United States
Environmental Protection
Agency
Office Of Air Quality
Planning And Standards
Research Triangle Park, NC 277 1 1
EPA
December 2000
EPA-452/R-0 1 -002
Air
Economic Impact Analysis for the Proposed
Mercury Cell Chlor-Alkali Production
NESHAP
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This report has been reviewed by the Emission Standards Division of the Office of Air
Quality Planning and Standards of the United States Environmental Protection Agency and
approved for publication. Mention of trade names or commercial products is not intended to
constitute endorsement or recommendation for use. Copies of this report are available through
the Library Services (MD-35), U.S. Environmental Protection Agency, Research Triangle Park,
NC 27711, or from the National Technical Information Services 5285 Port Royal Road,
Springfield, VA 22161.
U S. Environmental Protection Agency
Region 5, Library (PL-12J)
77 West Jackson Boulevard, 12th Floor
Chicago, IL 60604-3590
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Acronyms
EIA Economic Impact Analysis
EPA United States Environmental Protection Agency
HAPs Hazardous Air Pollutants
ISEG Innovative Strategies and Economics Group
NESHAP National Emission Standards for Hazardous Air Pollutants
OAQPS Office of Air Quality, Planning, and Standards
RFA Regulatory Flexibility Act
SBREFA Small Business Regulatory Enforcement Fairness Act
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SECTION 1
INTRODUCTION
Chlorine is used in the production of a wide range of products including organic and
inorganic chemicals, as well as in direct application for uses such as drinking water treatment.
Producers can choose from a variety of processes for the production of chlorine. One
process, the mercury cell process, results in the release of hazardous air pollutants (HAPs) in
the form of mercury emissions. Under Section 112 of the Clean Air Act (CAA), the U.S.
Environmental Protection Agency (EPA) is required to promulgate national emission
standards for hazardous air pollutants (NESHAP) for mercury cell chlor-alkali facilities in
early part of the year 2001, and develop a maximum achievable control technology (MACT)
standard to reduce HAPs from the facilities. To support this rulemaking, EPA's Innovative
Strategies and Economics Group (ISEG) has conducted an economic impact analysis (EIA) to
assess the potential costs of the rule.' This report documents the methods and results of this
EIA.
1.1 Agency Requirements for an EIA
Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for specific
regulations and standards proposed under the authority of the Act.1 The Office of Air Quality
Planning and Standards' (OAQPS') Economic Analysis Resource Document provides detailed
instructions and expectations for economic analyses that support rulemaking (EPA, 1999). In
'in addition, Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs for
proposed significant regulatory actions. Office of Management and Budget (OMB) guidance under EO
12866 stipulates that a full benefit-cost analysis is required only when the regulatory action has an annual
effect on the economy of $100 million or more. Other statutory and administrative requirements include
examination of the composition and distribution of benefits and costs. For example, the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of
1996 (SBREFA), requires EPA to consider the economic impacts of regulatory actions on small entities.
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the case of the mercury cell chlor-alkali MACT standard, these requirements are fulfilled by
examining
• facility-level impacts,
• market-level impacts,
• industry-level impacts, and
• societal-level impacts.
1.2 Overview of the Chlor-Alkali Industry
The U.S. Census Bureau refers to the "chlorine" industry as the "alkalies and chlorine"
industry (SIC 2812; NAICS 325181), or the "chlor-alkali" industry. Even though it is a
significant economic commodity itself, chlorine is linked with other products because of
unique characteristics in the production process. As described in more detail below, chlorine
is typically produced by a chemical process that jointly creates both chlorine and sodium
hydroxide (caustic soda), an alkali, in fixed proportions. As a result, chlorine and sodium
hydroxide are joint commodities and must be considered together in an economic analysis.
Chlorine is among the ten largest chemical commodities by volume in the United States (see
Table 1-1) (Shakhahiri, 2000).
The three most popular methods for producing chlorine are the membrane cell, the
diaphragm cell, and the mercury cell. These methods account for over 95 percent of chlorine
production. The regulations examined in this analysis pertain directly to the mercury cell
chlor-alkali facilities, which account for 16 percent of chlorine production.
