts of lumber (uniformly sized,
debarked logs) against a grinding stone to separate fiber from lignin.  The stone is then cleaned
                                            A-7

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 with water to recover the pulp, the resulting slurry is screened to remove oversized pieces, and
 finally water is removed. The stone groundwood method produces short strands of pulp, which
 accounts for the pulp's weakness. Refiner processing replaces the grinding stone with a pair of
 discs and is designed to generate longer, stronger strands of pulp fiber.  Grooved discs spinning
 against each other in opposite directions effectively shred the pulp instead of grinding it.  The
 main disadvantage of refiner pulping is that it produces a darker pulp that is more difficult to
 bleach than stone groundwood pulp.
       A2.I.4 Thermomechaniccd, Chemimechanical, and Chemi-thermomechanical Pulping
              Processes
       Thermomechanical pulping is a fourth pulping process.  In this method, steam is used to
soften the fibers before shredding. The chips are presteamed or refined in one or more stages of
pressurized refining or followed by atmospheric refining. Following the brief cooking process,
the pulp is mechanically defibrated in refiners. Thermomechanical pulping, which produces pulp
of low strength but higher than the groundwood and refiner mechanical processes, is used for
products such as newsprint, publication papers, and fiberboard.

       Another pulping process is chemimechanical pulping, which produces a pulp of slightly
higher strength than thermomechanical pulping. The method allows hardwoods to be pulped
mechanically by first subjecting the wood to a chemical softening stage. Two major processes are
used:  the chemigroundwood process and the cold soda process.  Chemigroundwood processing
cooks bolts of timber in an alkaline sulfite solution prior to mechanical grinding.  The sulfite
solution softens the fiber to make it more responsive to the grinding stone.  Cold soda
chemimechanical processing uses a caustic soda to soften wood chips at room temperature.  The
chips are then pulped by the mechanical refiner method. Chemimechanical pulping is similar to
scmichemical pulping, but the semichcmical pulping process employs a chemical stage to partially
dclignify the furnish, whereas the chemimechanical method relies exclusively  on mechanical
dclignification.  Chemical treatment in the chemimechanical process is only a means of preparing
the furnish for mechanical delignification; the semichemical process supplements mechanical
dclignification with chemical dclignification.
                                          A-8

-------
       Chemi-thermomechanical pulping employs chemicals and heat to break down the chips,
followed by mechanical defibration.  The wood is cooked in a chemical liquor of sodium sulfite
and sodium carbonates at elevated temperatures to prepare it for defibration.  Some paper
products produced from this type of pulp are newsprint, tissue, and board.
       A2.1J5 Bleaching and Brightening

       Bleaching may be an additional process added to any of the pulping methods described
above. Bleaching is a means of whitening pulp and involves further delignification as well as
alteration of chromophoric compounds present in the pulp fiber. Bleaching permanently alters
the pulp by removing lignin. Thus, in addition to whitening the pulp, bleaching increases the
longevity of whiteness and retards discoloring in the final product.  The main disadvantage
associated with bleaching is that lignin removal weakens the pulp. The bleaching process can be
either single stage or multi-stage, depending on the desired color of the final product. The
following five procedures are generally used in bleaching:  chlorine, chlorine dioxide,
hypochlorite, peroxide, and ozone.  The order in which the steps occur varies and is determined
by the degree of delignification  required, the wood  type, and the pulping process used.

       As Figure A-l shows, secondary fibers may also  be used as inputs to the bleaching
process and papermaking process.  Secondary fibers are any type of fiber obtained from
wastepapers and other used, reclaimable fiber sources.

       Brightening, the alternative and the  complement to bleaching, involves altering only the
chromophoric compounds present in the pulp. No  delignification occurs. As a result, the
brightening process is less damaging to the  strength of the pulp, but the whiteness of the pulp
lasts only temporarily, and exposure to the sun yellows brightened pulps easily.
                                           A-9

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       A.2.2 Paper Production Processes

       The papermaking process uses pulp as an input to produce paper and paperboard
 products. The process begins with refining, which mechanically cuts and macerates pulp to
 convert raw fiber into a form suitable for papermaking. Pulps also may be mixed with other pulp
 types to enhance strength or other characteristics.  Additives to impart certain characteristics  may
 be added, and then the stock, or furnish, is pumped to the paper machine.

       Three basic steps occur in paper and paperboard production:

       1.     A web of fiber is formed from a fiber and water suspension on a paper machine
              wire.
       2.     Water is pressed out of the web.
       3.     The remaining water is driven off by heat.

A variety of machines make paper, but  the two most common are the fourdrinier and cylinder
machines. The fourdrinier  machine typically is used  for manufacturing a variety of paper grades
and lightweight bonds and the cylinder machine for multi-ply paperboard or building board
grades.

       Each paper or paperboard product may be  made using some combination of bleached  or
unbleached pulps and secondary fiber depending on the desired characteristics of the final
product.  These combinations are very closely related-the pulpwood input (hardwood or
softwood) requires a particular pulping  process that results in a certain  type of pulp, which may
or may not require bleaching to obtain the brightness required  for the final product.  For
example, the "recipe" for uncoated free sheet might call for 80 percent  kraft pulp (from the kraft
pulping process) and 20 percent groundwood pulp (from the mechanical pulping  process) with
each type of pulp bleached with a particular bleaching sequence.
                                          A-10

-------
       A.2.3  Producers

       The pulp and paper industry is characterized by both nonintegrated and vertically
integrated mills. Vertically integrated mills rely mostly on their own production of pulp to
produce paper and paperboard products, while nonintegrated mills include pulp mills that
produce market pulp as well as paper mills that purchase market pulp to produce paper and
paperboard products.  Mills producing low-value products are usually integrated, and mills
making specialized, high-value products are usually nonintegrated.  Those vertically  integrated
mills without enough internally produced pulp are also demanders  of market pulp; those mills
that produce an excess supply of pulp are suppliers of market pulp.

       A mill is defined as a single physical entity with a unique geographic location that
includes one  or several production lines. A mill may have several parallel decision-making units
in place at once, reflecting the decision-maker's choice to produce multiple outputs. For this
study, three types of mills exist for producing pulp and paper:  pulp mills, paper mills, and
integrated facilities. Their total number and distinguishing characteristics are as follows:
              Pulp mills (28)—mills engaging solely in the production of pulp to be sold on the
              pulp market for use as an input in the production process of a paper or
              paperboard product. Pulp mills include mills producing pulp from both virgin
              fiber as well as secondary fibers such as recycled paper, rags, linters (cottonseed
              fiber fuzz), and straw.
              Paper mills (303)—mills producing paper and paperboard products from market-
              purchased pulp produced from pulp mills and integrated mills.  Paper mills
              include makers of all paper and paperboard products in the National Census that
              do not produce their own pulp on-site but may repulp secondary fiber as an input
              to production.
              Integrated  mills (235)—mills  producing not only final products but also  the pulp
              required to manufacture these products. Also included are mills that have some
              production lines devoted to paper production and others devoted to market pulp
              production (a mill that is both a pulp mill and a paper mill but that does not use
              the pulp produced on-site as  an input to the on-site paper production).3
       This categorization of mills divides them only according to whether they engage in market
activities to meet their input needs; it does not discriminate according to facility size.  Hence, this
                                           A-ll

-------
definition does not imply that an integrated facility is necessarily larger than a pulp facility;
however, in reality the integrated mill may dwarf the pulp mill.  This characterization refers to
each mill's evaluation of the relative costs of purchasing or manufacturing their input; integrated
mills produce their input rather than purchase it, whereas nonintegrated facilities rely on the
market to meet their input demand.
       A.2.4 Products and Markets

       The analysis described in the following sections accounts for all marketable commodities
involved in producing pulp and paper.  The first marketable product is pulp, either bleached or
unbleached, and the second marketable product is the final paper or paperboard product. An
additional marketable commodity is secondary fiber.  All of these products are consumed and
produced domestically, as well as traded internationally.  Therefore, domestic  producers export
some pulp and paper products to other countries, and foreign producers supply their pulp and
paper products to U.S. markets. This section includes tables and figures on value, quantity, and
price trends over the past decade for aggregate products (i.e., market pulp, paper, and
paperboard).

       Domestic quantity and value shipped for pulp products from 1981 to 1989 are shown in
Table A-l (see Figures A-2 and A-3). In 1989, the domestic shipments of pulp products were
valued at $7.4 billion, which was an increase of 115 percent over the pulp shipment value in
1981. As shown in Table A-l and Figure A-2, the quantity of pulp shipped grew fairly steadily
over the 9-year period, reaching 11.4 million tons in 1989.  The average price for pulp per ton
was approximately $645 (see Table A-l).  Aggregate prices per ton  for pulp, paper, and
paperboard  products are shown in Figure A-4. Special Alpha and dissolving woodpulp products
had the highest estimated  price per ton at $735.33. Bleached sulfate pulps were close to  average
for all pulps with a price of $646 per ton.  Lower end pulps included unbleached sulfate, $384
per ton, and unbleached secondary fiber, $417 per ton.
       Table A-2 shows domestic quantity and value shipped for paper products from 1981 to
1989 (see also Figures A-2 and A-3). Total paper products in 1989 were valued at $33.3 billion;
                                          A-l 2

-------
                                   TABLE A-l
                 U.S. PRODUCTION OF PULP:  1981-19394's' 6'7> 8
Year
Quantity Shipped Short
         Tons
Value Shipped (S103)
Price/Ton
1981
1982
1983
1984
1985
1986
1987
1988
1989
       8,259,272
       8,581,831
       9,359,292
       9,927,473
       9,952,129
      11,132,855
      11,575,838
      11,553,220
      11,423,483
     3,424,840
     3,238,794
     3,252,707
     4,001,373
     3,686,080
     4,017,736
     5,135,618
     6,494,338
     7,369,559
 414.67
 377.40
 347.54
 403.06
 370.38
 360.89
 443.65
 562.12
 645.12
                                          A-13

-------

    40,000,000 -•
    35,000,000 --
    30,000,000
    25,000,000 •-
    20,000,000 -
    15,000,000 • •
10,000,000 j
5,000,000 "
o-
	 	 • 	 • 	 •-
l 	 • 	 •


| 	 1 	 1 	 1 i i
1981 1982 1983 1984 1985 1986
Year

	 • 	 Market Pulp D Paper products


I 	 1 	 1

1987 1988 1989

A ,
" Haperboard Products
Figure A-2 U.S. quantities shipped of pulp, paper, and paperboard products:  1981-1989
                                          A-14

-------
   35,000,000  -r



   30,000,000  ••




   25,000,000  --




o  20,000,000
r~

-------
1
900.00 j
800.00 --
700.00 +
600.00
500.00
400.00
300.00
200.00 --
100.00 -•
  0.00
      1981
                  1982
1983
1984
1985
Year
1986
1987
1988
1989
           ' Market Pulp
                                    Paper Products
                                        ' Paperboard Products
 Figure A-4.  Price per ton for U.S. pulp, paper, and paperboard products:  1981-1989
                                         A-16

-------
              TABLE A-2

U.S. PRODUCTION OF PAPER PRODUCTS:
           1981-19899'10'11'12'13
Year
Total Paper
1981
1982
1983
1984
1985
1986
1987
1988
1989
Printing and
1981
1982
1983
1984
1985
1986
1987
1988
1989
Quantity Shipped Short
Tons
Products
29,815,913
30,150,893
32,205,274
32,989,205
32,317,371
34,859,400
36,133,517
38,005,856
38,073,553
Writing Paper
20,790,643
20,986,247
22,662,033
23,924,514
23,514,596
25,448,416
26,799,576
27,948,521
27,878,961
Value Shipped
(S103)

19,607,188
20,157,769
21,399,481
24,271,824
23,550,366
25,782,800
26,835,126
31,719,331
33,302,931

13,339,811
13,553,318
14,504,942
17,135,025
16,661,865
17,671,871
19,090,537
22,833,368
23,334,857
Price/Ton

657.61
668.56
664.47
728.72
739.62
739.62
742.67
834.59
874.70

641.63
645.82
640.05
708.58
694.42
694.42
712.34
816.98
837.01
Packaging and Industrial Converting Paper
1981
1982
1983
1984
1985
. 1986
1987
1988
1989
4,994,353
4,873,388
5,096,948
4,975,517
4,686,169
4,642,574
4,437,607
4,874,730
4.743,575
2,717,212
2,766,858
2,917,972
3,118,102
2,836,997
2.898,312
3,173,890
3,746,612
3,910,349
544.06
567.75
572.49
605.40
624.29
624.29
715.23
768.58
824.35
                A-17

-------
 printing and writing paper products were valued at $23.3 billion, and packaging and industrial
 converting paper products were valued at $3.9 billion. In 1989, value of shipments increased
 almost 70 percent over 1981. The largest increase in growth was in the printing and writing
 papers sector, which increased almost 75 percent in 1989 over 1981.  Shipments of paper
 products in 1989 totaled 38.1 million tons. The average prices of paper products per ton from
 1981 to 1989 are compared with average prices for pulp and paperboard products in Figure A-4.
 The average estimated price per ton for paper products was $875 (Table A-2).  Printing and
 writing and packaging and industrial paper products had lower average values per ton:  $837 and
 $824, respectively. The two market segments had a lower average price per ton than the total
 paper market throughout the 9-year period.  Individual products with a higher price per ton than
 the average included cotton fiber writing paper, $2,040; special industrial paper, $1,718; and
 glassine, greaseproof, and vegetable parchment, $1,359. The lowest priced paper product was
 newsprint at $490 per ton.  Other paper products valued less than $700 per ton  included
 unbleached kraft packaging paper, shipping sack, and uncoated groundwood paper.

       Table A-3 shows quantity and value shipped  for paperboard products from 1981 to 1989
 (sec Figures A-2 and A-3). Total shipments  of paperboard were almost $16.3 billion, which
 represents an increase of 63 percent over the 1981 value.  As Figure A-2 and Table A-3
 illustrate, quantities shipped of paperboard dipped in 1982 and 1985 slightly but otherwise rose
 steadily over the  1981 to 1989 period, reaching 38 million tons in 1989. Paperboard products
 had a price per ton less than that of paper products  in 1989  at an average of $427 per ton (Table
 A-3 and Figure A-4). The lower value per ton for paperboard products is illustrated by the fact
 that in 1989 paperboard products accounted for approximately half (38 million tons) of all paper
 and paperboard products shipped but accounted for  only 33 percent of the value shipped. All of
 the bleached packaging and industrial paperboard products had a higher than average price per
 ton.  The highest average prices per ton for individual products were  molded pulp products,
51,196; folding carton boxboard, $721; and milk carton board, $719. Hardboard  and insulating
board had the lowest price per ton with $337 and $338, respectively.
                                          A-18

-------
                                  TABLE A-3
               U.S. PRODUCTION OF PAPERBOARD PRODUCTS:
                               1981-198914-1S> 16> "•18
Year
Quantity Shipped Short
         Tons
Value Shipped
    (Sio3)
Price/Ton
1981
1982
1983
1984
1985
1986
1987
1988
1989
      30,566,254
      28,912,522
      31,470,079
      33,514,510
      33,030,693
      35,613,237
      36,989,614
      37,762,521
      38,047,313
   9,993,099
   9,138,993
   9,738,689
  11,572,125
  10,562,943
  11,452,177
  13,531,922
  15,235,749
  16,256,939
 326.93
 316.09
 309.46
 345.29
 319.79
 321.57
 365.83
 403.46
 427.28
                                 A-19

-------
       A.2.5 Foreign Trade

       In 1989, the United States was a net importer of total pulp, paper, and paperboard
products.  Imports in 1989 totaled $10.2 billion. The majority of U.S. pulp imports come from
Canada and secondly Latin America.  The top three countries exporting paper and paperboard
products to the U.S. are Canada, Finland, and Sweden. In 1989 the U.S. exported approximately
$6.6 billion in pulp, paper, and paperboard  products. The two largest importing countries of
U.S. pulp products are Japan and Germany. Major importers of U.S. paper and paperboard
products are Canada, Japan, and the U.K.1'

       As shown in Table A-4 and Figure A-5, the U.S. was a net exporter of pulp products in
1989 and had been since 1986. In 1989, exports totaled $3.6 billion, approximately 48 percent of
the domestic value of shipments. Imports were 41 percent of the domestic value of shipments
and totaled almost $3.0 billion.  Total quantities of pulp exported and imported were about 6.4
and 5 million tons, respectively. Bleached and semi-bleached sulphate and soda woodpulp were
the pulp products imported and exported in the greatest amount.20

       The U.S. was a net importer of paper products in 1989,  as it was for the eight years prior
to 1989 (see Table A-5 and Figure A-6).  Exports  represent 3.6 percent of the domestic value of
shipments whereas imports  represent 20.7 percent. Imports to the  U.S. were mainly from the
printing and writing paper segment; newsprint was the number one imported paper product.
Imports of printing and writing paper were  over 27 percent of the domestic value of printing and
writing paper shipped. In 1989, major imports in the printing and writing group were newsprint
and uncoated groundwood paper.  Exports were led in this segment by newsprint and clay coated
printing papers.  In the packaging and industrial segment, imports were led by the glassine,
greaseproof, and vegetable parchment product group.  Shipping sack was the product exported in
the largest quantity.25
       Exports and imports of papcrboard products for 1981 to 1989 are shown in Table A-6
and Figure A-7. As with pulp, the U.S. is a net exporter of these products, exporting $1.7 billion,
or about 10 percent of the value of pulp shipments in 1989.  Imports were $3.3 million, or less
than 2 percent of the value of total pulp shipments.  However, by 1989 imports increased by a

                                         A-20

-------
                TABLE A-4




FOREIGN TRADE OF MARKET PULP: 1981-198$"'22
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
Export
Quantity
Short Tons
3,809,545
3,499,208
3,746,826
3,678,468
3,902,326
4,615,769
5,071,332
5,729,859
6,353,213
Export
Value
C$103)
1,746,506
1,486,885
1,431,827
1,565,493
1,425,560
2,073,541
2,350,742
3,026,445
3,613,114
Export
Price/Ton
458.46
424.92
382.14
425.58
365.31
449.23
463.54
528.19
568.71
Import
Quantity
Short Tons
4,086,698
3,655,786
4,093,436
4,490,081
4,465,746
4,581,760
4,850,238
5,038,158
5,004,366
Import
Value
(S103)
1,764,287
1,493,241
1,472,478
1,844,766
1,520,907
1,601,378
2,069,394
2,663,424
2,980,197
Import
Price/
Tons
431.71
408.46
359.72
410.85
340.57
349.51
426.66
528.65
595.52
                  A-21

-------
     4,000,000 --
     3,500,000 •-
     3,000,000 ••
     2,500,000 -•
1981
p
£
o
Q


2,000,000 -
L
1,500,000 -
1,000,000 -
500,000 -
n -
Jl^ ^X"^ ^^^
r~"^--^n ^^^-:* 	 r^^—-^^^


	 1 	 1 	 ! 	 1 	 1 	 1 	 1 	 1
                       1982
1983
1984
1985
Year
1986
1987
1988
1989
                                            Exports
                               Imports
Figure A-5  U.S. foreign trade of market pulp: 1981-1989
                                        A-22

-------
                   TABLE A-5




FOREIGN TRADE OF PAPER PRODUCTS:  1981-198923'24
Export Export
Quantity Value
Year Short Tons (SIO3)
Export
Price/
Ton
Import
Quantity
Short Tons
Import
Value
C$103)
Import
Price/
Tons
Total Paper Products
1981
1982
1983
1984
1985
1986
1987
1988
1989
1,008,409
840,445
773,760
810,933
779,000
883,768
921,419
1,102,489.
1,465,752
Printing and Writing
1981
1982
1983
1984
1985
1986
1987
1988
1989
Packaging
1981
1982
1983
1984
1985
653,777
554,274
496,690
509,723
517,211
582,909
588,865
714,503
1,102,998
846,775
679,069
599,557
632,493
594,337
642,728
776,226
988,031
1,233,526
Paper
494,310
325,423
325,423
353,889
333,223
379,825
452,732
608,521
822,549
and Industrial Converting
354,632
286,171
277,370
301,210
261,789
352,464
296,971
274,134
278,604
261.114
839.71
807.99
774.86
779.96
762.95
727.26
842.42
896.18
841.57

756.08
587.12
655.18
694.28
644.27
651.60
768.82
851.67
745.74
Paper
993.89
1,037.74
988.33
924.95
997.42
7,716,284
7,381,252
8,189,498
10,113,718
10,637,427
10,925,453
11,765,207
12,063,790
11,814,260

7,615,656
7,294,771
8,070,359
9,937,922
10,409,435
10,616,810
11,396,765
11,661,032
11,286,377

100,628
86,481
119,138
175,796
227,992
3,247,846
3,226,307
3,428,868
4,592,641
4,906,913
5,051,916
5,768,703
6,799,044
6,900,798

3,171,894
3,157,203
3,344,950
4,469,714
4,754,971
4,862,153
5,533,785
6,518,760
6,375,753

75,954
69,104
83,919
122,927
151,942
420.91
437.09
418.69
454.10
461.29
462.40
490.32
563.59
584.11

416.50
432.80
414.47
449.76
456.79
457.97
485.56
559.02
564.91

754.80
799.07
704.38
699.26
666.44
                      A-23

-------
TABLE A-5 (cont.)
Year
1986
1987
1988
1989
Export
Quantify
Short Tons
300,859
332,554
387,986
362,754
Export
Value
(Sio3)
262,903
323,494
379,510
410,977
Export
Price/
Ton
873.84
972.76
978.15
1,132.94
Import
Quantity
Short Tons
308,643
368,442
402,758
527,883
Import
Value
C$103)
189,763
234,918
280,284
525,045
Import
Price/
Tons
614.83
637.60
695.91
994.62
       A-24

-------
       7,000,000  •-

       6,000,000  ••

       5,000,000  ••

   £  4,000,000  -•
   (0
   I  3,000,000
   o
   Q  2,000,000

       1,000,000
1981 1982
-i 	 1 	 1 	 1 	 1 	 1 	 1
1983 1984 1985 1986 1987 1988 1989
Year
-I
B bxports D Imports

Figure A-6  U.S. foreign trade of paper products: 1981-1989
                                              A-25

-------
                TABLE A-6

FOREIGN TRADE OF PAPERBOARD PRODUCTS:
               1981-1980"-28
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
Export
Quantity
Short Tons
3,025,579
2,829,968
3,210,777
3,008,283
2,801,547
3,276,516
3,657,633
3,774,075
3,793,982
Export
Value
(Sio3)
1,233,162
1,075,284
1,118,478
1,157,019
991,898
1,211,020
1,504,195
1,713,375
1,749,159
Export
Price/Ton
407.58
379.96
348.35
384.61
354.05
369.61
411.25
453.99
461.04
Import
Quantity
Short Tons
528,658
536,165
645,069
742,272
600,667
. 621,093
670,279
663,456
723,211
Import
Value
(Sio3)
114,041
117,898
153,424
189,989
167,600
195,211
226,419
238,584
330,851
Import
Price/
Tons'
215.72
219.89
237.84
255.96
279.02
314.30
337.80
359.61
457.48
                 A-26

-------
  to
  "o
  0
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000  "
  800,000  "
  600,000  -•
  400,000
  200,000
        0
                                                                    -D-
1981     1982     1983    1984     1985
                                   Year
                                                          1986
                                                             1987
1988
1989
                                             Exports
                                                         Imports
Figure A-7  U.S. foreign trade of paperhoard products:  19H1-1989
                                         A-27

-------
greater percentage than exports over 1981 values. The total quantity exported in 1989 was
almost 3.8 million tons: the main products were milk carton board and linerboard. Imports
totaled 723,000 tons and were led by construction paper, unbleached kraft packaging and
paperboard, recycled paperboard, and semichemical paperboard.26
A.3    MODELING MARKET ADJUSTMENTS

       Implementing regulations to control air and water pollutants from pulp and paper
•manufacturers will affect the costs of production in the U.S. pulp and paper industry. As shown
in Section 4.2 of this report, the costs of the regulations will vary across the many different mills
in the industry, depending on the production processes currently employed. Mill-level
production responses to these additional costs will  determine the market impacts of the
regulations. Specifically, the cost of the regulations may induce some mills, or product lines
within mills, to close or to change their current level of production.  These choices affect, and in
turn are affected by, the market price for market pulp, paper, and paperboard products.

       This section examines the impact of the regulations that affect the production costs for
facilities in the U.S. pulp and paper industry.  It provides an overview of the basic economic
theory of the effect the regulations may have on facility production decisions and of the
concomitant effect on pulp, paper, and paperboard prices.

       An  economic impact analysis  should assess  the market-, facility-, small  business-, and
community-level impacts of proposed regulatory alternatives.  A variety of approaches may be
used to quantify and evaluate economic impacts;  they reflect a variety of underlying paradigms.
The neoclassical model provides the state-of-the-art paradigm for regulatory analysis and
establishes  the framework for subsequent empirical modeling. The paradigm appropriate for this
industry is described below.  It is based, in pan, on the industry profile information  presented in
Section 2 of this report and followed by the description of an integrated approach to
implementing the conceptual model.
                                           A-28

-------
       We employed standard microeconomics concepts to model the supply of pulp, paper, and
paperboard products and the impacts of the regulations on production costs and facility output
decisions. The three main elements of the analysis are regulatory effects on the manufacturing
facility, market responses, and facility-market interactions.
       A.3.1  Facility-Level Effects

       At any point in time, the costs that a firm faces can be classified as either unavoidable
(sunk) or avoidable. In the former category, we include costs to which the firm is committed and
that must be paid regardless of any future actions of the firm.  For instance, debt incurred to
construct a production facility must be repaid regardless of the facility's production plan and
even if the facility ceases operation prior to full repayment, unless the range of viable alternatives
includes  declaring bankruptcy by the owners.  The second category, avoidable costs, describes any
costs that are foregone by ceasing production.  These costs can be further refined to distinguish
between  costs that vary with the level of production and those that are independent of the
production level.  For example, production factors such as labor, materials, and capital (except in
the short run) vary with the level of output, whereas expenditures for facility security and
administration may be independent of production levels but avoidable if the facility closes down.
Determining both the avoidability and the variability of firms' costs is essential to the  analysis of
economic responses to the proposed regulations.

       Figure A-8 illustrates  the derivation of a facility supply function for a market pulp, paper,
or paperboard product from the classical U-shaped  structure of production costs with  respect to
output.  Let AVAC be the facility's average variable (avoidable) cost curve and ATAC the
average total (avoidable) cost curve for producing the product. The vertical distance between
ATAC and AVAC is the per-unit average cost of nonvariable avoidable costs, and it approaches
zero as the number of units of output increases. MC is the marginal cost of producing paper,
paperboard, or market pulp, which intersects AVAC and ATAC at their respective minimum
points. All these curves are conditional on input prices and the  technology in place at the
facility.
                                           A-29

-------
  $/q
   pm  _
Figure A-8  Product supply function at facility
                                       A-30

-------
       The facility supply function is the section of the marginal cost curve bounded by the
quantities qm and qM.  qM is the largest feasible production rate that can be sustained at the
facility given the technology and other fixed factors in place, regardless of the output price.  qm is
the minimum economically feasible production rate determined by the minimum of the AVAC
curve, which coincides with the price pm. Suppose the market price of paper is less than pm. In
this case, the firm's best response is to close the facility and not produce paper because P <
AVAC implies that total revenue would be less than variable costs if the facility operated at the
associated output levels below qm.

       The nature of the pulp and paper production process typically implies that the manager
prefers to operate the plant at full capacity when producing output. This may at first seem to
contradict the notion of the U-shaped cost structure discussed above;  however,  rather than being
logically  inconsistent, it is actually just a matter of what period of time is being considered in the
decision. We will describe the manager's decision  of whether  to operate at full capacity or not at
all as a very short run problem (daily or weekly), whereas the  decision of how much to produce
over a longer period of time (e.g., a year)  is an aggregation of these very short run decisions.

       Since our model uses a year as the time unit of observation, it is the  latter model we are
interested in.  In order for that model to be consistent with U-shaped costs, successive very short
run operating decisions must involve successively higher operating costs beyond a certain point.
The reason average variable costs, and thus marginal costs, might rise with the number of
production days per year is found in the law of diminishing marginal returns—the classic cause of
U-shaped cost curves in economic theory.  Beyond a certain level of operation (expressed  in
terms of duration of days or level of production), the marginal product of variable inputs to
production diminishes  given fixed plant and capital equipment. The corresponding marginal
costs therefore increase beyond that level of output or operating  days.

       In the case of the pulp and paper industry,  factors contributing to this notion of rising
marginal costs might include the increased likelihood of machine failure—and thus reduced
productivity—as less down-time is available for maintenance, the potential for raw material
                                           A-31

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shortages with less time to accumulate inventories, or reduced service lives of the physical capital
through higher rates of utilization, thus requiring more rapid replacement of the capital stock.

       Now consider the effect of the proposed regulatory control costs. These control costs fall
into one of two,categories: avoidable variable and avoidable nonvariable. We characterized
these proposed costs as avoidable because a firm can choose to cease operation of the facility
and thus avoid incurring the costs of compliance.  The variable control costs include the O&M
costs of the controls, and the nonvariable costs include  compliance capital equipment.

       The effect of these additional costs is illustrated in Figure A-9. The facility's AVAC and
MC curves shift upward (to AVAC1 and MC) by the per-unit variable compliance costs. In
addition, the nonvariable compliance costs increase total avoidable costs and thus the vertical
distance between ATAC and AVAC. The facility's supply curve shifts upward with marginal
costs, and the new (higher) minimum operating level (qml) is determined by a new (higher) pml.

       Now consider the effect of compliance costs on the derived demand for inputs at the
regulated facility. Paper and paperboard  manufacturing facilities are market demanders of pulp.
We can employ a similar neoclassical analysis to the one above to demonstrate the effect of
compliance costs on the demand for the market pulp input. Figure A-10 illustrates the paper
and  paperboard manufacturing facility demand function for market  pulp. Each point on the
derived demand curve equals the firm's maximum willingness to  pay for the corresponding
marginal input. This is typically referred  to as the input's value of marginal product (VMP),
which is equal to the price of the output (P) less the per-unit compliance costs (c) times the
input's "marginal physical product" (MPP), which is the incremental output attributable  to the
incremental input. Ignoring any effect on the output price for now, an increase in per-unit
compliance costs due to the regulations will lower the VMP of all inputs by the unit amount of
the additional compliance costs, leading to a downward shift in the derived demand curve in
Figure A-10 (a) from D,- to D';.
       The paper and paperboard manufacturing facility demand curve for market pulp is
downward sloping in this example, indicating that the marginal physical product of market pulp
diminishes as more  is used to produce paper and paperboard, and substitution possibilities exist

                                          A-32

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                                             MC'

                                             MC
                                            ATAC'
                                            AVAC1
                                            ATAC
                                            AVAC
                           qm qm'       qM
q/t
Figure A-9 Effect of compliance costs on product supply function at facility
                                  A-33

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 $/qv
$/q\
                                                                                 -Dy






                                                                                   1
                                      qy/t
                                     qy/t
      a) Without Fixed Input Coefficients
       b) With Fixed Input Coefficients
Figure A-10  Effect of compliance costs on derived demand for market pulp at regulated facility
                                           A-34

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 with other inputs.  If, as is assumed in this model, the input-output relationship between the
 market pulp and the final paper and paperboard product is strictly fixed, not only by product
 specification but also  by constant efficiency of use at all input levels, then the VMP of the
 market pulp is constant and the derived demand curve is horizontal with the constant VMP as
 the vertical intercept, as shown in Figure A-10 (b).

       The regulations will affect the costs of producing both market pulp and paper and
 paperboard products.  Because the markets are interrelated, paper and paperboard market prices
 and quantities will be affected by changes in the market price and quantity of market pulp and
 vice versa. These market linkages are described below.
       A3.2 Market-Level Effects

       For the purposes of this example, consider the relationship depicted in Figure A-ll
between the markets for a single paper or paperboard product, Q^ and a market pulp input, Qy.
Qy, along with other inputs, such as labor, energy, and chemicals, is used in the production of Qr
The competitive structure of the market is an important determinant of the regulations' effect on
market price and quantity.  Below we show the market effects under the assumption of perfectly
competitive  market structure for the pulp and paper industry.

       We assumed that prices for the respective commodities are determined  in competitive
markets (i.e., individual facilities have negligible power over the market price of the commodities
and thus take the price as "given" by the market).  Under perfect competition, market prices and
quantities  are determined by the intersection of market supply and demand curves.  A market
supply curve is the  sum of all facility supply curves, and a market demand curve is the sum of the
demand curves  for  all demanders of the commodity. The demanders of paper or paperboard
product, Qx, are final product consumers, and the demanders of market pulp, Qy, are the
individual  facilities  that purchase market pulp for producing paper and paperboard  products.
Without the proposed compliance costs, the  market quantity and price of paper or paperboard
product, Qx (Q^, P^), are determined by the intersection of the market  demand curve (DJ and
                                          A-35

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                       $/Qx
                        Px1
                        PxO
                                                                               Dx
                                                            Qxi  Qxo

                                 (a) Market for Paper or Paperboard Product, Qx
                       $/Qy
                        Py2
                        Pyo
                        P/1
Qx/t
                                                Qy1 Qy3 Qy2      QyO


                                            (b) Market for Pulp, Qy
Qy/t
Figure A-ll   Market equilibria with -and without compliance costs
                                               A-36

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the market supply curve (S J, and the market quantity and price of market pulp, Qy (Qyo, Pyo), are
determined by the intersection of the market demand curve (Dy) and market supply curve (Sy).

       Imposing the regulations increases the costs of producing pulp and, thus, paper and
paperboard, shifting the market supply function for both commodities upward to S'x and S'y,
respectively (see Figure A-ll).  The supply shift in the market for paper and paperboard
.products causes the market quantity of each to fall to Qxl and the market price to rise to P^ in
the new equilibrium.  In the market for pulp, the drop in the market quantity is unambiguous;
however, the direction of the change in the market price can only be determined if we know the
relative magnitudes of the demand and supply shifts.  If the downward demand effect dominates,
the price will fall (e.g., P^), if the upward supply effect dominates, the price will rise (e.g., P^),
and if the effects just offset each other, the price remains unchanged (e.g., Py3  = Pyo).

        The sign (positive or negative) of the effect of these market adjustments on commodity
prices and quantities  is summarized in Figure A-12; the magnitude of these effects is an
empirical matter. The supply shifts for market pulp, paper, and paperboard cause the market
price to rise and market quantity to fall  for these commodities at the new equilibrium.  However,
the downward shift in the demand curve for market pulp will have an offsetting effect on price
leaving the total effect ambiguous, while exacerbating the effect on quantity resulting in an  even
lower quantity produced.  In both cases, the producers that are unaffected by the  regulations
 receive the higher price for  their products without the associated increase in compliance costs
and thus increase their production levels.

        Alternatively, if production cost  savings are attributed to implementing pollution controls,
 downward supply shifts for market pulp and paper and paperboard products and  upward shifts in
 the demand curve for market pulp are possible.  The downward supply shifts will cause the
 market price to fall and market quantity to rise for these commodities at  the new equilibrium, as
 displayed in Figure A-13. However, the upward shift in the demand curve for market pulp will
 have an offsetting effect on price, leaving the total effect ambiguous, while exacerbating the
 effect on quantity,  resulting in  an even higher quantity produced.  In this scenario, the producers
 that are unaffected by the regulations receive  lower prices for their products and thus reduce
 their production levels.
                                            A-37

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                      Quantity
                  Increase    Decrease
      Increase
  Price
     Decrease
Yes
Yes
Yes
Yes
                 a) Market Pulp
                                                  Quantity
                                              Increase    Decrease
Increase
                               Price
                                                    Decrease
                                                                  No
                                               Yes
                                                           Yes
                                               No
                                  b) Paper and Paperboard Products
Figure A-12  Market adjustments for market pulp, paper and paperboard products
                                        A-38

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                    $/Qx
                      Bco
                                                                           Dx
                                                         Qxo Qxi

                              (a) Market for Paper or Paperboard Product, Qx
                    $/Qy
Qx/t
                                                                           Dy
                                                        QyO       Qyt


                                         (b) Market for Pulp, Qy
Qy/t
Figure A-13   Market equilibria with and without compliance costs:  cost savings attributed to
               regulation
                                                A-39

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        A33  Facility-Level Response to Control Costs and New Market Prices

        In evaluating the market effects for pulp, paper, and paperboard products, we must
 distinguish between the initial effect of-the regulations and the net effect after all markets have
 adjusted. Initially, assuming no production cost savings attributed to the pollution controls,  all
 affected facilities' supply curves for market pulp, paper, and paperboard shift upward by the unit
 variable costs of the regulation. As a result, all affected facilities' derived demand curves for
 market pulp shift downward by the unit variable control costs.  However, the upward shift in the
 industry supply curves for paper and paperboard pushes up the prices of those commodities,
 which subsequently raises the VMP of the market pulp and, thus, puts upward pressure on the
 derived demand for that commodity.  In general, the initial upward shift in supply at the facility
 will be greater than the subsequent increase in market price so that the mill reduces supply  of
 market pulp, paper, or paperboard. The initial downward  shift in demand will typically dominate
 the subsequent upward shift so that the net shift is downward and the mill reduces demand  for
 market  pulp.  However, determining which shift dominates for a particular mill is difficult:  it
 depends on  the relative magnitude of the facility-specific unit variable costs of the regulation and
 the changes in market prices.

       Given changes  in market prices and costs, mills will elect to either
              Continue to operate, adjusting production and input use based on new revenues
              and costs, or
              Close the facility if revenues do not exceed total avoidable costs.
This decision can be extended to the multi-product  facility where product lines may be closed if
product revenues are less than product-specific avoidable costs, and the entire facility may be
closed if total revenues from all  products (market pulp, paper, and paperboard) do not exceed
facility-specific avoidable costs.
       Thus, after considering the interaction of facility and market forces, we can derive the
production responses at each individual facility. The facility-level output effects can be
aggregated by mill type (pulp, paper, or integrated) to assess the distribution of production

                                           A-40

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changes across different segments of the industry.  Facility output effects can also provide
information on the employment impacts of the proposed  regulations.

       This approach to modeling the facility closure decision is based on conventional
microeconomic theory.  It compares the ATAC—which includes all cost components that fall to
zero when production discontinues—to the expected post-regulatory price.  Figure A-9 illustrates
this comparison.  If price falls below the ATAC, total revenue would be less than the total
avoidable costs.  In this situation, the owner's cost-minimizing response is to cease production.

       An additional aspect of the  facility-level impacts is the quantity adjustments. Changes in
costs will  change producers' output rates. However, some of this effect is mitigated when prices
are increased. Of course, facility and product-line closures directly translate into quantity
reductions.  However, the output of operating facilities will also change as will supply from
foreign sources.  Affected facilities  that continue to produce may increase or decrease their
output levels depending on the relative magnitude of the  unit variable control costs and the
changes in market prices. Unaffected facilities will not face an upward shift in their product
supply curves, so their response to higher product prices is to increase production.  This response
is illustrated in Figure A-14 as an upward movement along the facility's supply curve for the
product.  Foreign producers, which do not incur higher production costs because of the
regulations, will  respond in the same  manner as these unaffected U.S. mills.

       As mentioned earlier, if production cost savings are attributed to pollution control
measures at a facility, the facility's product supply curve will shift downward.  This  response is
illustrated in Figure A-15.  The facility will enjoy lower costs of production because of the
regulations  and will  respond by increasing production, given current market prices. In addition,
recall that facility and market forces interact to determine the ultimate market adjustments and
facility responses. The changes in the price of market pulp, an input  into the production of
paper and paperboard, will also affect the supply curves of facilities that produce paper and
papcrboard (i.e., paper mills and integrated mills that purchase market pulp).  These indirectly
affected mills will face upward shifts  in product supply curves if market pulp prices increase—a
result similar to mills facing  increased production costs due to the regulations.  Further,
                                             A-41

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  $/q
  pm
                                                             ,M
                                                                            Qi/t
Figure A-14  Movement along the product supply function
                                      A-42

-------
         $/q
  p* _
         pm
                               «m
                                                *      *
Figure A-15 Shift downward in the product supply function
                                        A-43

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indirectly affected mills will face downward shifts in product supply curves if market pulp prices
decrease—a result similar to mills facing decreased production costs due to the regulations.

       The approach described above provides a comprehensive view of the effect of the
regulations on responses  at the facility level as well as the corresponding effect on market prices
and quantities for the affected commodities. This approach is a substantial improvement over
analytical methods that do not account for facility-level responses such as quantity adjustments,
input adjustments, and closure of product lines or methods that ignore the effect of these
regulations on market prices when determining the change in revenues and costs at the facility
level. Methods that do not allow for production adjustments at the facility level essentially
assume that firms cannot or will not adjust to changes in production costs.  No credible model
for changes in market prices exists unless it accounts for responses at the facility level.  In reality,
firms do respond to market conditions and market price changes respond to regulations.
A.4    OPERATIONALIZING THE MODEL
       To estimate the 'economic impacts of the regulations, we operationalized the competitive
market model of the pulp and paper industry outlined above. The purpose of the model is to
provide a structure for analyzing the economic impact of regulations to control the release of air
and water pollutants from chemical pulping and bleaching operations.