Much of the chlorine produced is used internally by facilities to produce other
products (referred to as captive production), while only 27 percent of chlorine is sold directly
on the merchant market in the 1997 base year. Based on traditional measures of industry
concentration, the chlorine industry appears to be highly concentrated, although the merchant
market is less concentrated than the overall production numbers suggest. The economic
analysis presented below was carried out under two different assumptions about market
concentration—a perfectly competitive merchant market for chlorine and a concentrated
merchant market for chlorine.
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Table 1-1. Top Ten U.S. Chemicals by Mass: 1997
Rank
1
2
3
4
5
6
7
8
9
10
Chemical
Sulfuric acid
Nitrogen
Oxygen
Ethylene
Lime
Ammonia
Phosphoric acid
Propylene
Ethylene dichloride
Chlorine
Mass (109 Ibs)
95.6
82.8
64.8
51.1
42.5
38.4
33.6
27.5
26.3
26.0
Source: Shakhahiri, B.Z. 2000. Chemical of the Week: Sulfuric Acid, . Obtained June 15, 2000.
1.3 Summary of El A Results
The proposed mercury cell chlor-alkali rule will impose small regulatory control costs
on production and therefore generate small economic impacts in the chlorine market. The
impacts of these cost increases will be borne largely by producers, especially the directly
affected facilities in both the merchant and captive markets. The key results of the El A for
chlorine and sodium hydroxide are as follows:
• Engineering Costs: Total annual costs measure the costs incurred by the industry
annually. The annual engineering control costs are estimated to be $1.460 million
before accounting for behavior changes by consumers and producers.
• Price and Quantity Impacts: These impacts are small.
- The average prices in the merchant market for chlorine and sodium hydroxide
are projected to remain essentially unchanged (prices increase by less than
0.001 percent) in either the competitive market model or the concentrated
market model.
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- The quantities of chlorine and sodium hydroxide produced for the merchant
market are projected to fall by less than 50 tons per year in either the
competitive market model or the concentrated market model.
• Small Businesses: The economic model does not predict any significant changes in
revenue or profits for small business as a result of the regulation. The ratio of
compliance costs-to-sales (CSR) is less than 1 percent for both large and small
businesses.
• Social Costs: The economic model estimates the total social cost of the rule at
$1.460 million in the competitive model and $1.462 million in the concentrated
market model. Directly affected producers bear nearly all of these costs as profits
decline by $1.459 million in the competitive market model and $1.460 in the
concentrated market model. Consumers (domestic and foreign) are projected to
lose less than $10,000 annually in both models.
1.4 Organization of this Report
The remainder of this report supports and details the methodology and the results of
the EIA of the chlorine NESHAP.
* Section 2 presents a profile of the chlor-alkali industry.
• Section 3 describes the regulatory controls and presents engineering cost estimates
for the regulation.
• Section 4 describes the EIA methodology and reports market-, industry-, and
societal-level impacts.
• Section 5 contains the small business screening analysis.
In addition to these sections, several appendices provide detail on the economic
modeling approach and sensitivity analysis of some of the key parameters.
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SECTION 2
INDUSTRY PROFILE
The NESHAP will potentially affect 43 (chlorine production) facilities known to be in
operation in 1997. Thirty-nine of the facilities use the chlor-alkali processes, jointly
producing sodium hydroxide. Three chlor-alkali processes exist: diaphragm cell, membrane
cell, and mercury cell. The remaining facilities use one of four other processes that exist to
produce chlorine: Downs sodium process, magnesium production process, hydrogen chloride
(HC1) decomposition, and nitric acid salt process. This profile begins by characterizing the
supply side of the chlor-alkali products industry, including the stages of the production
process, the types of chlorine products, and the costs of production. Section 2.2 addresses the
consumers, uses, and substitutes for chlorine and sodium hydroxide products. The
organization of the chlorine products industry is discussed in Section 2.3, including a
description of U.S. manufacturing plants and the parent companies that own these plants.
Finally, Section 2.4 presents historical statistics on U.S. production and consumption of
chlorine and sodium hydroxide as well as data on the foreign trade of chlorine and sodium
hydroxide.
2.1 Production Overview
This section describes the process by which chlorine and alkali co-products are
produced and presents information on the configuration of production plants and the cost of
production.
2.1.1 Chlor-Alkali Process1
More than 95 percent of the domestic chlorine produced results from the chlor-alkali
process that involves the electrolysis of brine (Chemical Week, 1996). Figure 2-1 presents a
simple diagram of this process. Chlorine and sodium hydroxide are co-products of
'The material in this section draws heavily from Kroschwitz (1991) and Gerhartz (1992). Any exceptions to
this or specific references within these two sources are noted accordingly.
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Water-
Salt
Brine
w
Electricitv
^
Electrolysis
• Diaphragm cell
• Membrane cell
• Mercury cell
Chlorine Gas
(1.0)
-W Purification
Liquefied
Final
Forms
Sodium
' Hydroxide (1.1)
Figure 2-1. Chlor-Alkali Process
electrolysis of sodium chloride brine. Electricity acts as a catalyst in this reaction, which
takes place in electrolytic cells. The amount of electricity required depends on electrolytic
cell parameters such as current density, voltage, anode and cathode material, and the cell
design.
Conversion of sodium chloride brine to chlorine and sodium hydroxide can take place
in one of three types of electrolytic cells: the diaphragm cell, the membrane cell, or the
mercury cell. An important distinguishing feature of these cells is the manner by which the
products are prevented from mixing with each other, thus ensuring generation of products
having the proper purity (Kroschwitz, 1991).
The chlorine produced by the electrolysis of brine is then purified and liquified for
commercial use. Important factors affecting the liquefaction process are the composition of
the chlorine gas, the desired purity of the liquified chlorine, and the desired yield. Each of
the main process steps is now described in more detail.
2.1.1.1 Chlorine Synthesis
As indicated previously, electrolysis is the primary method of chlorine production;
however, other chlorine manufacturing processes exist. These operations generally capture
chlorine as a co-product of the production of another chemical or as a result of a chemical
reaction. Similarities exist across the cells used for electrolysis; however, there are important
distinctions between the diaphragm cell, the membrane cell, and the mercury cell processes.
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The primary distinguishing characteristic is the manner by which the electrolysis products are
prevented from mixing.
Diaphragm Cell Process. During the diaphragm production process, saturated brine
enters the electrolytic cell and flows into an anode chamber (see Figure 2-2). As the brine
flows past the anodes, the electrons are stripped off the chloride ions to form chlorine gas.
The solution passes through the diaphragm into the cathode chamber where sodium
hydroxide and hydrogen are produced. Chlorine gas is collected at the top of the cell, cooled,
compressed, and liquified. The sodium hydroxide solution may undergo further purification
steps, but it is generally suitable for over 80 percent of the caustic market. Hydrogen gas is
collected at the top of the cell similar to chlorine, cooled and filtered, used on-site or sold off-
site, or released to the atmosphere.
Chlorine
Hydrogen
Saturated
brine
Diaphragm
Dilute caustic soda
and sodium chloride
Figure 2-2. Schematic of the Diaphragm Cell Process
Source: Kroschwitz, Jacqueline. 1991. Kirk-Othmer Encyclopedia of Chemical Technology, 4th Ed. New
York: John Wiley & Sons.
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Membrane Cell Process. The membrane cell also contains an anode and cathode
assembly, but they are separated by a semipermeable Nation (ion-exchange) membrane (see
Figure 2-3). Brine flows into the annode chamber, but unlike the diaphragm process,
chloride ions cannot migrate through this membrane into the cathode chamber. An electric
voltage is applied between the anode and cathode that generates chlorine gas in the anode and
releases sodium ions and water into the cathode. The chlorine gas flows out of the anode
chamber and is ducted to a chlorine purification section. In contrast, the catholyte solution is
processed in an evaporation system where a sodium hydroxide solution is obtained, filtered,
and sold. The sodium hydroxide derived from the membrane process is higher quality than
that derived from the diaphragm process.