       The  model is a multi-dimensional Lotus spreadsheet incorporating the facility-specific
information on production obtained from the EPA's 1990 National Census of Pulp, Paper, and
Paperboard Manufacturing Facilities and model parameters characterizing domestic and foreign
(export)  demands as well as foreign supply (imports).  The model incorporates various data
sources to provide an empirical characterization of the U.S. pulp and paper industry and product
markets  for a base year of 1989.  We chose this base year of analysis because it is the last year
for which facility-specific production and technical data were available from the National Census
and for which supporting economic data were readily available.  The model analyzes market
adjustments for 31 paper and papcrboard product markets and 6 market pulps by employing a
process of tatonnement whereby prices approach equilibrium through successive correction—

                                           A-44

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modeled as a WalrasiaA auctioneer. Integrated facilities and paper-making facilities constitute
those facilities supplying final paper products; the pulp mills and those integrated mills involved
in the market for pulp, either as a supplier or demander, constitute those facilities included in
the model for market pulps. The model also includes a foreign trade sector with which to assess
the impact of international trade responses on market outcomes and vice versa.

       To implement this model, we identified commodities and facilities to be included jn the
analysis, specified the supply and demand side of the market and associated response parameters,
specified the foreign trade sector and provided the corresponding response  parameters,
incorporated demand and supply specifications into a market model framework, and evaluated
market adjustments due to imposing regulatory compliance costs and estimated the impacts.
This section discusses these activities.
       A.4.1  Model Dimensions

       Clearly the analysis must account for all marketable commodities involved in producing
pulp and paper, as well as all producers of these commodities.  Figure A-16 illustrates the
modeled interactions between commodities  and producers. The first marketable product is pulp,
either bleached or unbleached; the second marketable product is the final  paper or paperboard
product. The model  analyses the market adjustments for 6 market pulps and 31 paper and
paperboard products. AJ1 of these  products are consumed and produced domestically, as well as
traded internationally.  Therefore, domestic producers export some pulp and paper products to
other countries, and foreign producers supply their products to U.S. markets.

       The pulp and paper industry is characterized by both nonintegrated and vertically
integrated mills. Nonintegrated mills include pulp mills that produce market  pulp as well as
paper mills that purchase market pulp to produce  paper and paperboard products. Vertically
integrated mills rely mostly on their own production of pulp to produce  paper and paperboard
products.  Those vertically integrated mills without enough internally produced pulp are  also
demanders of market pulp, and those that produce an excess supply pulp of are suppliers of
                                          A--45

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                    Domestic
                   Consumers
                     Foreign
                     (Exports)
                  C
PAPER/PAPERBOARD (31)
       Integrated
          Mills
          (235)
                               Paper Mills
                                  (303)
                                                        Foreign
                                                        (Imports)
                                                        Foreign
                                                        (Exports)
                                       MARKET PULP (6)
                                Pulp Mills
                                  (28)
                                 Foreign
                                (Imports)
Figure A-16 Interactions between commodities and producers
                                  A-46

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market pulp. We modeled the production from 566 pulp, paper, and paperboard manufacturing
facilities, including 28 pulp mills, 303 paper mills, and 235 integrated mills.
       A.4.1.1 Commodities
       EPA's 1990 National Census of Pulp, Paper, and Paperboard Manufacturing Facilities
identifies the mills existing in 1989 that may be affected by the air and water pollution
regulations.  The detailed production data obtained from this source on each mill form the basis
for characterizing the commodities included in the model.  Table A-7 lists the products with a
description of each product and its product  code.

       The National Census identifies 42 product markets to analyze—33 final paper and
paperboard products and 9 pulp products.  However, National Census data on facility-level
production indicate  no U.S. production of either other shipping sack (product code 32) or
hardboard (product code 52) in 1989.  The markets for these product groups are not included in
the model; therefore, the model analyzes 31 paper and paperboard product markets.

       Although some of the pulp product categories provided by the National Census
distinguish between bleached and unbleached pulps, not all pulp categories have this distinction.
Consequently, as shown in Table A-8, the pulp product categories were expanded to 17 to
account for bleached and unbleached versions of each pulp by matching the pulp category with
pulp process  codes from the National Census. Bleached and unbleached pulps were categorized
using National Census data on the fiber source indicated by the pulp process codes and the
percentage of the fiber that is bleached and unbleached.  Distinguishing the pulp products by
these features—pulping process and bleaching—is particularly important because the regulations
are aimed primarily at chemical pulping and bleaching. Thus, the model includes 17 pulp inputs
into the production  of paper and paperboard.

       Some subset of the 17 pulps described above are sold on the market (i.e., market  pulps).
A number of the pulp inputs are only produced at integrated facilities for in-house production of
paper and paperboard products and are consequently not marketed.  In addition, because some

                                           A-47

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                                      TABLE A-7
                 PULP, PAPER, AND PAPERBOARD PRODUCTS29'30> 31'32
Product (Code)'
Product Description
Pulp

Special Alpha and dissolving
woodpulp (1)
Sulfate-bleached (2)
Sulfate-unbleached (3)
Sulfite-bleached (4)
Sulfite-unbleached (5)
Groundwood-bleached (6)
Groundwood-unblcached (7)
Thermomechanical-bleached (8)
Thcrmomcchanical-unblcached (9)
Semiehemical-bleachcd (10)
Semicheniieal-unbleachcd (11)
Dcflbratcd or exploded-bleached
(12)
Defibrated or exploded-unbleached
(13)

Secondary-bleached (14)
Secondary-unbleached (15)


Cotton and rag pulp-bleached and
unbleached (16)
Chemical pulp from wood and other fibers with a very
high alpha cellulose content, readily adaptable for uses
other than paper and paperboard making.

Made from an alkaline pulp manufacturing process that
cooks chips in a pressure vessel using a liquor of primarily
sodium sulfide and sodium hydroxide with sodium sulfate
and lime being used to replenish these chemicals  in
recovery  operations (also kraft).

Made from acid pulp manufacturing process that cooks
chips in a pressure vessel using a liquor composed of
calcium, sodium, magnesium, or ammonia salts of
sulfurous acid.

Slurry produced by mechanically abrading fibers from
barked logs through forced contact with the surface of a
revolving grindstone. Used as newsprint  and publication
paper.

Pulp made by presteaming chips and reducing them into
their fiber components during an initial mechanical
treatment in refiners under, elevated temperature  and
pressure. Subsequent  refining done at atmospheric
pressure.

Lower quality pulp made by cooking fibrous materials in a
neutral sodium sulfite-sodium carbonate liquor followed
by a  final separation of the fiber using unpressurized
mechanical means.

Pulp made by thermomechanical process  in which
woodchips are pretreated with a chemical, usually sodium
sulfite, either prior to or during presteaming as an aid to
subsequent  mechanical  processing in refiners.

Any type  of paper- and paperboard-making fiber obtained
from \vastepapers  and  other used, reclaimable fiber
sources.

Pulp made from rags or cotton linters by  a conventional
cooking process with lime and sodium hydroxide, followed
by refining and bleaching.
                                              A-48

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                                   TABLE A-7 (cont)
Product (Code)"
Product Description
All other fiber, n.e.c. (17)
Pulps other than wood such as pulp of fibrous vegetable
material (e.g., straw, reed, bagasse, bamboo, etc.); or
synthetic and semi-synthetic sources (e.g., glass, fiberglass,
rayon, nylon, combinations).
Paper

Newsprint (20)



Uncoated groundwood paper (21)
Clay coated printing and converted
paper (22)

Uncoated free sheet (23)
 Bleached bristols (24)


 Cotton fiber writing paper and thin
 paper (25)


 Unbleached kraft packaging and
 industrial converting paper (26)


 Special industrial paper, except
 specialty packaging (27)

 Tissue (28)
 Wrapping (30)
Light, inexpensive grade made largely from mechanical
pulps and some unbleached sulfite or other chemical
pulps.
A higher grade than newsprint that is smoother and
brighter and used in newspaper inserts, catalogs,
paperback books, and directories.

Printing and converting papers that contain a layer of
coating material, such as clay or pigment, in combination
with an adhesive.
Contains no more than 10% mechanical pulps including
most grades of business paper, including forms, bond,
stationary, tablet, envelope, xerox, and computer paper,
and cover and text grades used in printing.
High quality cardboards used for products such as index
tags, cards, file folders, and postcards.
Papers in which cotton or other non-wood fibers comprise
25% or more of the total (e.g., bond, ledget, specialty
papers [also, rag]).
Various types of paper used for industrial or commercial
purposes, such as wrapping papers, bag and sack stock,
specialty papers.
Special industrial papers such as photographic sensitizing
paper, blotting paper, filter paper.

Light, fairly transparent, strong, absorbable, easily
disposable paper characterized by its gauze-like texture
made from mainly bleached kraft and sulfite pulps.  Used
 tor sanitary products.
 Grade of non-sanitary tissue, all M.G. and M.F. wrapping
 papers, treated and untreated butcher papers and
 miscellaneous wrapping.
                                          A-49

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                                    TABLE A-7 (cont)
 Product (Code)'
 Product Description
 Shipping sack (31)
 Other shipping sack (32)
 Paper made mainly from sulfate or soda, unbleached or
 bleached woodpulp characterized by toughness and
 strength, used in the manufacture of shipping sacks.

 Rope and combination kraft and rope shipping sack
 paper.
 Other bag and sack (33)
 Other bag and sack paper for
 conversion (34)
 Waxing stock (35)
 Other (36)
Specialty packaging (37)

Glassine, greaseproof and vegetable
parchment (38)
Paperboard

Unbleached kraft (40)


Semichcmical papcrboard (41)


Recycled paperboard (42)
Wet machine board (43)
Construction paper (50)
 All other kraft wrapping paper made mainly from sulfate
 or soda, used in the manufacture of grocery bags and bags
 other than shipping sacks.

 Used for conversion in liquor, millinery, notion, or other
 variety bags.

 Packaging paper with weight over 29.4 g/m2

 Other packaging and industrial converting paper such as
 asphalting and creping stocks, coating and laminating,
 gummed, twisting and spinning stocks (weight over 29.4
 g/m2)

 Packaging paper of weight not more than 150g/m2.

 Papers made from pure chemical woodpulp or from
 mixtures of chemical woodpulp, cotton fiber pulp, treated
 by highly hydrated or hand beaten to render the resulting
 paper resistant to oil,  grease, and water.
High strength paperboard made from sulfate pulp, usually
with a  naturally brown color from unbleached pulp.

Made from semichemical pulp, mostly used for
corrugating medium, which  forms the inner, fluted layer
of cardboard  and corrugated containers.

Made from a combination of recycled fibers from various
grades  of paper stock, used  for folding boxboard; core,
can, and tube grades, corrugating medium; and gypsum
linerboard.

Paper board manufactured using  a paper machine
consisting essentially of a wire-covered cylinder rotating in
a vat of pulpstock on which  a mat of varying thickness is
formed by drainage, such as binder's board and shoe
board.

Heavy paper used for watercolor  and crayon artwork,
made in various colors primarily from groundwood pulp.
                                     A-50

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                                    TABLE A-7 (cent)
 Product (Code)'
Product Description
 Hardboard (51)
 Insulating board (52)
Paperboard made resistant to water and ink penetration
by exposure to high degree of sizing treatments.

Paperboard used for insulating electric cables.
 Bleached linerboard (60)
 Folding carton type board (61)
 Milk carton board (62)
 Heavyweight cup and round nested
 food container (63)


 Plate, dish, and tray stock (64)


 Bleached paperboard for
 miscellaneous packaging (65)

 Other solid bleached board (66)
 Molded pulp products (70)
Kraft paperboard used to line or face corrugated core
board to form shipping boxes and various other
containers.

Type of boxboard made of bleached chemical woodpulp
and used in the manufacture of "folding type" containers
which are formed, filled, and closed by the user.

Special grade of bleached boxboard capable of being
converted into containers for milk,  cream, and  other
beverages.

Bleached paperboard used in the manufacture  of cups
and other nested cylindrical containers, used for hot and
cold drinks and in packaging moist, liquid, and oily foods.

Bleached paperboard hard-sized for moisture resistance
and strength qualities.

Paperboard for miscellaneous packaging purposes such as
non-folding board for shipping cases and set-up boxboard.

Single-ply, homogeneous types of paperboards,  made from
the same stock throughout the sheet structure,  including
paperboard for moist,  oily, and liquid foods.

Products including fruit and vegetable packs and egg
cartons.
*For all products termed bleached or unbleached: bleaching is the process if chemically treating
fibers to reduce or remove coloring matter so that the pulp is improved in terms of whiteness or
brightness and unbleached is produced without  being treated with bleaching agents.
                                         A-51

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                                   TABLE A-8




             PULP PRODUCTS, PRODUCT CODES, AND PROCESS CODES
Pulp Product
Special Alpha and
dissolving woodpulp
Sulfate-bleached
Sulfate-unbleachefl
Sulfite-bleached
Sulfite-unbleached
Groundwood-bleached
Groundwood-unbleached
Thermomechanical-bleached
Thermomechanical-unbleached
Semichemical-bleached
Scmichemical-unbleached
Defibrated or exploded-
bleached
Defibratcd or exploded-
unbleached
Secondary-bleached
j
Secondary-unbleached

Cotton and rag pulp-
bleached and unbleached
All other fiber, n.e.c.
Pulp Product
Code
1

2
3
4
5
6
7
8
9
10
11
12

13

14

15

16

17
National Census Process
Codea
A,D

C, W
C, W
B
B
H,J
H,J
G
G
E
E
I,F

I,F

K, L, M, N, O, P, R, S, T,
U,Y,Z
K, L, M, N, 0, P, R, S, T,
U,Y,Z
V

Q, X, SS
"Process codes taken from Subappendix, Table AA-1.
                                  A-52

-------
of these pulps are traded in small quantities by a small number of suppliers, data were
insufficient to derive prices for some of these market pulp products. The U.S. Department of
Commerce's Current Industrial Reports:  Pulp, Paper, and Board does not contain data on value of
product shipments and quantity of product shipped for a number of pulps because  of disclosure
concerns. Thus, the model analyzes six market pulps:

       •     Special Alpha and dissolving woodpulp
       •     Bleached sulfate
       •     Unbleached sulfate
       •     Bleached sulfite
       •     Bleached secondary fiber
       •     Unbleached secondary fiber
       A.4.1.2  Facilities

       The pulp and paper industry is characterized by both nonintegrated and vertically
 integrated mills.  Nonintegrated mills include pulp mills that produce market pulp as well as
 paper mills that purchase market pulp to produce paper and paperboard products.  Vertically
 integrated mills rely mostly on their own production of pulp to produce paper and paperboard
 products.  Mills producing low-value products are usually integrated, and mills making
 specialized, high-value products arc usually nonintegrated.  Technical integration (i.e., the
 integration of pulp and paper manufacturing processes) can lead to savings in costs by reducing
 pulp processing costs, transportation costs, and collective  mill departmental and administrative
 costs.

        Each type of facility, integrated or nonintegrated,  has a different decision to make
 regarding production of pulp, paper, and paperboard.  Accounting for the differences across mills
 and modeling the decisions correctly for each type of mill allow for a more realistic portrayal of
 the facility and, thus, market responses to the regulatory compliance costs.  In this model,

                                            A-53

-------
 facilities are classified as either integrated or nonintegrated, and nonintegrated mills are broken
 down further into pulp mills and paper mills. Therefore, we account for and operationalize the
 different production decisions at each type of facility.

        Integrated mills must determine optimal output given the market prices for all paper
 products they produce, which will determine the amount of internal pulp to produce. Excess
 supply of pulp will spillover into the market, while excess demand will cause the facility to
 demand market pulp.  For nonintegrated paper mills, the market prices for pulp inputs and final
 paper and paperboard outputs will determine the optimal level of output to produce, and then,
 the corresponding market pulp to purchase.  For pulp mills, the price of market pulp will
 determine the optimal supply of market pulp. The market  supply of pulp is the sum of supply
 from all market pulp suppliers, and the market demand for pulp is the  sum of demand from all
 market pulp demanders. The same is true for paper and paperboard products.

       The economic model includes 566 pulp, paper, and paperboard manufacturing facilities
 for which 1989 production and technical data were available from the National Census.  As
 mentioned in Section A.2.3, a total of 331  mills, or 58.5 percent, are nonintegrated. Paper-only
 mills  make up  the vast majority of the nonintegrated classification (303  mills), leaving only 28
 mills  classified as pulp-only mills.  The remaining 235 mills  are considered integrated facilities
 producing both pulp and paper on-site.  This segment of the industry accounts for 41.5 percent
 of all mills operating in 1989.
       A.4.2 Domestic Supply of Pulp and Paper Products

       Mills have the ability to vary output in the face of production cost changes. To allow for
mills to vary output in the face of regulatory control costs, we developed facility-specific, upward-
sloping supply curves for each product. The supply curves are specified over a productive range
with an upper bound given by facility productive capacity and a lower bound given by the
minimum economically viable output level at the facility.
                                           A-54

-------
       We describe the technology characterizing pulp and paper production at U.S. mills and
the corresponding supply functions and discuss the econometric estimation of the supply
relationships.  We provide details on defining the product-specific production range at each
facility and explain how we incorporated the regulatory control costs into the model structure.
       A.4.2.1 Production Technology and Supply Functions

       For our analysis, we assumed the generalized Leontief technology to characterize pulp
and paper production at all mills. This formulation allows for estimating supply curves at the
mill level for each final good produced.  Specification of the model includes 31 final paper
products, q;, with market price, p;; 17 fixed-proportion pulp inputs, qk; however only 6 are
marketable with price rk; and an aggregate measure of variable-proportion inputs — x, which
represents the variable inputs labor, energy, and chemicals with price I.

       We assumed a Leontief, fixed-proportion relationship between paper and pulp — that is,
each unit of paper product q; requires aik units of qk. This fixed-proportions  relationship
between the q;s and the qks implies that the firm's profit function, supply functions, and derived
demand functions depend on p; and r; only insofar as they depend on net price
                                           n
Further, we assumed that the variable proportions input combines with pulp according to a
generalized Leontief technology, which is not fixed proportion. The supply functions for the
generalized Leontief technology may be derived via Retelling's lemma by differentiating the
profit function with respect to product price (sec Varian33).

       In general, the supply function for paper products resulting from the generalized Leontief
technology with the assumption of no substitutability across final  products (i.e., cross-price
elasticity of supply equal to zero for all mill outputs) is
where y^ and /3; are model parameters to be estimated econometrically, i indexes products, and j
indexes facilities.  The theoretical restrictions on the model parameters that ensure that the
                                           A-55

-------
                                                                                      (1)
profit function is convex in <£ and I and that the mill's supply curves are upward sloping are 7^ >
0 and $ < 0.

       Equation (1) sets out the generalized Leontief functional form that is used to estimate
supply relations  for three types of facilities:  pulp mills, paper mills, and integrated mills. The
own-price variable is written as  and is different for the three types of facilities.  For a pulp
mill, the relevant supply price is r, the unadjusted price of market pulp. For integrated mills and
nonintegrated paper mills, the appropriate supply price is the net price,
                                           n
The net price specification follows from assuming that a fixed amount of market pulp is required
for each unit of paper produced.  The treatment of integrated mills views the internally
consumed pulp as an unobservable intermediate stage of production — the supply price is net of
market purchases of pulp.  Thus,  if the integrated mill purchased no market pulp, the
appropriate supply price is p, the unadjusted price of paper.
       AA.2.2 Econometric Estimation of Supply Relationships
       The upward-sloping product supply curve for each facility is econometrically estimated
using facility-specific data on production from the 1990 National Census of Pulp, Paper, and
Paparbourd Manufacturing Facilities and market prices obtained from U.S. Department of
Commerce data.  Assuming generalized Leontief technology, as detailed above, the specification
of the supply function for a particular product to be estimated by ordinary least squares is
                                              , j= 1, . . . ,N
                                              t  = 1985,  1988,  1989
(2)
                                           A-56

-------
where qjt is production at facility j of the product in time period t, pt is the market price of the
product at time t, Ijt is a cost-share weighted index of the three components of variable costs
(labor, energy, and chemicals) that varies across facilities j and time periods t. Finally, let j>jt
represent the effects of unobserved variables that vary over j and t. The parameters to be
estimated are the facility-specific intercept (yj) and the product-specific coefficient (/?) on the
cost-price variable.  Note that j is an index for facility, not product whose subscript has been
suppressed.  This specification allows intercepts to vary across facilities but restricts their slopes
to be the same.  The procedure can be thought of as pooling many (N) three-observation
regressions to estimate /S.
       A.4.2.2.1 Facility-level production data. Production data in off-machine tons (OMT) of
market pulp, paper, and paperboard products at each facility in the industry for the years 1985,
1988, and 1989 were obtained from the 7990 National Census of Pulp, Paper, and Paperboard
Manufacturing Facilities?4  The production data for each mill were cross-checked with other data
available from the National Census to ensure accuracy.  Such data included the fiber furnish used
in production, the bleached component of the fiber furnish, inter-facility product transfers, and
reported product shipments.
       A.4.2.2.2 Market price data. Prices for market pulp, paper, and paperboard product were
imputed using data on value of product shipments and quantity of product shipped obtained
from the U.S. Department of Commerce's Current Industrial Reports:  Pulp, Paper, and
Board.35-36-31  Market prices for the relevant years (1985, 1988, 1989) were calculated as
                     Market Price =
                                         Value  °f
                                                  ,
                                          Quantity
       The market prices used for bleached and unbleached secondary fiber and molded puip
were not derived from this source. Instead the prices for these products were imputed from
National Census data using the above formula. For each year, we summed the value of
shipments for all mills producing the product and divided by the sum of all product shipments

                                            A-57

-------
 across those same mills. For each mill, the product of interest was the only marketed good
 produced—ensuring that the calculations do not include the value or shipments of any other
 products.
       A.4.2.2.3 Cost-share weighted variable production cost index. The cost-share weighted index
of variable production costs, Ijt, was constructed from an average regional wage variable
computed as earnings per employee (wjt); the producer price index for fuels, related products,
and power (e,); and the producer price index for chemicals and allied products (ct).  The Ijt
variable varies across time, as does each  cost component, and across facilities, because of the
regional wage variable.  The cost shares used to weight the variable cost components vary by the
three product types—pulp, paper, and paperboard.  We computed the shares for each product
type from input-output accounts from the U.S. Department of Commerce as shown in Table A-9.