Chlorine
Hydrogen
Saturated
T" Sodium KAri—
kms(Na+) CC-id
Chloride
ions(CI~)
V//////////A
MM
•
Water
Cathode
brine V (+)
Membrane
ceil
Ion-exchange membrane
Concentrated
caustic soda
Figure 2-3. Schematic of the Membrane Cell Process
Source: EC/R Incorporated. September 12, 1996. Background Information Document: Chlorine Production
Summary Report. Prepared for the U.S. Environmental Protection Agency. Durham, NC: EC/Rlnc.
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Mercury Cell Process. In the mercury cell process, chlor-alkali production involves
two distinct cells. The electrolytic cell produces chlorine gas (see Figure 2-4), and a separate
amalgam decomposer (not pictured) produces hydrogen gas and caustic solution.2 A
saturated salt brine is fed to the electrolytic cell, and the brine flows on top of a continuously
fed mercury stream (which acts as the cathode'in this process). An electric current is applied,
causing a reaction that produces chlorine gas at the anodes suspended in the top of the cell
and a mercury-sodium amalgam at the cathode. The chlorine is collected at the top of the cell
while the amalgam proceeds to the decomposer. In the decomposer, the mercury amalgam
comes in contact with deionized water where it reacts and regenerates into elemental mercury
and produces caustic solution and hydrogen. Caustic solution and hydrogen are transferred to
other processes for purification, and the mercury is recycled back into the cell. Like the
diaphragm process, the mercury cell produces high quality sodium hydroxide directly from
the caustic solution.
Of the three electrolytic processes, the diaphragm and membrane processes are the
most similar. Both share the advantage of lower electricity consumption. New plant
construction has favored membrane cell construction because of low capital investment and
operating costs relative to diaphragm and mercury processes. Membrane cells' share of
domestic capacity increased from 3 percent in 1986 to 16 percent in 1999 (Chlorine Institute,
2000). Although still economical, the diaphragm process share of domestic capacity has
declined slightly from 76 percent in 1986 to 71 percent in 1999. The diaphragm process
produces a lower-quality sodium hydroxide, which may be a contributing factor to this
decline. The mercury cell process produces high-quality sodium hydroxide with simple brine
purification, but the use of mercury includes the cost disadvantages associated with
environmental controls (Kroschwitz, 1991). Similar to the diaphragm process, the mercury
process' share of domestic capacity has declined from 17 percent in 1986 to 12 percent in
1999. In addition, no new mercury cells have been built since 1970.
e decomposer is a short-circuited electrical cell in which graphite acts as the cathode and the amalgam as the
anode.
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Chlorine
Saturated
brine
Depleted
brine
lons(Na+)
Cathode (-)
Mercury
cell
Na-Hg amalgam
Mercury in
Figure 2-4. Schematic of the Mercury Cell Process
Amalgam
to decomposer
Source: EC/R Incorporated. September 12, 1996. Background Information Document: Chlorine Production
Summary Report. Prepared for the U.S. Environmental Protection Agency. Durham, NC: EC/R Inc.
2.1.1.2 Other Chorine Synthesis Processes
While the vast majority of chlorine is produced by one of the three electrolytic
methods, other commercial processes for chlorine also exist. EPA's Background Information
Document (BID) identified facilities using the following "minor" chlorine production
processes:
• Chloride production from hydrogen chloride: Electrolytic decomposition of
aqueous hydrochloric acid is used to produce chlorine and hydrogen. The process
is similar to the electrolytic processes described above with the exception that the
input solution is hydrogen chloride (typically a 22 to 24 percent hydrogen
chloride).
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• Chlorine from sodium metal co-production with Downs cell: Molten salt
consisting of sodium chloride, calcium chloride, and barium chloride is
electrolytically broken down into sodium metal and chlorine gas using open top
diaphragm cells. The Downs sodium cells require more maintenance (i.e.,
diaphragm replacement, purification) than the closed electrolytic chlor-alkali cells
described earlier.