       Before computing the cost-share weighted index, we normalized the producer price
indices for energy and chemicals to 1989 and converted the regional wage variable into a wage
index arbitrarily normalized to the southern region in 1989. This transformation allows each
variable to be measured in terms of a relative index for use in deriving the cost-share weighted
variable production costs index.  The index was computed as
                               Jjt = 5W  wjt  + Seet  +  S°ct                          (3)

where Sw is the cost share for labor in the production of the product (pulp, paper, or
paperboard), while Se and S° are the corresponding cost shares for energy and chemicals.  The
cost shares vary according to product (pulp, paper, or paperboard); thus, the index differs across
pulp, paper, and paperboard products.  In addition, it is normalized relative to the southern
region in 1989 so that the index for mills  located in the South in 1989 is equal to 100. Table A-
10 provides the indices used in the econometric estimation for each product by region and year.
       AA.2.2A Facility-specific supply intercepts. Different intercepts were estimated for each
facility because of the lack of other independent variables to explain variation across mills in
production levels.  Variables such as production capacity, mill size and age, productive efficiency,

                                           A-58

-------
                                   TABLE A-9

               COST-SHARES OF VARIABLE PRODUCTION FACTORS
                FOR PULP, PAPER, AND PAPERBOARD PRODUCTS38

Pulp
Labor
Chemicals
Energy
Total
Paper
Labor
Chemicals
Energy
Total
Paperboard
Labor
Chemicals
Energy
Total
Actual Cost
Share (%)

20.5
12.6
18.9
52.0

21.1
5.5
13.7
40.3

21.1
6.2
18.6
45.9
Modified Cost
Share* (%)

39.4
24.2
36.4
100.0

52.5
13.6
33.9
100.0

46.0
13.6
40.4
100.0
"Calculated as actual cost share for factor divided by total cost-share of all variable production
factors.
                                     A-59

-------
                    TABLE A-10

COST-SHARE WEIGHTED INDEX OF VARIABLE PRODUCTION
        COSTS BY PRODUCT REGION AND YEAR
Product/Region
Pulp
South
Midwest
Northeast
West
Paper
South
Mid-west
Northeast
West
Paperboard
South
Mid-west
Northeast
West
1985

101.909
98.298
97.589
105.166

101.777
96.965
96.020
106.116

103.999
99.792
98.966
107.793
1988

94.503
91.054
91.537
97.115

94.948
90.351
90.995
98.428

94.568
90.549
91.112
97.610
1989

100.000
98.356
97.227
102.289

100.000
97.809
96.305
103.050

100.000
98.084
96.770
102.667
                   A-60

-------
capital intensity, and investment would all be helpful in explaining the differences across mills,
but these variables or reliable proxies were not available from the 1990 National Census of Pulp,
Paper, and Paperboard Manufacturing Facilities or any other industry source at the facility level.
Therefore, we employed facility dummies to capture those otherwise unexplained differences in
production levels across facilities that are not accounted for through variation in variable
production costs and prices.
       A.4.2.2.5  Supply parameters. A closer look at the econometric supply specification
requires interpreting the model parameters.  Although the parameter /S for each product does
not have an intuitively appealing interpretation, it is related to the facility's supply elasticity for
the product—a well-known model parameter. The facility's supply elasticity for a particular
product, £jt, can be expressed as
                                                      3
-------
                                                                                        (6)
 or
                                 jt
                                                ./
                                                                                      (6')
        Because economic theory dictates that the supply elasticity is positive (i.e., £jt > 0), and
 q,,, p,, and Ijt are all positive, equation (6') above indicates that the parameter /S is negative (i.e.,
 /5 < 0) for all products. Finally, the solution for /3 from equation (6') reveals the following
 expression:
                                   = -lit
(7)
        Therefore, although the supply elasticity is not directly estimated by the econometric
specification of the supply function, we were able to derive the facility-specific supply elasticity
for each product via equation (61) given the estimated /S, market price, variable production cost
index, and facility's production level of the product.  Unlike the product-specific ft the elasticity
is not constant but varies for a facility with qjt, pt, and Ijt.

        An additional parameter provided by the econometric estimation of the supply function is
the intercept, y^, which varies across facilities.  This parameter  does not influence the facility's
production responsiveness to price changes as  does the & parameter.  Therefore,  the 7-
parameter was used to  establish  production levels from the supply function (to be employed in
the economic model) that are consistent with those observed in the base year of analysis, 1989.
Thus. 7- was used to calibrate the model so that each facility's supply equation is exact using
1989 data. We explain  the details of the calibration in Section A.4.5.
       A.4.22.6 Results. The results of the econometric estimation of supply parameters are
summarized in Table A-ll. For 29 of the 36 product supply specifications, the estimated /3 is

                                           A-62

-------
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negative and consistent with the theoretical value expected for this parameter.  Furthermore, 17
out of the 29 estimates (58.6 percent) are significantly negative—as measured at an 80 percent
confidence level.  With as many product groups as there are in the data set, sampling error is
certain to cause some estimated supply curves slope downward.  Those products with positive
estimates  for ft all suffer from a limited number of observations—all less than 30 observations.
Only one positive estimate of ft, that for bleached paperboard for miscellaneous packaging (65),
is significant at any reasonable level of significance.

       The positive estimates of ft are not acceptable as inputs into the economic model because
they imply negatively sloped supply functions, which would lead to perverse model simulation
results.  The method employed to provide acceptable ft parameters was to  substitute the
production-weighted average market supply elasticity for successfully estimated products in the
same  product code groupings (i.e., the 30s, the 40s, and the 60s). We then calculated the  ft
parameters for products with positive econometric estimates by incorporating the appropriately
weighted market supply elasticity in equation (7). A summary of the ft coefficients used in the
economic model for each product and the corresponding market supply elasticity are provided in
Table A-12.
       A.4.2.3 Estimating Product-Specific Production Ranges at Facilities

       Figure A-17 illustrates a product supply function at the facility, which is the section of the
marginal cost curve bounded by the maximum and minimum quantities qM and qm.  qM is the
largest feasible production rate that can be sustained at the facility given the technology and
other fixed factors in place, regardless of the output price. qm is the minimum economically
feasible production rate that is determined by the minimum of the AVAC curve, which coincides
with the price pm.  If the market  price of the paper product is less than pm, the firm's best
response is to close the product line because p <  AVAC. This relationship implies that total
revenue from producing the paper product would be less than the corresponding total variable
costs of production at any level of output.
                                          A-67

-------
                         TABLE A-12




PRODUCT-SPECIFIC BETA COEFFICIENTS AND SUPPLY ELASTICITIES
Product (code)
Market Pulp
Special Alpha and dissolving woodpulp (1)
Sulfate-bleached (2)
Sulfate-unbleached (3)
Sulfite-bleached (4)
Sccondary-blcachcd(14)
Secondary-unbleached(15)
Paper
Newsprint (20)
Uncoated groundwood paper (21)
Clay coated printing and converted paper (22)
Uncoated free sheet (23)
Bleached bristols (24)
Cotton fiber writing paper and thin paper (25)
Unbleached kraft packaging and industrial converting
paper (26)
Special industrial paper, except specialty packaging
(27)
Tissue (28)
Wrapping (30)
Shipping sack (31)
Other shipping sack (32)
Other bag and sack (33)
Other bag and sack paper for conversion (34)
Waxing stock (35)
Other (36)
Specialty packaging (37)
Glassine, greaseproof and vegetable parchment (38)
Supply
j8 Elasticity1

-408,318
-292,665
-84,012
-86,665
-239,065
-239,065

-669,183
-333,516
-3,736,643
-438,893
-997,887
-50,616
-197,787
-332,276
-777,387
-163,636
-238,335
N/A
-655,300
-458,630
-222,059
-108,326
-356,807
-262,312

0.2009
0.1856
0.2674
0.2320
0.7641
0.8211

0.2939
0.3304
1.6530
0.3087
1.2102
0.1 192
0.1858
0.9965
0.8156
1.6309
1.2618
N/A
1.6309
2.2533
1.6309
1.2049
1.6586;
1.6309
                            A-68

-------
                                    TABLE A-12 (cont)
Product (code)
Glassine, greaseproof and vegetable parchment (38)
Paperboard
Unbleached kraft (40)
Semichemical paperboard (41)
Recycled paperboard (42)
Wet machine board (43)
Construction paper (50)
Hardboard (51)
Insulating board (52)
Linerboard (60)
Folding carton type board (61)
Milk carton board (62)
Heavyweight cup and round nested food container
(63)
Plate, dish, and tray stock (64)
Bleached paperboard for miscellaneous packaging
(65)
Other solid bleached board (66)
Molded pulp products (70)
Supply
ft Elasticity*
-262,312

-1,079,860
-401,789
-260,179
-31,802
-233,717
N/A
-129,821
-392,619
-1,480,241
-815,179
-271,920
-195,233
-404,756
-270,147
-46,986
1.6309

0.3158
0. 2757
0.4928
0.3545
0.8820
N/A
0.7406
1.0139
0.7481
0.4430
0.6807
0.6807
0.6807
0.6807
0.2382
•The product-specific supply elasticities were derived using equation (6') with the corrresponding
product-specific beta coefficient, product quantity (q) equal to the mean production level across
all mills in 1989, and the cost-share weighted index of variable production costs (I) equal to the
mean index across all mills in 1989.
                                           A-69

-------
                                      m
                                                                                  M
Figure A-17  Economctricaliy estimated supply function at facility
                                          A-70

-------
       A.4.2.3.1 Product-specific maximum capacity at facility.  The facility and product-specific
intercept, 7-;, is the natural choice for the maximum production level of each product i at the
facility, qY-  It represents the limiting value of quantity supplied as price becomes infinite,
                   A
                           -
                                           oo  \vs,  + H_
                                 hr h-   =  Til
because the value of the second term in the limit goes to zero as price approaches infinity.  This
                                          M
limiting value is shown in Figure A-17 as q • ^  = y^.
       A.4.2.3.2 Product-specific minimum prices and quantities at facility.  The area under the
product supply curve at the facility represents the facility's total variable costs of producing that
product. This area can be expressed as
      yq  =
                                                                                     (8)
where VQ is the total variable cost of producing product i, q* is the level of production of
product i at the facility, /j(qj)  is the inverse supply function, and q? is the minimum economically
feasible production level at the facility, which corresponds to the price P™. The sum of VQ for
all final products produced at the facility represents the  facility's total variable costs of
production (i.e., VCmill  =  f VQ for all products i) or
rc.m
                                                  !
                                       i (?;)
-------
paperboard is reported by each mill in the EPA's 1990 National Census of Pulp, Paper, and
Paperboard Manufacturing Facilities.39 This figure represents the facility's total variable costs of
production, and integrating under the generalized Leontief supply function,1 given the above
relationships, we can express it as a function of q\ and q°:
                  VC.
    \~^  6 • I •
,'77=^-4-^
                    mill
  (9')
where qj is known, while q™ is unknown. This is one condition in as many unknowns (q™) as
there are products at the facility.

       The problem can be reduced further if we assume that q7 is proportional to base year
output, q|, by a factor k, so that
                                          \, for all i.
  (10)
The factor k is not related to product capacity at the mill; therefore, it is not a determinant of
the capacity utilization rate. This factor simply posits the minimum economically achievable level
of output to be the same fraction of current output for each product at the mill.

       Thus, the facility's total variable costs can be  expressed as
              VC.
                mill'
                       1    4
(9")
       Product-specific q? and pf at the facility may be derived by solving equation (9") for the
unknown variable k and then backsolving through equation (10) to solve for qf and using that
result with the inverse  supply function to solve for p™.
    'See equation (1) in Section A.4.2.
                                           A-72

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       Applying this technique to the questionnaire data for each mill resulted in three different
outcomes, as summarized in Figure A-18. First, as shown in Figure A-18 (a), the value for k is
determined to be greater than zero and less than one (i.e., 0 < k < 1).  Thus, the total variable
costs as measured by the area under the facility's product supply function matches the value
reported in the 1990 National Census for that facility.  Second, in Figure A-18 (b), the value for
k is zero so that the minimum economically achievable output level also equals zero.  Thus, the
total variable cost as measured by the area under the facility's product supply function is greater
than the value reported in the 1990 National Census for that facility. With k equal to zero, this
area represents the smallest possible value for total variable costs, which precludes matching the
reported number. Lastly, in Figure A-18 (c), the value for k is greater than one so that the
minimum economically achievable output and price levels are higher than the current output and
price levels. Thus, the total variable cost as measured by the area under thefacility's product
supply function is less than the value reported in the 1990 National  Census for that facility. If k
equals one, this area represents the largest possible value for total variable costs, which again
precludes matching the reported number.

       The first scenario calls for no adjustments because the calculated cost figure exactly
replicates the reported number at the mill.  This scenario is true for 325 out of 566 mills
included in the analysis, or 57.4 percent. However, the other two cases necessitate some
adjustment because the calculated number does not replicate the reported number at the mill.
For the situation  shown in Figure A-18  (b) with k = 0, the adjustments to fixed costs and other
revenue discussed below ensure consistency of the model cost estimates with reported cost
estimates from the 1990 National Census. This situation is true for  147 mills, or 26 percent of
the total.

       For the situation shown in Figure A-18  (c), we assumed that the minimum economically
achievable level of output equals zero (i.e., k = 0) to  calculate the area under the facility's
product supply curve.  This assumption  avoids  erroneous baseline closure of product lines
(current output level less than shutdown level), as well as the selection of some arbitrary value
for k that will be  instrumental in determining product line closures. We dismissed setting the
minimum economically achievable output level  equal  to the  current output level after observing
profit levels for these  mills from the 7990 National Census that were inconsistent with the zero
                                            A-73

-------
                                             qm           q*
                              a) Model TVC Equal to Reported Value
                         P*

                        pm
                            = o                            q*
                            b) Model TVC Greater than Reported Value
                                             q*          qm
                             c) Model TVC Less than Reported Value
Figure A-18 Comparison of total variable cost measures
                                             A-74

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profit condition implied by operating all product lines at the shutdown point.  As before, after
setting k = 0, the adjustments to fixed costs and other revenue discussed below ensure
consistency of the model cost estimates with reported cost estimates from the 1990 National
Census. This situation applies to 94 mills, or 16.6 percent of the total.
       A.4.2.4  Incorporating Regulatory Control Costs into Model Structure

       The starting point for assessing the impact of the regulations on the markets for pulp and
paper products is to incorporate the regulatory control costs of each mill producing the products.
The compliance costs for each mill are estimated by Agency engineers and include the total
capital investment, the annual general and administrative costs, and the annual O&M costs
(variable costs).

       The primary  focus of incorporating regulatory control costs into the model structure is to
appropriately assign  the O&M costs to the pulp products directly affected by the incidence of
control costs.  In some cases this assignment is straightforward, such as the case of bleach plant
process changes or the case of bleach plant process vent controls.  In these cases, the O&M costs
are shared by each bleached pulp product.  Other cases are not as straightforward, such as the
case of end-of-pipe effluent controls. Because the costs of these controls are not readily
attributable to any specific production area of the mill, the costs are assumed to be shared by all
pulp products.  The result of assigning the O&M costs to the pulp products produced by each
mill is a mill-specific per-unit production cost change for each of the 17 pulp products described
in Table A-8.

       The secondary focus of incorporating regulatory control costs into the model structure is
to calculate the annual nonvariable cost of regulation-imposed controls. The annual nonvariable
control costs are determined from the net present discounted value (NPDV) of the stream of
after-tax cash outflows:  the cash outflows are the  total capital investment and the annual general
and administrative costs. The length of the stream of cash outflows corresponds to the average
length of the capital  investment, which is estimated as 15 years, and the costs are discounted
using the facility-specific discount rate found in the National Census. The annual nonvariable
                                           A-75

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control cost is then computed by annualizing the NPDV over the lifetime of the investment at
the facility-specific rate of discount. The annual nonvariable control costs enter the model at the
facility level, while the per-unit variable control costs enter at the product level for all facilities
affected by the regulations.
       A.4.2.4.1 Product-level supply decisions at facility.  The production decisions at the three
types of facilities — integrated paper mills, nonintegrated paper mills, and pulp mills — are affected
differently by the variable costs of control (i.e., the annual O&M costs). These direct costs are
borne by pulp producers, both  suppliers of pulp to the market and to integrated mills that
produce and consume their own pulp. Because of the direct costs of control, market pulp prices
will rise, leading to indirect costs borne by nonintegrated paper mills and integrated paper mills
who purchase market pulp. The nonvariable control costs do not directly affect product-level
supply decisions except in the case of facility closure where supply is reduced to zero (see Section
A.4.2.4.2).

       For integrated mills the variable costs of control associated with on-site production of
pulp will be borne at the level  of paper and  paperboard production.  These costs, Cjk, are
expressed per unit of pulp and can be transmitted up to the paper product through the input
ratios. For example, the control costs at the paper level equal the sum of each pulp input's
                                                                 n
control cost weighted by the on-site input ratio  (a^^)  that is,  J^  a7i^cjk f°r aU
                                                               /C ~~ X

internally produced pulps used in  the production of paper or  paperboard product i. In addition,
                *
the integrated mills will be indirectly affected by increases in  the price of market pulp inputs.
These increases in pulp prices, Ar^ arc transmitted through the purchased input
                          n
ratios  (ctj)  that is,      a-Ark  for all market pulps used in the production of paper
product i. Therefore, the supply function for integrated mills is
                                            A-76

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Further, although some nonintegrated paper mills may not be directly affected by the control
costs, they will be indirectly affected through the changes in the prices of market pulp inputs to
paper production.  The supply function for nonintegrated paper mills is therefore expressed as
                                                                                    (12)
       Pulp mills will be directly affected by the regulatory control costs, Cj,,, which enter as a net
price change to pulp producers (i.e., rk - Cjk). Thus, the supply function for pulp mills, assuming
the same generalized Leontief production technology is
                                                                                    (13)
       The empirical specification of the market pulp supply equations of integrated mills and
pulp mills uses the unadjusted price of market pulp, which is the conceptually proper variable.
However, because of data limitations, the empirical specification of the paper and paperboard
supply equations of integrated and nonintegrated paper mills used the unadjusted paper and
paperboard prices rather than the price net of purchased pulp inputs.  The effect this
has on the estimated supply parameters for paper and paperboard products depends on the
relationship between the variation in unadjusted price (ApJ and adjusted price
                  n
                     aikArk)  over the period of observation.
                                          A-77

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       If the variation in unadjusted price is equal to the variation in adjusted price, then the
paper and paperboard supply equations of integrated and nonintegrated paper mills fully
captures the quantity response to the observed paper price and the unobserved market pulp
price.  Intuitively, the variation is the same when the share of purchased pulp in production is
                    n
equal to zero (i.e.,  ^^ aik - 0 ) and\or market pulp prices are constant over this period of
time (i.e.,Ark = 0).  Thus, the largest component of variation in the true net price must be
attributed to the change in observed paper price, Api5 as opposed to the change in the share-
                             n
weighted market pulp prices,
                                aikArk
                            k=l
       If an integrated mill purchases no market pulp, the appropriate supply price is pi} the
unadjusted price of paper. However, integrated mills may purchase some portion of their fiber
furnish.  Model data derived from the National Census indicate that integrated mills, as a group,
purchase 9 percent of their fiber furnish.  Thus, the effect of using unadjusted price in their
supply relation is limited by the small  amount of purchased pulp used in the production of paper
and paperboard products. Nonintegrated paper mills, by definition, purchase their entire fiber
furnish so that the appropriateness of the supply equation is determined by the variation in
market pulp prices.  Although market pulp prices varied over this time period, the overall effect
on any one mill's supply relation may be mitigated by the combined effect of low (high) input
shares for purchased pulps with large (small) price changes. In addition,  data on price changes
for individual market pulps over this time period indicate that offsetting price changes across all
purchased pulps used in production is also possible  at nonintegrated mills.

       Therefore, both the direct and indirect costs of control can be incorporated into the
supply relations as follows:
                                          A-78

-------
Integrated paper mills:
Ju
Pi-
n
E aj
n 1
P AT + V a .°. c
iJ^k + JL ajiJtcik
lc=l 1
Nonintegrated paper mills:
                                         Pi
                                                n
Pulp mills:
       A.4.2.4.2  Facility closure decisions. The discussion above assumes that producing pulp and
paper is profitable.  However, a facility's optimal choice could be to produce zero output (i.e.,
close the facility). The facility may not always find complying with the regulation feasible and
thus may shutdown the pulp and paper manufacturing operations because it is no longer
profitable.  We define the sufficient condition for production at the mill as nonnegative net
earnings before interest, depreciation, and taxes (EBIDT) (II),  that is,
                                    H = 77? - TC
(14)
where total revenue (TR) is the sum of product revenue (R(q)) and other revenue (R°), and
total cost (TC) is the sum of total variable production costs (C(q)) and total avoidable fixed costs
(FA).  Post-regulatory net EBIDT are
                          IT = R(q) + R° - C(q) - C"(q) - FA- E
                                                              'KC
                                           A-79

-------
 where C"(q) represents the variable compliance costs at the mill and EKC represents the
 annualized expenditure for compliance capital.  The decision to operate requires non-negative
 post-regulatory net EBIDT, i.e., nR ^ 0, which occurs when
R(q) + R° - C(q) -
 or
                            - EKC
                                                              0
(15)
R(q)+R°-C(q) -.
                                                           7KC
                                                                                     (15')
In other words, a mill's net EBIDT before regulation must exceed the annual cost of compliance
(variable and nonvariable). This decision does not include an annualized value for the
liquidation opportunity cost, which is equivalent to assuming that the opportunity cost is offset by
costs of closing the facility.
       A.4.23 Adjustments to National Census Facility-Level Data
       The data reported in the 1990 National Census for a number of economic variables at
each mill had to be adjusted so that mill-level EBIDT in the model were consistent with that
imputed from the National Census. The economic model calculates 1989 revenue from pulp and
paper production for each mill as
              31
            = £
                                                   6
                                                  E
where the market prices for paper and paperboard products, pi5 and market pulp, rk, were taken
from the U.S. Department of Commerce's Current Industrial Reports: Pulp, Paper, and Board40
and the facility-level production of paper and paperboard products, q^, and market pulp, qjk, were
taken from the National Census.  This estimate of product revenue is very similar to the reported
                                          A-SO

-------
values from the National Census.  In fact, the Pearson2 correlation coefficient, which reflects the
extent of a linear relationship between two data sets ranging from a value of -1 and 1, has a
value of 0.949 for these two variables. This value indicates a strong positive relationship between
the two measures of product revenue at each mill—a value of 1 would indicate that the measures
are exact (see Figure A-19).

       In addition, the economic model calculates 1989 variable costs of production at each mill
according to the method outlined in Section A.4.2.3.2. Although we made every effort to
replicate the reported values in the National Census for variable production costs at each mill,
the two measures are not exact.  The value of the Pearson correlation coefficient is 0.964 for
these two measures of variable production costs at each mill. As is the case for product revenue,
this value indicates a strong positive relationship between the two measures (see Figure A-20).

       Given  the 1989 values at each mill for product revenue and variable production costs, we
adjusted other revenue (from sources other than pulp and paper products) and total fixed costs
at each mill to approximate their reported EBIDT from the National Census.  We derived
reported EBIDT from the National Census in the following way:
               Pulp and Paper                  Total        Nonmanufactunng
                   Product     + Rgvenue - Manufacturing -    Costsless
                   Revenue                      Costs           depreciation
Using the reported value of other revenue at each mill in conjunction with the previous estimates
of product revenue and variable production costs, we calculated the implied base year value of
total fixed costs so that the profit at each mill in the economic model will exactly match the
reported EBIDT from the National Census.  If the resulting estimate of total fixed costs is
    2Given N observations of two variables x and y, the Pearson, or product moment, coefficient (r)
can be computed as
                                    r =
where cov (x,y) is the sample covariance of x and y, and
sample standard deviations of each variable.

                                          A-81
                                                         var(x)     and   Jvar(y)     are the

-------
   CO
   1
   O
  I
                     100,000  200.000  300,000   400,000  500,000   600,000  700,000  800,000

                                           Economic Model ($103)
Figure A-19  Production Revenue
                                        A-82

-------
  (0
  «

  a
  §
  o
600,000 j






500,000 •  •






400,000 •  -






300,000 -  -






200,000 -  •

            •



100,000-j  •'• *

         ••'  • 5*.
                        100,000      200,000      300.000     400,000



                                          Economic Model (S103)
                                                                500,000     600,000
Figure A-2Q  Totaf Variable Costs

-------
 negative (to match reported EBIDT), then total fixed costs are set to zero, and the absolute
 value of the negative estimate of total fixed costs is added to other revenue in a lump sum
 fashion.  Thus, the base year value of total fixed costs at each mill as included in the economic
 model is restricted to be greater than or equal to zero.

       Furthermore, a number of mills lacked revenue and cost data from the National Census
 to impute EBIDT. For these 41 mills, we calculated profit as the difference between 1989
 revenue from pulp and paper production and 1989 variable costs of production. Thus, other
 revenue and fixed cost at each of these mills are reported to be zero.

       The resulting total revenue and total cost estimates in the economic model (after
 adjusting other, revenue and total fixed costs at each mill) are very similar to the National Census
 values reported for each mill.  The Pearson correlation coefficient has a value of 0.966 for the
 two measures of total revenue at each mill (see Figure A-21) and a value of 0.934 for the two
 measures of total costs at each mill (see Figure A.-22). These values indicate  a strong positive
 relationship for each variable (i.e, the economic model closely resembles the characterization of
 each mill as determined by the National Census).
       A.4-3  Domestic Demand For Pulp And Paper Products

       A.4.3.1 Market Pulp

       The model does not specify an exogenous demand function for market pulps because that
demand is derived from the paper supply decisions at the integrated and paper mills.3
   3SpcciaI Alpha and dissolving woodpulp is not only an input into the production of paper and
paperboard products, but also in the production of other commodities.  We solved,for the
consumption of this pulp by industries other than the pulp and paper industry using the  following
equation:
         Consumption by _    US.
         Other Industries ~ Production
          Consumption by
Imports -  the Pulp and
          Paper Industry
                                         A-84

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c
T—
CO
3
CO
c
V
O
"53
c
O
co
Z



800,000 -

700,000 -
i
600,000 •
500,000 -



400,000 •


300,000 •

f^f\f\ f\f\f\ •
200,000
100,000 -
• ^^f
• • ss


"./• '
[ i*.-
m J' •
Sz
«^» • * * *

? *x^«*»* c*

• • *&/***
• * <^A fi/^» • •


•.y«28*«""
o >


             0     100,000  200,000   300,000  400,000  500,000   600,000  700,000  800,000



                                          Economic Model ($103)
Figure A-21  Total Revenue
                                         A-85

-------
   to
        700,000 T
        eoo.ooo • r
100.000    200,000    300,000   400,000    500,000
                   Economic Model ($103)
                                                                         600,000    700,000
Figure A-22  Total Costs
                                         A-86

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                                                               c
Therefore, once the paper and paperboard production decisions (0..)  at each mill have been
made, the mill-specific purchased input ratios for each market pulp (aL) will determine the

domestic demand for each market pulp q£ as
Internal consumption of pulp is determined by mill-specific on-site input ratios for each pulp
input  (a^,)  .  These on-site input ratios also form the basis for transmitting the variable
         juc
compliance costs expressed per unit of pulp produced at the mill (cj^) to per-unit variable
compliance costs at the level of paper and paperboard products (Cjj), that is,

                       "    0
                 C~ = 2J a-jf c-k for °U PaPer and paperboard products (/) .
                      k=l
       We deriyed the mill-specific purchased input ratios for each market pulp and the mill-
specific on-site ratios for each pulp input from technical production data obtained from the
National Census.  We assumed these ratios to be constant throughout the analysis, thereby
restricting each mill to produce paper and paperboard products with the same combination of
fiber sources, in the same relative amounts, both before and after imposing the regulations.

       The model assumes the  integrated mills  that met all pulp input needs through on-site
production in 1989 will not be active on the markets for pulp and will continue to satisfy all pulp
requirements internally after imposing the regulation.  Thus, these mills are neither suppliers nor
dcmandcrs in the markets for pulp. However, the model does account for the interaction of
those integrated facilities that were active in the pulp markets during 1989, by specifying supply
relationships tor market pulp suppliers, or by specifying purchased pulp input ratios for market
pulp demanders.
This approach indicates that 634,286 (short) tons of this woodpulp were consumed by other
industries in the United States.  The domestic demand is determined as in equation (18) with the
domestic demand elasticity estimate reported in Table A-14 and the constant parameter solved
for in a similar fashion as that for paper and paperboard products.
                                          A-87

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       A.4.3.2  Paper and Paperboard Products

       The model specifies a general  formula for the domestic demand for each paper and
 paperboard product (q*-), that is,
where Aj is a positive constant and ???, the demand elasticity, is negative.  This specification is
consistent with a constant elasticity demand curve that is derived via simultaneous equation
estimation in logarithmic form. Thus, we used the econometric estimate of the  demand
elasticity, ijf, for each paper and paperboard product in this demand specification and determines
the responsiveness of quantity demanded to changes in paper product price.  The product-
specific demand parameters, A;, were determined through backsolving techniques to calibrate the
model so that base year supply equals base year demand for all paper and paperboard products
as discussed in Section A.4.5.2.
       A.4.3.2.1 Econometric estimation of domestic demand relationships. Recall from our
discussion of the "auctioneer" market model that each time the mythical auctioneer offers a new
price for each product, each firm offers its profit-maximizing quantity at that price. Summed
across firms, this quantity equals the market supply response to the price.  On the demand side
of the market, we need to adjust the quantity demanded in response  to the new price. This
adjustment can be expressed in terms of a demand function

                                      QJ = Q1 (P,Z)
where quantity demanded, Qd, is a function of price, P, and Z, other demand factors such as
income or the price of substitute goods.  The responsiveness of quantity demanded to a change
in price can be characterized by the demand elasticity       .
This demand elasticity measures the proportional change in quantity demanded given a
proportional change in price.  Economic theory suggests that t\ is negative (i.e., a rise in price

                                        A-KS

-------
                                           dQd
                                        .   Qd
                                            dP_
                                            T
should induce a reduction in quantity demanded, all else equal). The absolute value of a
product's demand elasticity  measure is often compared to a benchmark value of one. An
absolute value of 17 greater (less) than one indicates that demand is elastic (inelastic) with respect
to price.

       In this section we describe the underlying model of product demand, the econometric
method used to estimate the product demand functions, the data employed in the analysis, and
the resulting product demand elasticities.
       A.4.3.2.1.1 Specifying the demand function. We generated values of r\ for each paper
and paperboard product by specifying a market demand function for each product, with quantity
demanded as a function of price and other factors, and by econometrically estimating the direct
effect of price on quantity demanded through this functional specification. The general form of
the demand function is specified
                              m

3, Ln (PJ
                                    Ln
(19)
       The i subscript indicates the product, the t subscript indicates the time period of
observation, and the j subscript indexes m. other demand variables.  The error term, j>it, reflects
the nonsystcmatic random factors that affect observed demand quantities in each period.
Because we specified the natural log of the quantity as a linear function of the natural log of the
price, the value ,we derived for the parameter, £,,,  gives an estimate of the demand elasticity, 7j;.
       A.4J.2.1.2 Estimating the demand function.  At first glance, estimating the demand
function seems like a simple procedure of regressing the observed market quantities on the

                                          A-S9

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 observed market prices and other demand determinants indicated in equation (19).
 Unfortunately the task is not so straightforward. We must account for the fact that the observed
 prices and quantities are equilibrium values, which are determined by the simultaneous solution
 of the separate market demand and supply functions.  We elaborate on this point here to
 correctly specify the system for econometric estimation.

       A partial  equilibrium market supply and demand model is specified as a system of
 interdependent equations in which the price and output of a product are simultaneously
 determined by the interaction of producers and consumers in the market. We can define the
 supply and demand system for a particular product as  follows:
                                     Qi"=f(P,Z!)+ui
                                         (20)
=
                                         Q? = Q
(21)

(22)
       Equation (20) is analogous to equation (21), representing quantity demanded as a
function of price, P;; an array of demand factors, Z;; and an error term, u;.  Equation (21)
represents quantity supplied as a function of price and other supply factors, Wj (e.g., input
prices), and an error term, v;.  Equation (22) specifies the equilibrium condition: quantity
supplied equals'quantity demanded. Thus we have a system of three equations, which include
three variables.  The interaction of the specified market forces solves this system, generating
equilibrium values for the variables. P' and Oi"=Q,d*=Qi*".

       Variables that arc determined within a system, such as P;" and Qj", are said to be
endogenous to that system, while those that  arc determined outside of the system, such as Z; and
W;, are called exogenous.  In simultaneous equation models, endogenous variables are correlated
                i
with the error terms through solution of the system. As a result  of the interdependence of the
endogenous variables and the error terms, we must modify the application of standard regression
techniques to estimate the effect of an endogenous right-hand side (regressor) variable (i.e.,
equilibrium price) on the endogenous left-hand side quantity demanded (or supplied) variable.

                                          A-90

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In general, ordinary least-squares estimation of the individual equations in the market model
leads to biased and inconsistent parameter estimates when a regressor is endogenous.

       An additional consideration is that the supply and demand equations must be
econometrically identified, which means that the relevant values of the structural parameters
(e.g., the price elasticity of demand in this case) can be obtained from the estimated equation.
To identify an equation in a simultaneous system, the number of exogenous variables excluded
from the equation must exceed the number of included endogenous variables minus one. This
situation is referred to as the order condition for identification.  Because both equations (21) and
(22) have two included endogenous variables (Pj and Qi), the order condition requires that each
equation must also include at least one exogenous variable that is not included in the other
equation. This condition is satisfied by the distinction between exogenous demand factors, Zj,
and exogenous supply factors, W; in equations (20) and (21). Note that the order condition is a
necessary, but not sufficient, condition for identification.  The sufficient condition for
identification ist the rank condition, which tests whether the equation  in question could be
constructed from  a linear combination of other equations in the system.  If so, then the equation
is  not uniquely identified.

       Endogeneity bias is corrected by applying the two-stage least squares (2SLS) regression
procedure for each equation estimated  (see, for example, Pindyck and Rubinfeld41). Because the
objective was to generate estimates of the demand -elasticities, we estimated only the demand
function for each1 market.  In the  first stage of the 2SLS method, the price observations were
regressed against  all exogenous variables (Z^W;)  in the system.  This  regression produced  fitted
(or predicted) values for the price variable that are, by definition, highly correlated with the true
endogenous variable and the observed price and uncorrelated with the error term. In the  second
stage, these fitted values were employed as observations of the right-hand side price variable in
the demand function.  This fitted value is uncorrelated with the  error term by construction and
thus does not incur the endogcneity bias previously mentioned.  The second-stage parameter
estimate for price  provides the elasticity estimate indicated by equation (19).

       For the purposes of domestic demand estimation, the dependent variable is domestic
consumption of product i (in tons), which equals  domestic production less exports plus imports:

                                          A-91

-------
                                    f= Qi* - Q? + 0,"  •
(23)
 Likewise, the value of domestic consumption equals the value of domestic shipments less value of
 exports plus value of imports:
                                                                                     (24)
 We computed the consumption price of the product as domestic consumption value divided by
 domestic consumption quantity:
       In general, imports and exports are reported at higher levels of aggregation than the
 product groups identified in the National Census. For instance, paper products 30 through 37
 are summed together in the import and export data, as are products 40 and 42 and 60 through
 66. Because we needed domestic production, import, and export values to compute domestic
 consumption, we aggregated the domestic production data according to these import and export
 aggregations.

       Once the product groups were aggregated, we computed the prices and quantities as
 specified above. As discussed above, the first stage of the 2SLS procedure involved regressing
 the observed price against supply and demand variables that are exogenous to the market. On
 the demand side, these variables included GNP and population for the U.S. while the supply-side
 variables included the separate prices of labor, materials,  and energy faced by the paper and
 paperboard industry. All prices employed in the estimation process were deflated by the
 consumer price index (CPI) to  reflect real, rather than nominal, prices.

       In addition to price, other potential demand variables included CPI-deflated Gross
 National  Product as a measure of economic  activity and separate price  indices for fuels, plastics
and rubber, and lumber as measures of substitute product prices. The right-hand side variables
arc not the same for all. equations, which allows for some  product-specific  differences. For
example,  the fuels price index is specified as a  demand factor for insulating board (product 52),

                                         A-92

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and the plastics and rubber price index is included in the demand equations for packaging and
industrial converting paper (products 30  through 37) as a proxy for the price of substitute
packing materials.
       A.4.3.2.1.3 Data sources. Annual value of shipments and quantities produced by
domestic producers for each of the product groups are reported in the U.S. Department of
Commerce's, Current Industrial Reports: Pulp, Paper, and Board *2-43-44-45-464 The domestic
shipments data are available for the years 1981 through 1989. The corresponding annual values
for imports and exports are reported in Statistics of Paper, Paperboard, and Wood Pulp, published
by the American Paper Institute.50-51

       The labor price facing the paper and  paperboard industry was derived using annual data
from the. Annual Survey of Manufactures52-53-S4> S5> 56 for the paper sector (SIC-2621) and
paperboard sector (SIC-2631). We computed this value by dividing total compensation
(including mandated and other employer-paid benefits) by total labor hours. Total annual labor
hours equals the sum of production hours and nonproduction hours, the latter estimated as the
number of nonproduction employees multiplied by 2000.  The Producer Price Index for
intermediate supplies and materials served as a proxy for materials  price for the paper and
paperboard industry, while the producer price index for fuels served as the proxy for energy
price.37  Annual figures for the Producer Price Indices of substitute commodities, as well as the
CPI were taken from the Handbook of Labor Statistics and the Survey of Current Business.5*-59
U.S. Gross National Product figures were also taken from the Survey of Current Business.60
       A.4.3.2.1.4  Results. Because the domestic shipments data for these categories are only
available for 1981 through 1989, we were limited to nine observations for each equation.  This
    "Production data for product category 70, molded pulp, are from the 1982 and 1987 Census of
Manufactures: Converted Paper and Paperboard Products, Except Containers and Boxes (years 1981 -
 1986)47-4* and the 1990 Annual Sun-ey of Manufactures, Value of Product Shipments (years 1987 -
1989).49
                                           A-93

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 situation constrained the number of explanatory variables we specified for each equation because
 of statistical inference considerations related to the degrees of freedom of the estimated model.

       Table A-13 provides domestic demand elasticity estimates along with the associated t-
 statistics, marginal significance levels (i.e., probability values for the t-statistics), and list of
 regressors.  Note that a number of closely related products share the same elasticity estimate
 because of the data aggregation discussed above. Various specifications of the demand functions
 for products 24 and 26 performed poorly in estimation and are not reported here. Because of a
 lack of data, we provide no estimate for product 70. Consequently the estimates for similar
 products are used in place of direct estimates for these three product groups. The estimate for
 product 25 is used for product 24, the estimate for 27 is used for 26, and the estimates for
 products 60 through 66 are used for product 70. The elasticity estimates for all products are of a
 magnitude similar to other industrial commodities, ranging from -0.232 for product 23 to -2.930
 for product 52:  most estimates fall in the -0.5 to -1.5 interval.  The t-statistics are fairly strong
 for a large number of the products.  This level of significance is particularly true for the
 paperboard estimates (40-66), most of which are significant at an 85 percent level of significance
 or better.
       A.4.4 Foreign Sector

       The importance of including a foreign sector in the economic model is highlighted by the
significant level of international trade of products manufactured by facilities in the U.S. pulp and
paper industry. Section A.2.5 provides detailed information on the extent of foreign supply of
pulp and paper products to the U.S. (imports) and foreign demand for U.S.-produced pulp and
paper products (exports).

       The model specifies a general  formula  for the  foreign supply for each  market pulp (q£)
arid paper and papcrboard product (q{):
                                          A-94

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                                   TABLE A-13

                    DOMESTIC DEMAND ELASTICITIES-PAPER
                          AND PAPERBOARD PRODUCTS
Product Code*
Paper
20
21
22
23
24
25
26
27
28
30-37
38
Paperboard
40,42
41
43
50
51
52
60-66
70
Elasticity
Estimate

-0.301
-1.135
-1.839
-0.232
-0.647
-0.647
-1.907
-1.907
-0.574
-1 .937
• -0.894

-0.235
-0.353
-1.032
-0.940
-0.259
-2.930
-0.752
-0.752
t-statistic

-1.087
-1.192
-3.371
-0.987
-1.055
-1.055
-0.920
-0 .920
-0.517
-1.630
,2.770

-1.407
-2.198
-4.644
-1.760
-0.718
-0.981
-2.280
-2.280
Prob-val

0.32
0.28
0.02
0.37
0.33
0.33
0.40
0.40
0.63
0.16
0.03

0.22
0.07
0.01
0.13
0.50
0.38
0.07
0.07
Regressors

P, GNP
P, GNP
P, GNP
P, GNP
P, GNP
P, GNP
P, GNP
P, GNP, time
P, GNP, PPI-plastics
P, GNP, PPI-plastics
P, GNP

P, GNP, PPI-lumber
P, GNP
P,GNP
P,GNP
P, GNP
P, GNP, PPI-fuels
P, GNP, PPI-plastics
P, GNP, PPI-plastics
'Product names and descriptions corresponding to the product code are given in Table A-7.
                                     A-95

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/ - fi'frf*
*k ~ Bj£i\
                                                                                    (25)
and
                                                                                    (26)
where Bj and B| are positive constants and Q and f { are positive measures of the foreign supply
elasticities for market pulp (k) and paper and paperboard products (i).

       The model also specifies a general formula for the foreign demand for each market pulp
(qj) and paper and paperboard product (q*):

                                                 (*                                  (27)
and
                                                                                    (28)
where A£ and A* are positive constants and ijj and ij* are negative measures of the foreign
demand elasticities for market pulp (k) and paper and paperboard products (i).

       Numerically computed, rather than cconornetrically estimated, elasticities of import
supply and export demand for each of the pulp and paper commodities were used in these
foreign supply and demand specifications and determined the responsiveness of foreign trade
flows to changes in product prices. The  multiplicative product-specific foreign supply and
demand parameters, Ax and B', were determined through backsolving techniques given estimates
of the import supply and export demand elasticities, 1989 baseline prices, and product-specific
quantities of U.S. imports and exports for 1989 (sec Section A.4.5 for further details on model
calibration).
                                          A-96

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       The next section describes the methodology for obtaining the key parameters—the import
supply and export demand elasticities—necessary for including the foreign sector in the economic
model.
       A.4.4.1 Computing Import Supply and Export Demand Elasticities

       To evaluate the full economic effect of changes in the cost structure for U.S. pulp and
paper producers, we must consider the role of international trade. A regulation-induced increase
in the U.S. price for a product can be expected to attract imports and reduce exports of that
product, all else equal. In this section we describe the methods used to derive the elasticities of
import supply and export demand for each defined product.   .
       A.4.4.1J  Specifying the model.  The difficulty of econometrically estimating import and
export elasticities from international trade data has long been recognized. Orcutt demonstrated
that elasticity estimates derived from regressions of a country's import (export) quantity on
historical prices understate the true price responsiveness of imports and exports, typically by a
substantial magnitude.61 Part of the difficulty derives from the identification problem, described
above, which is more pronounced given the difficulty in procuring measures of exogenous
demand and supply factors for foreign  consumers and producers. Orcutt demonstrates how to
derive the total elasticity of imports and exports, which accounts for the effect of the change in
price on all (foreign and domestic) producing and consuming parties. We develop that method
              i
here to numerically compute, rather than econometrically estimate, the elasticities  of import
supply and export demand for each of the pulp and paper commodities in the study.

       For the purposes of this example, consider country A, who internally produces some
portion of a product it consumes and imports the rest from  country B. Let the U.S. be country
A.  Country B can either be an aggregate entity (i.e., the "rest of the world") or a specific country
such as Canada.  -Assume here that country B exports  to the U.S. only; the rest of production is
consumed internally in country B.
                                          A-97

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       Imports to country A equal A's excess demand for the product.
o A =
!eJm
- QA(P)
                                                                                      (29)
where P is the price of the good in country A.

       Exports from country B equal B's excess supply of the product

                                  QB = QB(pB) . QB (fB)                              (3Q)

where PB is the price in country B. In equilibrium, the home price received by the country B
exporter should just equal the net price  received from exporting to country A.
                                       P* = XP -1
                                                  AB
                                                   (31)
where X is the exchange rate and t^ is the transportation cost (and any tariffs) between A and
B. In this example,  country B's exports must equal country A's imports in equilibrium.
    os = a
                                                                                      (32)
       We now want to evaluate the effect of import supply with respect to a change in country
A's price (e.g., as a result of regulations on country A's producers). The supply elasticity of
imports is defined

                                emA =  (dQmAldP)(PIQm«)   .                             (33)

       By manipulating the trade equations above, we get the following expression for the
import elasticity:

                     <-«„," =11 + (UP")] A'/ (Q"/Q S) - edB(QdBIQmA)J                  (34)
                                          A-98

-------
where esB and edB, respectively, are the supply and demand elasticities for country B's producers
and consumers.

       For demonstration, let the following values hold:  esB=0.5, e^ = -1.0, QSB= 40, QdB=20,
which implies QmA = 20. Suppose transport costs to country A are 20 percent of the country B
price. Inserting these values into the elasticity equation yields emA = 1.6, which is more than
three times the "regular" supply elasticity.  This difference would be even more pronounced if a
smaller  portion of country B's product was exported or if transport costs were a larger portion of
the price.

       Similarly, we can compute the elasticity of export demand facing country B. Because we
are interested  in the export demarid for U.S. products, country B is the U.S. in this scenario and
country A is the foreign entity (rest of the world or a specific country).  After manipulating the
trade equations, we get the following expression  for the export demand elasticity:
e  =
                                              (OS/OS) - e?(Q,AIQ*B)]
(35)
where esA and edB, respectively, are the supply and demand elasticities for country A producers
and consumers.  Let the supply and demand elasticities be the same in country A as they are in
country B (0.5, -1.0), and let country A's demand and supply quantities be QdA=100 and QSA=80,
which is consistent with Qx"=20.

       Inserting these values into the elasticity equation yields exB = -8.75, which is almost nine
times the "regular" domestic demand elasticity.  This difference would be even more pronounced
if a smaller portion of country A's demand was satisfied with exports from country  B or if
transport costs were a smaller portion of the price.
       The underlying message here is that theory strongly suggests foreign trade elasticities are
larger than domestic elasticities, much like the elasticity facing a single producer or consumer is
larger than the elasticity facing the aggregate of consumers and producers (the market).  This
theory is borne out in empirical work as well.  For instance, a study of the supply of wheat for
consumption in Japan estimates that the short-run import supply elasticity for Japan is more than

                                          A-99

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 400 times the magnitude of the "regular" supply elasticity for world wheat producers.62 We
 explain the logic behind this using the example of import supply to country A.  When the price
 in country A rises, the A market looks marginally more profitable for B's producers.  They will
 respond by shifting supplies to country A's destinations until marginal supply units are equally
 profitable for each destination (i.e., a new [higher] equilibrium price is established in Country B)
 via equation (31).  In the transformation to the new equilibrium, country B consumers demand
 less as the price they pay rises, and country B producers produce more as the price they receive
 rises.  Exports to country A rise by the amount of the increased production by B's producers plus
 the reduced consumption of B's consumers (i.e., by the growth in excess supply).  The
 proportional effect, as implied by the elasticity in equation (34), is larger if exports from B to A
 are small relative to B's production (and B's consumption). At the limit, these elasticities are
 infinite, indicating the textbook case of price-taking in world markets by small open economy
 producers and consumers.
       A.4.4,1.2  Computation procedure. To compute the foreign trade elasticities for the U.S.,
we must specify who plays the "role" of the foreign entity in the analysis, that is, who are the
foreign (country B) producers and consumers in constructing the import supply elasticity,
equation (34), and the foreign (country A) producers and consumers in constructing the export
demand elasticity, equation (35).

       As previously mentioned, the foreign entity can be perceived as one country in the case
of bilateral trade or the rest of the world in the case of multilateral trade. For a  number of pulp
and paper products (e.g., newsprint imports), U.S. trade is almost entirely bilateral with Canada,
while for other products (e.g., linerboard exports), U.S. trade is essentially multilateral.63 In the
case of import supply to the U.S., we have
where cmc is the import supply elasticity using equation (34) with Canada as country B (the
source of U.S. imports), Smc is the Canadian share of U.S. imports, emR is the import supply
elasticity using equation (34) with the rest of the world as country B, and SmR is the rest of the
                                          A- 100

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world share of U.S. imports. For the purposes of this study, the rest of the world includes all
OECD countries excluding the U.S. and Canada.

       Likewise we computed a weighted average for the demand elasticity for U.S. exports:
where e,0 is the export demand elasticity using equation (35) with Canada as country A (the
destination of U.S. exports), Smc is the Canadian share of U.S. exports, exR is the export demand
elasticity using equation (35) with the rest of the world as country A, and SXR is the rest of the
world share of U.S. exports.
       A.4.4.1.3  Data sources.  Data on production and consumption of pulp and paper
commodities by each country in the OECD for 1989 are found in The Pulp and Paper Industry in
OECD Countries.M Tables in that publication report trade flows (imports and exports) to and
from each of the member countries and the OECD in aggregate for 30 different pulp, paper, and
paperboard  product groups.  These tables also report total production,  consumption, imports,
and exports  for each country and the OECD aggregate for each product.  From these tables we
computed the foreign and domestic ratios implicit in equations (34) and (35) to compute the
Canadian and rest of world elasticities. The product groups classified by the OECD were
matched up with the product categories specified for this study to the extent possible.  Because
the OECD classification includes fewer groups, sometimes we had to use the foreign and
domestic ratios from one OECD category as representative of that ratio for more than one of
the product  categories defined for this study.

       We used the  U.S. demand elasticity estimates, described in Section A.4.3.2, as proxies for
consumer demand elasticities elsewhere in the OECD. We also constructed estimates of the
U.S. domestic supply elasticity for each product using equation (6') for the supply elasticity from
Section A.4.2.2.5 computed at the mean production level for facilities supplying the product.
The U.S. domestic supply elasticity is similarly used as  a proxy for the supply elasticity of other
OECD producing countries.
                                         A-101

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        The data for transportation costs from the U.S. to foreign ports were derived from a
 number of different sources.  Transportation costs between Canada and the U.S. for several
 different pulp and paper products were provided through personal  communication with the
 economics staff at the Forest Products Laboratory of the U.S. Forest Service in Madison, WI.6S
 These sources also provided expert opinion estimates for transportation costs from the eastern
 U.S. to Europe and from the western U.S. to Asia.  The latter estimates were verified with data
 on transport costs of pulp products from Seattle to Japan provided in. a report published by the
 Center for International Trade in Forest Products at the University of Washington.66
       A.4.4.1.4  Results. Table A-14 presents the numerically computed import supply and
 export demand elasticities for each product. In addition, we report the domestic demand and
 supply estimates  that were used to construct these estimates, the share of U.S. consumption that
 is imported from OECD countries, and the share of U.S. production that is exported to OECD
 countries.  The foreign trade elasticity estimates were computed as weighted averages of the
 bilateral trade elasticities with Canada  and multilateral  trade elasticities with the rest of the
 world. We concentrated on trade with  OECD countries because OECD was the only data
 source that could provide information on the countries of origin for U.S. imports and countries
 of destination for U.S. exports by any meaningful product classifications.  The origin and
 destination data were needed to compute the international trade elasticities (see import supply
 and export demand equations above). Note that the shares reported in Table A-14 were used
 for the purpose of computing the international trade elasticities only.  The total value and
 volume of U.S. imports and exports data by product group, the data used to compute total
 production by U.S. producers and total  consumption by  U.S. consumers for use in the market
 model, were derived from API data.685

       In regard  to providing model parameters, the OECD data for Canada were more
 consistent than for other OECD countries so that the foreign trade elasticity  for Canada was
 used in the model if the Canadian share of U.S.  imports or exports for a particular product
   Si
   5Export data  for production category 70,  molded  pulp, are from  the  U.S. Department  of
Commerce.69
                                         A-102

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           TABLE A-14

FOREIGN TRADE ELASTICITIES—PULP
      AND PAPER PRODUCTS
Domestic
Demand
Product Elasticity
Pulp
1
2
3
4
Paper
20
21
22
23
24
25
26
27
28
30
31
32
33
34
35
36
37
38
Paperboard
40
41

-0.750
-0.413
-0.913
-1.051

-0.301
-1.135
-1.839
-0.232
-0.647
-0.647
-1.907
-1.907
-0.574
-1.937
-1.937
-1.937
-1.937
-1.937
-1.937
-1.937
-1.93 7
-0.894

-0.235
-0.353
Domestic
Supply
Elasticity"

0.2009
0.1856
0.2674
0.2320

0.2939
0.3304
1.6530
0.3087
1.2102
0.1192
0.1858
0.9965
0.8156
1.6309
1.2618
N/A
1.6309
2.2533
1.6309
1.2049
1.6586
1.6309

0.3158
0.2757
Import
Supply
Elasticity

11.047
5.964
175.119
20.8 07

1.498
17.255
68.951
6.797
28.2 23
63.408
29.041
119.454
65.95 2
457.782
139.176
130.776
28.297
41.849
—
—
791.116
424.372

5.797
11.590
Export
Demand
Elasticity

-4.377
-5.752
-872.206
-26.652

-43.172
-100.884
-299.428
-41.980
-153.329
-367.272
-141.519
-95.968
-43.445
-84.030
-213.117
-200.201
-47.521
-70.2 55
-3.896
-2.408
-145.232
-81.303

-25.232
-49.011
Import
Share of
Consumption11

0.2037
0.13 79
0.0033
0.2377

0.6146
0.1105
0 .0970
0.1226
0.1060
0.1060
0.1060
0.0789
. 0.0789
0.0065
0.0600
0.0600
0.0670
0:0670
—
—
0.0065
0.006 5

0.1060
0.1060
Export
Share of
Production1"

0.2490
0.1087
0.0005
0.1388

0.0377
0.0166
0.0203
0.0166
0.0179
0.0179
0.0179
0.0952
0.0952
0.0305
0.0304
0.0 304
0.0359
0.0359
—
—
•0.0305
0.0305

0.0179
0.0179
            A-103

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                                   TABLE A-14 (cont)
Product
42
43
50
51
52
60
61
62
63
64
65
66
70
Domestic
Demand
Elasticity
-0.235
-1.032
-0.940
-0.259
-2.930
-0.752
-0.752
-0.752
-0.752
-0.752
-0.752
-0.75?
-0.752
Domestic
Supply
Elasticity1
0.4928
0.3545
0.8820
N/A
0.7406
1.0139
0.7481
0.4430 .
0.6807
0.6807
0.6807
0.6807
0.2382
Import
Supply
Elasticity
13.088
17.414

14.917
57.453
384.651
611.789
485.303
584.004
584.004
584.004
584.004
212.68
Export
Demand
Elasticity
-57.169
-11.118
—
-7.758
-29.741
-29.630
-47.093
-37.362
-44.956
-44.956
-44.956
-44.956
-36.559
Import
Share of
Consumption1*
0.1060
0.0893
—
0.0893
0.0893
0.0047
0.0034
0.0034
0.0034
0.0034
0.0034
0.0034
0.0065
Export
Share of
Production1*
0.0 179
0.1199
—
0.1199
0.1199
0.0427
0.0323
0.0323
0.0323
0.0323
0.0323
0.0323
0.0305
'Table A-12.
bBased on U.S. imports from and exports to OECD countries as reported in OECD67 for product
groups different from those reported here.
                                     A-104

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group exceeded 25 percent. We provide the foreign trade elasticities incorporated into the
model in Table A-15.

       Results indicate rather large import supply and export demand elasticities for most
products.  In these cases, U.S. imports (exports) are a very small portion of total production and
consumption in the rest of the world and are, for all practical purposes,  price-takers on the  world
market for these products.  The exceptions occur in the categories where foreign trade is a large
component of total U.S. consumption or production. For instance, the U.S. imports over 60
percent of the newsprint it consumes (product 20),  and 98 percent of these imports are from
Canada.  Canada exports far more newsprint to the U.S. than it consumes internally. Recalling
equation (34), we see that these factors combine to make the import supply elasticity for
newsprint relatively low (1.498).  Employing the logic from the  preceding argument, the U.S. is
not a small consumer of Canadian production;  therefore, changes in U.S. consumption can have
a nontrivial effect on the import price.  A similar case is made  for U.S.  exports of Special Alpha
and dissolving woodpulp (product 1), which constitutes 25 percent of domestic production and
faces a fairly low export demand elasticity of -4.377.

       The results here suggest an inverse relationship between the proportional and absolute
effects of a domestic price change on foreign trade. Where foreign trade is a relatively minor
component of U.S. consumption or production, elasticities  imply that regulation-induced price
changes may generate large proportional changes in imports and exports.  But these changes may
not be so large in absolute value, given the  small initial values of foreign trade.  On the other
hand, price-taking in world markets should  dampen the price effects of regulation in U.S.
markets by suggesting large potential import supplies at the "world" price and the inability to
raise the price of exports on world markets.
   s    A.4.5  Calibration of the Economic Model

       To perform the regulatory market analysis, the model must allow for comparing a
historical  equilibrium generated by existing conditions that is assumed to be observable, and a
hypothetical or post-compliance equilibrium that the model produces under a changed policy
                                          A-105

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                    TABLE A-15




FOREIGN TRADE ELASTICITIES USED IN ECONOMIC MODEL
Product
Pulp
1
2
3
4
14
15
Paper
20
21
22
23
24
25
26
27
28
30
31
32
33
34
35
36
37
38
Import Supply Elasticity

0.7657"
1.0039"
29.3906"
6.0001"
10b
NA

0.466"
2.012a
6.575"
1.011"
3.688"
1.007"
2.703"
1.389"
0.442"
13.608C
13.608"
NA
5.827"
6.969"
13.608C
13.608C
13.608*
13.608'
Export Demand Elasticity

-4.377
-5.752
-20
-26.652
NA
-10b

-44.557"
-18.5029"
-18.8722"
-9.5657"
-24.7128"
. -6.9822"
-17.1357"
-0.6798"
-0.1954"
-51.1171"
-24.2047"
NA
-24.3361"
-29.1077"
-1.7128"
-1.7128"
-51.5154"
-36.4688"

-------
                                  TABLE A-15 (cont.)
Product
Paperboard
40
41
42
43
50
51
52
60
61
62
63
64
65
66
70
Import Supply Elasticity

1.11'
1.161
1.572"
1.5588a
4.1219d
NA
4.1219"
31.5747"
44.1675"
35.8311"
42.3362"
42.3362"
42.3362"
42.3362"
67.3917"
Export Demand Elasticity

-6.624"
-6.8143"
-9.3803"
-2.356"
-5.5834d
NA
-5.5834"
-29.6295
-9.7706"
-7.9264"
-9.3655"
-9.3655"
-9.3655"
-9.3655"
-14.0005"
"Value equal to that computed for Canada rather than value reported in Table A-14.
bAssumed values, data not available to compute foreign trade elasticities.
"Assumed value to be same as that computed for product 31.
dAssumed value to be same as that computed for product 52.
                                         A-107

-------
 regime.  The assumption of an "observable" equilibrium leads directly to the need for and
 construction of a data set that fulfills the equilibrium conditions in a competitive market model
 of the U.S. pulp and paper industry. The base year of analysis is 1989, the latest year for which
 facility-level production data are available for all mills included in the National Census.  The
 baseline data set for this model is a collection of data from the National Census, including data
 on facility-level output and production processes, and the other sources noted above in
 estimating supply and demand function parameters.'

       For the particular functions  assumed for supply and demand, we chose parameter values
 so that the model will exactly reproduce the 1989 equilibrium values as a solution to the model.
 This procedure is commonly referred to in the computable general equilibrium literature as
 "calibration." Calibration is augmented by a literature search or econometric estimation  for key
 parameters. Typically, key parameters are more or less synonomous with elasticities. In this
 case, we used the econometric estimates of the key parameters (j8s and elasticities) and assumed
 functional forms of the supply and demand relations to calibrate the model. This procedure not
 only guarantees that base year market supply equals market demand for all  commodities but also
 that facility-level  supply responses given 1989 market prices are consistent with those observed in
 the base year.   This section describes the data modifications and procedures used in constructing
 the 1989 baseline data set for analyzing the regulatory impact on the U.S. pulp and paper
 industry.
       A*4,5,l Supply Parameters

       On the supply side, we used the key parameters, that is, /3s and import supply elasticities,
and the assumed functional forms of domestic and foreign supply relations to "calibrate" the
model.  This guarantees that facility-level supply and import supply responses given 1989 market
prices arc consistent with those observed in the  base year.  This section describes the data
modifications and procedures employed on the production, or supply, side of the economic
model.
                                         A-108

-------
       A.4,5.1.1 Domestic supply. Recall that one of the supply parameters provided by the
econometric estimation of the supply function is the intercept, 7^, which varies across facilities.
This parameter does not influence the facility's production responsiveness to price changes as
does the /3 parameter.  Therefore, we used the 7^ parameter to establish production levels from
the supply function (to be employed in the economic model) that are consistent with those
observed in the base year of analysis, 1989.
       The supply relationship for a particular product for the base year of 1989 can be
expressed as
                                                1
                                                     J89
                                        (36)
where $ is the econometric estimate for that product's supply function.  Solving this equation for
the intercept term yields the following equation:
                                Jj89  =
1
                                                                                      (37)
       This equation can be solved for each facility producing product j to arrive at the value of
7jS9 that will ensure that facility, and thus market, quantity supplied is consistent with production
levels observed in 1989.  Thus, for each facility, the 1989 market price for product] will elicit a
production response equal to that level observed for 1989.  Backsolving for this parameter to
force such a supply response by mills will not bias the results of the model because it has no
bearing on their production responses  to changes in market price.  The price responsiveness is a
function of the f} parameter or, more intuitively, a function of the facility's implied supply
elasticity for the product.

       A.4.5.1.2 Foreign supply. Recall that the model specifies a general formula for the
foreign supply for each market pulp (qj) and paper and paperbpard product (qj): .
                                          A-KW

-------
and
where Bj and B] are positive constants and £j and £• are positive measures of the foreign supply
elasticities for market pulp (k) and paper and paperboard products (i). The product-specific
constants, B[ and B{ were determined through backsolving techniques to establish production
levels from foreign suppliers (to be employed in the economic model) that are consistent with
those observed in 1989 as determined by data obtained for each product from the American
Paper Institute's Statistics of Paper, Paperboard, and Wood Pulp, 1990.™  Thus, B£ and Bj were
adjusted so that each product's foreign supply equation is exact using 1989 data for market prices
and estimates of the foreign supply elasticity.
       A-4.5.2 Demand Parameters

       On the demand side, we used key parameters (i.e., the purchased input ratios and the1
domestic and foreign demand elasticities) and assumed functional forms of the derived demand
for market pulp and the domestic and foreign demand for paper and paperboard products to
"calibrate" the model.  This procedure guarantees that market supply equals market demand for
all commodities given 1989 market prices.  This section describes the data  modifications and
procedures employed on the consumption, or demand, side of the economic model.
       A.4.5.2.I  Domestic demand.  The calibration technique differs across product type,
specifically market pulp and paper and paperboard products.  These data modifications and
procedures are described in the following sections.
                                         A-lUl

-------
       A.4.5.2.1.1 Market pulps.  Recall that the model does not specify an exogenous demand
function for market pulps because that demand is derived from the paper supply decisions at the
                                                                              £
integrated and paper mills.  Once the paper and paperboard production decisions (#..)  at each

mill have been made, the mill-specific purchased input ratios for each market pulp («£)  will

determine the domestic demand for each market pulp (qt) as
                                  d   y y   P   s
                                 *k -  j   i  ajik «ji   '
The mill-specific purchased input ratios for each market pulp  (a£ )  were adjusted to establish

consumption levels by domestic consumers (to be employed in the economic model) so that for
each market pulp
                       Domestic   _  Domestic    Foreign _ Foreign
                     Consumption ~ Production    Imports    Exports

Domestic production was determined by summing facility-level production data for each market
pulp from the National Census, while foreign imports and  exports were determined using data
obtained for each market pulp from the American Paper Institute's Statistics of Paper,
Paperboard, and Wood Pulp.11 The mill-specific purchased input ratios for each market  pulp
were adjusted by a factor K across all mills  to calibrate the model so that the derived demand  for
                                                                        5
market pulp is exact, given the paper and paperboard production decisions  (#..)  at each mill,
that is,
                                       y  y     P  s
                                        j   i  ** ajik qji
satisfies the identity listed above for each market pulp.
       A.4.5.2.1.2  Paper and paperboard products.  Recall that the model specifies a general
formula for the domestic demand for each paper and paperboard product (q*j), that is,
                                         A-lll

-------
where Aj is a positive constant and 77? is the negative measure of the domestic demand elasticity.
The product-specific demand parameters, A;, were determined through backsolving techniques to
establish consumption levels by domestic consumers (to be employed in the economic model)
that are consistent with the following identity for each marketable product:
                       Domestic   _  Domestic    Foreign   Foreign
                     Comsumption   Production   Imports   Exports

Domestic production was determined by summing facility-level production data for each product
from the National Census; foreign imports and exports were determined using data obtained for
each product from the American Paper Institute's Statistics of Paper, Paperboard, and Wood
Pulp.12  Thus, the A,- parameters were used to calibrate the model so that each product's   •
domestic demand equation satisfies the identity listed' above for each paper and paperboard
product using 1989 data for market prices and estimates of the domestic demand elasticity.
       A.4.52,2 Foreign demand.  Recall that the model also specifies a general formula for the
foreign demand tfor each market pulp (qjj) and paper and paperboard product (q*), that is
and
where AJ and A* arc positive constants and r?J and rfi, the foreign demand elasticities for market
pulp (k) and paper anci paperboard products (i), are negative.  The product-specific foreign
demand parameters, AJ and A?, were determined through backsolving techniques to establish
consumption levels by foreign consumers (to  be employed in the economic model) that are
consistent with those observed in 1989 as determined by data obtained for each product from the
American Paper Institute's Statistics of Paper, Paperboard, and Wood Pulp.13  Thus, AJ and A;

                                         A-112

-------
were used to calibrate the model so that each product's foreign demand equation is exact using
1989 data for market prices and estimates of the foreign demand elasticity.
       A.4.6  Model Baseline Values

       This section presents the 1989 baseline data set for analyzing the regulatory impact on
the U.S. pulp and paper industry.
       A.4.6.1 Market Prices and Output

       Table A-16 shows the 1989 equilibrium prices, domestic production, exports, and imports
              i
of each market pulp, paper, and paperboard product. These values represent the starting point
for imposing the regulations and assessing the impacts.  Prices for market pulp, paper, and
paperboard products were imputed using data on value'of product shipments and quantity of
product shipped obtained from the U.S. Department of Commerce's Current Industrial Reports:
Pulp, Paper, and Board™  Domestic production data for market pulp, paper,  and paperboard
products were derived from facility-level production data for 1989 from EPA's 1990 National
Census of Pulp, Paper, and Paperboard Manufacturing Facilities.15  For export and import
quantities, we used data published by the American Paper Institute  in Statistics of Paper,
Paperboard, and Wood Pulp.1''
       We computed aggregate prices lor the three major product groupings:  market pulp,
paper products, and paperboard products.  Each aggregate price is a 1989 market quantity
weighted average of the market prices for all products within the major group. The weights used
to compute the,pre-compliance price level were also used to compute the post-compliance price
level, akin to a Laspeyres price index. Key commodities within the market pulp group include
bleached sulfitc (79 percent of market pulp traded in 1989) and Special Alpha and dissolving
woodpulp (12 percent).  For the paper product group, uncoated free sheet accounts for 24
percent of paper marketed in 1989 followed closely by clay-coated  printing paper (22 percent),
newsprint (16 percent), and tissue (14 percent). For the paperboard product group, unbleached

                                          A-113

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kraft packaging board accounts for 43 percent of paperboard traded in 1989 with recycled
paperboard and serai-chemical paperboard accounting for 19 and 12 percent, respectively.

       The pulp, paper, and paperboard product groups defined in the National Census match
product definitions put forth by the U.S. Department of Commerce's Current Industrial Reports
but do not exactly match API's import and export categories. Subappendix Table AA-2
summarizes the system we used to cross-reference pulp and paper product categories between
the National Census, the Current Industial Reports, and API's import and export categories.
       A.4.6.2 Foreign Trade

       Table A-17 provides the 1989 baseline values of shipments and quantities for all exported
and imported products included in the economic model. These values represent the starting
values on which we impose the regulations and assess the impacts on international trade.
       AA.63  Facilities, Product Lines, and Output

       Table A-18 provides the 1989 baseline values for the number of facilities and product
lines included in the analysis, as well as industry output by major product group.  These baseline
values arc further broken  down by the type of facility:  nonintegrated (pulp or paper only) and
integrated.  These values represent the starting  values with which to assess the production and
closure, impacts.
       A.4.6.4  Revenue, Production Cost, and Profit Impacts

       Table A-19 provides the 1989 baseline values of industry revenue, cost, and profit
 separated by type of facility.  These values represent the starting values with which to assess the
 revenue, production cost, and profit  impacts.
                                           A-117

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        A.4.6J) Employment

        As shown i'n Table A-20, total employment at nonintegrated and integrated mills included
 in the economic model is 217,625. This figure includes both production and nonproduction
 workers as reported in the National Census. The 1992 Lockwood-Post's Directory reports total
 employment in 1989 at pulp, paper, and board mills as 245,600.77 The difference may be
 attributed to the exclusion of "other" production  employees reported in the National Census.

        A number of mills included in the model lacked employment data from the National
 Census. Thus, we imputed employment data for these mills by multiplying baseline output by the
 average employee to output ratio for similar type mills (i.e., pulp, paper, and integrated).  This
 method was done separately for production workers .and total workers with nonproduction
 workers being the difference. The ratios  for pulp mills were 0.00167 for production workers  and
 0.00192 for total workers. The  ratios for  production and total workers were 0.0049 and 0.00669
 for paper mills and 0.00419 and 0.00554 for integrated mills.
       A.4.7 Market Equilibria

       This section explains the major components of the model. A complete list of exogenous
and endogenous variables, as well as the model equations, is given in Table A-21.
       The market supply of pulp (Q\) is the sum of supply from all market pulp producers, that
is,
                                     S     I
where qj is foreign supply of market pulp (k) and  ? q*  is the domestic supply of market pulp

(k), which is the sum of market pulp (k) production across all U.S. mills (j). In similar fashion,
                                          A-124

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                   TABLE A-20




FACILITY-LEVEL EMPLOYMENT: BASELINE VALUES, 1989
Employment
Facility Type
Nonintegrated mills
Pulp mills
Paper and paperboard
mills
Integrated mills
Total, all industry
Production
51,738
7,386
44,352
119,221
170,959
Nonproduction
14,840
1,340
13,499
31,827
46,666
Total
66,578
8,727
57,851
151,047
217,625
                         A-125

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                                      TABLE A-21

                        PULP AND PAPER MODEL SUMMARY
Variables
 Description
Exogenous
         •nl
          Tji
    M      M
            J7J
    A?, Af, AJ
 Demand elasticity for domestic consumers of U.S. paper and
 paperboard products i=l to 31.

 Demand elasticity for foreign consumers of U.S. paper and
 paperboard products i=l to 31 (exports).

 Demand elasticity for foreign consumers of U.S. market pulps k=l to
 6 (exports).

 Import supply elasticity of foreign paper and paperboard products
 i=l to 31.

 Import supply elasticity of foreign pulp products k=l to 6.

 Supply function parameters for paper and paperboard products (i)by
 mill 0)-

 Supply function parameters for market pulps (k) by mill (j).

 Production capacity for paper and paperboard products (i) and
 market  pulps (k) manufactured at each mill (j).

 Minimum economically feasible production level for paper and
 paperboard products (i) and market pulps (k) manufactured at each
 mill 0).

 Cost indices of variable-proportion inputs into paper and paperboard
 (i) and pulp (k) production by mill (j).

 Input ratios for pulps manufactured on-site (o) and purchased from
 the market (p). Indicates the amount of pulp k required to produce
 paper and paperboard product i at mill j.

 Regulatory control costs (per unit of output) for pulps (k) by mill (j).

 Demand function parameters for  paper and paperboard products (i)
 and exported market pulps (k). (Multiplicative constants for  domestic
 (d) and foreign (x) demand.)

 Import supply function parameters for those paper and paperboard
 products and market pulps produced abroad and shipped to U.S.
 (Multiplicative constants for paper and paperboard (i) and market
pulp (k) supply.)
                                           A-126

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                                  TABLE A-21 (cont)
 Variables
Description
 Endogenous

         Pi
      q?, <& Q?

      qt q* Q S
Price of paper and paperboard products.

Price of market pulps.


Domestic (mill-level) and foreign supply ( q ^ , q?), of paper and

paperboard products and market-level supply (Qf).


Domestic (mill-level) and foreign supply ( q^k , q£) of market

pulps and market-level supply (Q£).

Domestic and foreign demand (qf, q?) for paper and paperboard
products and market-level demand (Q^).

Domestic and foreign demand (qj|, q£) for market pulps and market-
level demand  (Q°).
Equations

Market Supply of Paper and Paperboard Products:

                                 of  - £
where
and
2-t  q. =
                 J
yj
                                       - BIW
           i + — i I— 11 2
                           f\
                                                  without regulation
                                          A-127

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                               TABLE A-21 (cent)
 Variables          Description
 or
                              k=l
Market Supply of Pulp Products:
where
and
                                                          v/ith
                                                          regulation
                                              wit/iout regulation
or
                                                 with regulation
Market Demand of Paper and Paperboard Products:


                                0? • 9? * «f
where
                                gf - 4 [PlJ"
                                        A-128

-------
                                TABLE A-21 (conL)
Variables           Description
and
                                   ± • 4 N"
Market Demand for Pulp Products:
where
and

                                         A-129

-------
 the market supply of paper and paperboard products (Qf) is the sum of supply from all paper
 and paperboard producers, that is,
where q- is foreign supply of paper and paperboard products (i) and V q..,  is the domestic
                                                               J  JIK

supply of paper and paperboard products (i), which is the sum of paper and paperboard (i)
production across all U.S. mills (j).

       The market demand for pulp (Q°) is the sum of demand from all market pulp
consumers, that h,

                                      0°  = a* +  ad
                                      j£ J,-    •*&'   •* If

where qj is foreign demand for market pulp (k) and q£ is the domestic demand for market pulp
(k), which is the sum of the derived demand for market pulp (k) across all U.S. mills (j).,  In
similar fashion, the market demand of paper and paperboard products (Qf) is the sum of
demand from all paper and paperboard consumers, that is,
                                     nP    x   d
                                     27  = qi + qL
where q* is foreign demand of paper and paperboard products (i) and q? is the domestic demand
of paper and paperboard products (i).

       Each type of facility, integrated or nonintegrated, has a different decision to make.
Integrated mills must determine optimal output given the market prices for all paper products
they produce, which will determine the amount of internal pulp to produce. An excess supply of
pulp will spillover into the  market, while an excess demand will cause the facility to demand
market pulp.  For nonintegrated paper mills, the optimal level of output will be determined by
the market prices for pulp  inputs and final paper and paperboard outputs  the optimal level of
                                         A-130

-------
output will determine the corresponding araojunt market pulp to purchase. For pulp mills, the
optimal supply of market pulp will be detertnined by the price of market pulp.

       Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased production costs due to compliance, which cause
facility-specific production responses. The cumulative effect of these responses leads to a change
in the market price that all producers (affected and unaffected) and consumers face, which leads
to further responses by producers (affected and unaffected) as well as consumers and thus new
                              ri*
market prices, and so'on.  The new post-regulatory equilibria is the result of a series of iterations
between producer and consumer responses and market adjustments until a stable market price
arises where total market supply equals total market demand, that is,
and
                     Q • = Q • > for au paper and paperboard products (i)
                             S    D
                           Q, = q , , for all market pulps (i)
(42)
(43)
This process is simulated given the producer and consumer response functions and market
adjustment mechanisms  to arrive at the post-compliance equilibria.
       The process for determining equilibrium prices (and outputs) is modeled as a Walrasian
auctioneer. The auctioneer calls out a price for each product and evaluates the reactions by all
participants (producers and consumers, both foreign and domestic), comparing quantities
supplied and demanded to determine the next price that will guide the market closer to
equilibrium (i.e.. market supply equal to market demand).  We developed an algorithm to
simulate the auctioneer process and tind a  new equilibrium price and quantity for all 37  pulp and
paper product markets simultaneously.  Decision rules were established to ensure that the
process will converge to an equilibrium and to specify the conditions  for equilibrium. The result
of this approach is a vector of post-compliance  product prices that  equilibrates supply and
demand for all product markets. To capture the derived demand nature of the market for
market pulps,  this auctioneer algorithm was applied simultaneously to both the markets for final
paper and paperboard products and market pulps.
                                         A-131

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        The algqrithm for deriving the post-compliance equilibria in all markets can be

 generalized to five recursive steps:
 1.

 2.
 3.

 4.
5.
Impose the control costs on the mills, thereby affecting their supply decisions.

Recalculate the market supply of each paper and paperboard product and each market
pulp product.  The new market supply of each product will determine the demand for
pulp in a derived manner through the input ratios.  Therefore, demand for market pulp is
simultaneously determined  with paper and paperboard supply.
         i
Determine the new prices via the price revision rule for all product markets  (i.e., 31
paper and paperboard products and 6 market pulp products).
Recalculate the supply functions  for all mills with the new prices, resulting in a new
market supply of paper,  paperboard, and market pulp, in addition to derived (domestic)
demand for market pulp. Evaluate domestic demand for paper and paperboard products,
as well as import supply and export demand for' paper, paperboard, and market pulp
products given the new prices.

Return to Step 3, and continue to repeat until equilibrium conditions are satisfied in all
markets (i.e., the ratio of supply to demand is arbitrarily close to one for  each  and every
product).
       A.4.8  Post-Regulatory Impact Estimates


       The model results can be summarized as market-level and facility-level impacts due to the

regulations.
       A.4.8.1 Market-Level Results


       Market-level impacts include the market-level adjustments in price and quantity for all

affected products as well as the changes in international trade flows. In addition, the market

adjustments in price and quantity were  used to calculate the changes in the aggregate economic

welfare using applied welfare economics principles. The following sections outline  the results

and the methods used to quantify these market-level impacts.
                                         A-132

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       A.4.8.1.1  Price and quantity impacts.  Market adjustments are a result of moving from the
pre-compliance to post-compliance equilibrium.  Given the regulatory control costs, the
interaction of facility-level responses and price revision mechanism, modeled as a Walrasian
auctioneer, along with the simultaneous coordination of the final product and input markets
results in a new post-compliance equilibrium with new prices and quantities for all 37 product
markets.
       A.4.8.1.2  Foreign trade impacts. The impacts of the regulations on foreign trade in the
pulp and paper industry were estimated by comparing baseline and post-compliance levels of
exports and imports of affected products.
       A.4.8.1.3  Economic welfare impacts.  The value of environmental improvements that result
from regulatory policy can be measured against  the change in economic welfare the policy
generates.  Welfare impacts resulting from the regulatory controls on the pulp and paper industry
will extend to the many consumers and producers of pulp and paper products.  Consumers of
pulp and paper products will experience welfare impacts due to the adjustments in price and
output of the pulp and paper  products caused by imposing the regulations. Producer welfare
impacts result from the changes in product revenues associated with the additional costs of
production and the corresponding market adjustments.  The theoretical approach used in applied
welfare economics to evaluate policies follows and indicates the approach used in this study to
estimate changes in economic welfare.

       The economic welfare implications of the post-compliance market price and output
changes of pulp and paper products can be examined using two slightly different measures, each
giving a somewhat different insight but the same implications:  changes in the net benefits of
consumers  and producers based on the price changes, and changes in the total benefits and costs
of pulp and paper products based on  the quantity changes.  For this analysis, we focused on the
first measure—the changes in the net benefits of consumers and producers. Figures A-23
through A-25 depict the changes in economic welfare by first measuring the change in consumer
                                          A-133

-------
            $/Qx
              Px2
              Px1
            $/Qy
             P/2
                                                     Qx2 Qx1
                       (a) Market for Paper or Paperboard Product, Qx
Qx/t
                                                   Qy2    Qy1
                                  (b) Market for Pulp, Qy
Qy/t
Figure A-23  Change in consumer surplus with regulation
                                     A-134

-------
           $/Qx
             Px2
             Px1
                                                                          Dx
           $/Qy
             Py2
             Py1
                                                      Qx2 Qx1
                       (a) Market for Paper or Paperboard Product, Qx
Qx/t
                                                                          Dy
                                                   Qy2     Qy1
                                   (b) Market for Pulp, Qy
Qy/t
Figure A-24  Change in producer surplus with regulation
                                            A-135

-------
            $/Q>
              Px2
              Px1
            $/Qy
                                                     Qx2 Qx1            Qx/t
                       (a) Market for Paper or Paperboard Product, Qx
                                                                         Dy
                                                  Qy2    Qy1
                                   (b) Market for Pulp, Qy
Qy/t
Figure A-25  Change in economic welfare with regulation
                                            A-136

-------
surplus and then the change in producer surplus. In essence, the demand and supply curves
                             *»
previously used as predictive devices are now being used as a valuation tool.

       This method of estimating the post-regulatory change in economic welfare divides society
into consumers and producers. In a market environment, consumers and producers of the good
or service derive welfare from a market transaction. The difference between the maximum price
consumers are willing to pay for a good and the price they actually pay is referred to  as
consumer surplus. Consumer surplus is measured as the area under the demand curve and
above the price of the product.  Similarly, the difference between the minimum price producers
are willing to accept  for a good and the price they actually receive is referred to as producer
surplus.  Producer surplus  is measured as the area above the supply curve to the price of the
product.  These areas may be thought of as consumers' net benefits of consumption and
producers' net benefits of production, respectively.

       In Figure A-23, baseline equilibrium occurs at the intersection of the pulp and paper
product demand curves, Dx and Dy, and supply curves, Sx and Sy. Paper price is Pxl with quantity
Qj,, while pulp price is Py, with quantity Qyl.  The increased  cost of production with the
regulations will cause the market supply curve of both to shift upward to S^ and Sy, respectively.
The new equilibrium price of paper is P,-, and price of pulp is P^. Higher pulp and paper
product prices mean  less consumer welfare, all  else being unchanged.  In Figure A-23, for both
products, area A represents the dollar value of the annual net loss  in consumers' benefits with
the increased price of pulp and paper products.  The rectangular portion represents the loss in
consumer surplus on the quantity still consumed, Q^ for paper and Qy2 for pulp,  respectively,
while the triangular area represents the foregone surplus resulting from the reduced amount of
pulp and paper product consumed.  Q,,- Q,: and Qyl - Qy2, respectively.

       Because this analysis involves u derived demand market for pulp, which is not a final
product market, the change in "consumer surplus" shown is actually the sum of the downstream
markets* changes  in producer surplus at paper mills and integrated paper producers as well as
the change in consumer surplus for households (sec Just, Heuth, and Schmidt78).  Thus, to avoid
double counting, we excluded the consumer surplus measures calculated from the pulp market
                                          A-137

-------
 adjustments that are included in the producer surplus changes for paper producers. In addition
 to the changes in consumer welfare, producers' welfare also changes with the regulations.

        With the increases in pulp and paper product prices, producers receive higher revenues
 on the quantity still purchased, Q^ for paper and Q^ for pulp.  In Figure A-24, for both
 products, area B represents the increase in revenues due to this increase in prices. For each
 product, the difference in the areas under the two supply curves up to the original market price,
 area C, measures the loss in producers' surplus, which includes the loss associated with the
 quantity no longer produced. The net change in producers' welfare is calculated as area B - C.

        The change in economic welfare attributable to the compliance costs of the regulations is
 the sum of consumer and producer surplus changes. 'The change is - (A) +  (B - C) for paper
 products, but as mentioned earlier we included only the producer surplus change (B - C) for
 market pulp products. The consumer surplus change resulting from the markets for pulp is
 included in the producer's surplus change for paper and paperboard products.  Figure A-25
 shows the net (negative) change in economic welfare associated with the regulations as  the sum
 of area D for p^per-products and area (B - C), the producer surplus change for pulp products.
 This value is the same as the one found by the alternative method of comparing the changes in
 the total benefits of consumption and the total costs of production.  However, this analysis does
 not include the benefits that occur outside the pulp and paper products markets—the value  of
 the reduced levels of air and water pollution with the regulations.  Inclusion of this benefit may
 reduce the net cost  of the regulations or even make them positive.
       A.4.83 Facility-Level Results

       Facility-level impacts include an evaluation of the post-regulatory compliance cost;'
product-line and facility closures; and changes in production, production costs, and EBIDT.  In
addition, we computed the change  in employment attributable to the changes in output at each
mill. These output changes are caused by product-line and facility closures as well as
adjustments in production at mills  that continue to operate under regulation. Workers'
dislocation costs associated with industry-wide job losses are also calculated.
                                          A-138

-------
       A.4.8.2.1 Post-policy compliance cost. For each regulatory alternative, the post-regulatory
compliance cost at an affected facility has two components:

       •     Variable compliance cost (i.e., O&M expenditures)
       •     Fixed compliance cost (i.e., annualized capital expenditures)

The variable compliance cost at each facility depends on its post-compliance output rate, while
the fixed compliance cost, as the name implies, is a constant lump-sum incurred at the facility.
As shown in Figure A-26, the marginal cost curve for the single-product facility shifts upward
from MC to MQ by the per-unit output variable compliance cost (c).  The facility response to
the upward shift and new market price (p*1) is to reduce output from  q* to q*1. The
corresponding total variable compliance cost at the facility can be calculated as the product of
the per-unit output variable compliance cost (c) and the new output rate (q*1).  This cost is
represented by the area A in Figure A-26.  This calculation can be extended to the multi-product
facility where total variable costs can be summed across all product-lines that continue operating
after post-regulatory market adjustments.

       At the industry-level, the post-policy compliance cost is the sum of the variable and fixed
compliance costs across all facilities and product-lines continuing to operate in the post-
compliance equilibrium.  Thus, the post-compliance cost is not necessarily equal to the estimated
compliance costs before accounting for market adjustments.  These cost estimates differ because
facilities  and product-lines close, and firms decide not to bear the costs of compliance (variable
or fixed). Output  rates change at affected facilities  so that total variable compliance cost equals
per-unit output variable compliance cost (c) times the post-compliance output rate (q*1)  as
opposed  to the pre-compliance output rate (q*).
       A.4.82.2  Production and closure impacts. The economic model accommodates both
product-line and facility closures in moving from the pre-compliance to post-compliance
equilibrium.  Within a model iteration, recalculating market prices allows for the possibility that
the minimum efficient level of production (qm) becomes binding for a product line. In other

                                           A-139

-------
Figure A-26  Variable post-compliance costs
                                              A-140

-------
 words the estimated production response to the new prices and costs may drive production levels
 below qm. In such a case, the mdtlel "closes" that product line for that facility by setting
 production to zero, and market quantities are adjusted accordingly.  The same is true when the
 entire facility closes because total revenues are less than total avoidable costs. In the case of a
 facility closure, the algorithm sets the production for each and every product line at the facility to
 zero.
       A.4.8.2.3 Revenue, production cost, and profit impacts.  The economic model generates
information on the change in facility and market quantities and market prices. This information
is used to compute the change in total revenue and total cost at the facility level.  The change in
facility production and market  prices effects a change in product revenue at the facility, which is
the difference between pre-compliance product revenue (R(q)) and post-compliance product
revenue (R(q)'):
                                                                                      (44)
In addition, the change in facility production effects a change in production costs, which can be
added to post-compliance costs to estimate the change in total costs for the facility.

       As shown in Figure A-27 (a), the variable production costs at the single-product facility
without regulation is the area under the marginal cost curve (MC) up to the current output rate,
q* (as represented  by the area A).  After imposing the variable control costs, as illustrated in
Figure A-27 (b), the marginal cost curve shifts upward to MC and market price increases to p*'
resulting in a reduced output rate of q*'.  The post-compliance total variable production cost at
the facility is represented by the area A' in Figure A-27 (b). The major components are the area
under the original marginal cost curve  (MC) up to the new output rate and  the area between the
original and new marginal cost curves up to the new output rate—the variable compliance cost.
In addition,  the facility no longer incurs the production costs associated with the forgone output
(q* -  q*1), represented  by the area B in Figure A-27 (b).  Thus, the total change in production
cost at the facility can be calculated as the post-compliance variable costs of production minus
                                            A-141

-------
                                            qm            q*
                      a)  Total Variable Cost at Facility Without Regulation
                       b) Total Variable Cost at Facility With Regulation
Figure A-27  Production cost changes due to regulation
                                             A-142

-------
the pre-compliance variable costs of production, which will account for the increase in costs due
to the regulation, and the decrease in costs due to the lower output rate.

       The changes in total revenue and total cost were then used to measure the profitability
impact of the regulations at the facility level and at the industry level.
       A.4.8.2.4 Employment impacts.  The regulatory alternative will displace workers from jobs
by affecting production levels.  The methodology employed to estimate the number of displaced
workers depends on the methodology used to project output effects.  In this case, changes in
employment at mills that continue to operate after the regulation were estimated by multiplying
a mill-specific ratio of production workers per output (Ej) by the projected change in mill output
                                           = E  *
       If the mill ceases to operate, then the change in employment at the mill equals total
employment, both production and nonproduction. Thus, the estimate of the change in
employment for the entire industry was obtained by adding the sum of the employment changes
across all mills that continue to operate and the sum of total employment across all mills that
close  C:
                                                           e.
                                                                                     (46)
This estimate will aggregate the job losses at facilities with reduced or zero output and job gains
at facilities with increased output.  Therefore, employee displacement, or job losses, were
estimated by summing the projected change in employment for those facilities that experience a
decrease in output because of the regulations.

       Worker displacement costs have traditionally not been measured in economic impact
analyses of regulations.  The assumption has usually been that workers costlessly move to new
jobs of equal productivity and earnings, despite numerous studies that show costs borne by
                                          A-143

-------
 displaced workers are significant (see Flaim79, Haraermesh80, Maxwell81, and Anderson and
 Chandran82).

        Building on the work by Adams83 and Topel84, Anderson and Chandran85 constructed
 incremental willingness-to-pay measures for job dislocations in a hedonic wage framework. Their
 method is analogous to that used by economists to estimate the implicit value of a life using
 labor market data (see Moore and Viscusi86). The hedonic displacement cost estimate
 conceptually approximates the one-time willingness to pay to avoid an involuntary unemployment
 episode.  Theoretically, it includes all worker-borne costs net of any off-setting pecuniary or
 nonpecuniary "benefits" of unemployment (e.g., unemployment compensation, leisure time
 enjoyment). The hedonic displacement cost estimate is a net present value valuation.

        According to Bureau of Labor Statistics data, average annual earnings in the paper and
 allied products for 1989 was $26,929.87  Using Topel's compensating differential estimate and the
 Anderson-Chandran methodology, we estimated that pulp and paper industry workers would
 demand an annual compensating differential of $673 ($26,929 * 0.025) to accept a one-point
 increase in the probability of displacement.  We assumed they would be willing to pay an
 equivalent amount to avoid such an  increase in the probability of displacement. The implied
 statistical cost of an involuntary layoff is thus $67,323 ($673 / 0.01).  This value is multiplied by
 the total number of employee displacements, or job losses, to estimate the worker displacement
 cost of the regulation.
A.5    REFERENCES
1.

2.

3.
4.
U.S. Environmental Protection Agency. 1990 National Census of Pulp, Paper, and
Paperboard Manufacturing Facilities.  Washington, DC.  October 31.  1991.    '
        i
Anderson, D. W., and Ram V. Chandran.  Market Estimates of Worker Dislocation
Costs.  Economic Letters. 24:381-384.  1987.
Ref. I.                                     ......

U.S. Department of Commerce. Current Industrial Reports: Pulp, Paper, and Board,
1982. Washington, DC:  U.S. Government Printing Office.  1983. ,

                                 A-144

-------
5.    U.S. Department of Commerce. Current Industrial Reports:  Pulp, Paper, and Board,
      1983  Washington, DC:  U.S. Government Printing Office.  1985.

6.    U.S. Department of Commerce. Current Industrial Reports:  Pulp, Paper, and Board,
      1985. Washington, DC: U.S. Government Printing Office. 1986.

7.    U.S. Department of Commerce. Current Industrial Reports:  Pulp, Paper, and Board,
      1987. Washington, DC: U.S. Government Printing Office. 1989.

8.    U.S. Department of Commerce. Current Industrial Reports:  Pulp, Paper, and Board,
      1989. Washington, DC: U.S. Government Printing Office. 1990.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
Ref.
Ref.
Ref.
Ref.
Ref.
Ref.
Ref.
Ref.
Ref.
Ref.
4.
5.
6.
7.
8.
4.
5.
6.
7.
8.
Organiz
Paper Ii
Amc
Thro
Ame
Thro
Ref.
Ref.
Ref.
Ref.
ria
lUgl
ria
ugh
20.
21.
20.
20.
      Organization for Economic Cooperation and Development (OECD). The Pulp and
      Paper Industry in the OECD Member Countries. 1992.

      American Paper Institute. 1990 Statistics of Paper, Paperboard, and Wood Pulp, Data
      Through 1988.  New York, NY. 1990.

      American Paper Institute. 1988 Statistics of Paper, Paperboard, and Wood Pulp, Data
      Through 1987.  New York, NY. 1988.
                                       A-145

-------
 Associates, Inc. Market Study of Molecular Chlorine-Free and Totally Chlorine-Free
Bleached Paper. Prepared for the U.S. Environmental Protection Agency.

Kline, James E. Paper and Paperboard Manufacturing and Converting Fundamentals.
2nd Edition. San Francisco, Miller Freeman Publications, Inc. 1991.
Varian, Hal R. Microeconomic Analysis. 2nd Edition.  New York, NY, W. W. Norton
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
Ref. 20.
Ref. 21.
Ref. 20.
Associa
Bleachec
Kline, Ja
2nd Edit
Ref. 19.
Ref. 1.
Varian, ]
and Con
Ref. 1.
Ref. 6.
Ref. 7.
Ref. 8.
U.S. Dc{
United S
Ref. 1.
Ref. 8.
Pindyck,
Forecast:
Ref. 4.
Ref. 5.
Ref. 6.
Ref. 7.
Ref. 8.
U.S. Department of Commerce. The 1982 Benchmark Input-Output Accounts of the
United States.  Washington, DC, U. S. Government Printing Office.  1991.
Pindyck, Robert S., and Daniel L. Rubinfeld.  Econometric Models and Economic
Forecasts. 2nd Ed. New York, NY, McGraw-Hill.  1981.
                                A-146

-------
47.     U.S. Department of Commerce. 1982 Census of Manufactures Industry Series:
       Converted Paper and Paperboard Products, Except Containers and Boxes. Washington,
       DC, Government Printing Office, 1985.

48.     U.S. Department of Commerce. 1987 Census of Manufactures Industry Series:
       Converted Paper and Paperboard Products, Except Containers and Boxes. Washington,
       DC, Government Printing Office, 1990.

49.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Value of Product
       Shipments.  Washington, DC, Government Printing Office, 1992.

50.     Ref. 21.

51.     Ref. 20.

52.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Statistics for
       Industry Groups and Industries. Washington, DC, Government Printing Office, 1984.

53.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Statistics for
       Industry Groups and Industries. Washington, DC, Government Printing Office, 1986.

54.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Statistics'for
       Industry Groups and Industries. Washington, DC, Government Printing Office, 1988.

55.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Statistics for
       Industry Groups and Industries. Washington, DC, Government Printing Office, 1990.

56.     U.S. Department of Commerce. 1990 Annual Survey of Manufactures, Statistics for
       Industry Groups and Industries. Washington, DC, Government Printing Office, 1992.

57.     Council of Economic Advisors. Economic Report of the President.  Washington, DC,
       Government Printing Office. February 1992.  pp. 368, 370.

58.     U.S. Department of Labor.  Handbook of Labor Statistics.  Bulletin  2340. 1989. pp. 475,
       490.

59.     U.S. Department of Commerce. Survey of Current Business. 70(7):S-5-S-6. July 1990.

60.     U.S. Department of Commerce. Survey of Current Business. 71(11):35. November
       1991.

61.     Orcutt, Guy H.  Measurement of Price Elasticities in International Trade. The Review of
       Economics and Statistics. 32(2):117-132. 1950.

62.     Love, H. Alan, and Endah Murniningtyas. Measuring the Degree of Market Power
       Exerted by Government Trade Agencies. American  Journal of Agricultural Economics.
       74(3):546-555.  1992.
                                        A-147

-------
 63.    Ref. 19.  ;

 64.    Ref. 19.

 65.    Telecon.  Ince, Peter, Forest Products Lab, with Murray, Brian , Research Triangle
        Institute.  January 1993. Transportation costs.

 66.    Stevens, J.A., and D.M. Adams. Opportunities for Expansion of Alaska's Market Pulp
        Exports. Working Paper 34. University of Washington, Center for International Trade in
        Forest Products.  1989.

 67.    Ref. 19

 68.    Ref. 20.

 69.    Telecon. U.S. Department of Commerce, Trade Data Inquiries and Control Section, with
        Dempsey, Jeanette, Research Triangle Institute. January 1993. Quantity and value of
        exports and imports for molded pulp products in 1989.

 70.     Ref. 20

 71.     Ref. 20.

 72.     Ref. 20.

 73.     Ref. 20.

 74.     Ref. 8.

 75.     Ref. 1.

 76.     Ref. 20.

 77.     1992 Lockwood-Post's Directory of the Pulp, Paper and Allied Trades.  San Francisco,
       Miller Freeman Publications. 1991.

 78.    Just, Richard E., Darrcll L. Hueth, and Andrew Schmitz. Applied Welfare Economics
       and Public Policy.  Englewood Cliffs, NJ, Prentice-Hall,  Inc. 1982.

 79.    Flaim, Paul O.  Unemployment in 1982:  The Cost to Workers and Their Families.
       Monthly Labor Review. Feb:30-37. 1984.

 80.    Hamcrmcsh, Daniel S.  What Do We Know About Worker Displacement  in the U.S.?
       Industrial Relations.  28(l):51-59.  1989.

81.    Maxwell. Nan L. Labor Market Effects from Involuntary Job Losses in Layoffs, Plant
       Closings: The Role of Human Capital in Facilitating Reemployment and Reduced Wage
       Losses.  American Journal of Economics and Sociology. 48(2):129-141.  1989.
                                        A-148

-------
82.    Ref. 2.

83.    Adams, James D.  Permanent Differences in Unemployment and Permanent Wage
       Differentials.  Quarterly Journal of Econometrics.  100(l):29-56.  1985.

84.    Topel, Robert H. Equilibrium Earnings, Turnover, and Unemployment:  New Evidence.
       Journal of Labor Economics. 2(4):500-522.  1984.

85.    Ref. 2.

86.    Moore, Michael J., and W. Kip Viscusi.  Compensation Mechanics for Job Risks.
       Princeton, NJ, Princeton University Press. 1990.

87.    Telecon.  U.S. Department of Labor, Bureau of Labor Statistics, Department of Monthly
       Industry Employment Statistics with Dempsey, J., Research Triangle Institute.  January 8,
       1993.  Average hourly earnings, weekly hours, weekly earnings for the pulp and paper
       industry in 1989 from Current Employment Statistics, Payroll Survey.
88.
89.
90.
91.
92.
Ref. 1
Ref. 47.
Ref. 48.
Ref. 49.
Ref. 69.
                                        A-149

-------

-------
Subappendix
   A-150

-------

-------
                             TABLE AA-1

          NATIONAL CENSUS PROCESS CODE DEFINITIONS88
Code
     Process
 A
 B
 C
 D
 E
 F
 G
 H
  I .
 J
 K
 L
 M
 N
 O
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 Q
 R
  S
 T
 U
 V
 W
  X
  Y
  Z
 ss
Dissolving Sulfite Pulp
Papergrade Sulfite Pulp
Kraft Pulp                                                       v
Dissolving Kraft Pulp
Semi-Chemical Pulp
Groundwood-Chemicai-Mechanical Pulp
Groundwood-Thermo-Mechanical Pulp
Groundwood-Stone Pulp
Groundwood-Chemi-Thermo-Mechanical Pulp
Groundwood-Refiner Pulp
Deink-Fine Papers
Deink-Newspapers
Deink-Tissue Papers
Tissue from Wastepaper  .
Wastepaper-Molded Products
Paperboard from Wastepaper
Builders' Paper and Roofing Felt
Newspaper - No Deink
Paper from Wastepaper
Deink - Paperboard
Paperboard and Lincrboard from Broke and Virgin Pulp
Rag and Cotton Pulp
Soda Pulp (Commonly included with sulfate/kraft)
High-Yield Acid Bisulfite
Paper from Waste-paperboard
Other Processes
Synthetic or Semi-Synthetic Glass, Fiberglass, Rayon, Nylon Combinations
                                  A-151

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