• Nitric acid salt process: One of the co-products during the electrolytic production
of potassium hydroxide is chlorine. In this process, potassium chloride reacts
with nitric acid and oxygen to form potassium nitrate, chlorine gas, and water.
The potassium nitrate and water are drained form the reactor. Chlorine is
liberated as a gas, along with nitrogen dioxide, and is liquified in refrigerated
condensers.
•• Co-production of magnesium and chlorine: Magnesium and chlorine are
produced by fused salt electrolysis of magnesium dichloride. Chlorine is recycled
through this process or it is sold commercially.
• Other production processes used to produce chlorine identified in the BID
document include the nitrosyl chloride process, Kel-Chlor process, potash
manufacture process, and sodium chloride/sulfuric acid process. However, no
U.S. facilities were identified that use these processes.
2.1.1.3 Chlorine Purification
Regardless of the process, the chlorine stream leaving the synthesis stage is hot and
saturated with water. Impurities in this chlorine stream include oxygen, nitrogen, carbon
dioxide, carbon monoxide, hydrogen, and other contaminants produced through side
reactions in the electrolytic process. To purify the chlorine, it is cooled, dried, and liquified.
Chlorine gas is generally liquified for commercial use.
2.7.2 Forms of Output
2.1.2.1 Chlorine
Chlorine is a greenish-yellow gas belonging to the halogen family. It has a pungent
odor and a density 2.5 times that of air. In liquid form, it is clear amber and solid chlorine
forms pale yellow crystals. Chlorine is soluble in water and in salt solutions with solubility
decreasing with salt strength and temperature. Chlorine is stored and transported as a
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liquefied gas. For shipping purposes, about 70 percent of chlorine is shipped by rail, 20
percent by pipeline, 7 percent by barges, and the remainder in cylinders (Kroschwitz, 1991).
2.1.2.2 Sodium Hydroxide
Sodium hydroxide, commonly referred to as caustic soda, is a brittle, white,
translucent crystalline solid. Two types of sodium hydroxide are produced:
• diaphragm caustic (50 percent rayon grade): This type is suitable for most
applications, and it accounts for approximately 85 percent of sodium hydroxide
consumption.
• membrane and mercury caustic: This type of sodium hydroxide meets high purity
requirements such as those required for rayon production. Membrane and
mercury caustic are also produced in 73 percent caustic and anhydrous caustic
forms.
2.L3 Costs of Production
Energy and raw material costs represent the highest share of the chlor-alkali
production costs. As shown in Table 2-1, these costs account for approximately 65 percent of
total costs. The primary differences in operating costs between the three electrolysis
processes (diaphragm, membrane, and mercury) result from variation in electricity
requirements (Kroschwitz, 1991). Labor is another significant cost component, accounting
for 21 percent of total production costs.
Total capital costs for a prototype 500 ton per day chlorine production plant are
approximately $111 million (reported in 1990 dollars, the most recent year available). As
shown in Table 2-2, the largest cost components are the electrolytic cells ($25.5 million) and
the establishment of energy sources ($22.5 million). Although one company has recently
converted a mercury process to a membrane process, conversion of mercury cells is generally
considered a less attractive alternative to the construction of a new membrane plant. Cost
estimates for this type of conversion range from $100,000 to $200,000 per ton per day.
Electrolytic cells and membranes account for approximately 60 percent of the total
investment (Kroschwitz, 1991).
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Table 2-1. Costs of Production for the Chlor-Alkali Industry (SIC 2812;
NAICS 325181): 1997
Raw materials and supplies
Fuels and electricity
Labor
Depreciation
Purchased services
Rental payments
Total
Value of shipments
Value
(103)
$537,520
$527,228
$339,677
$1.45,890
$62,293
$13,862
$1,626,470
$2,465,183
Share of Total
Costs
33%
32%
21%
9%
4%
1%
100%
NA
Share of Value of
Shipments
22%
21%
14%
6%
3%
1%
66%
100%
NA = not available
Source: U.S. Department of Commerce, Bureau of the Census. 1999. 7997 Economic
Census—Manufacturing Industry Series: Alkalies and Chlorine Manufacturing. EC97M-.3251E.
Washington, DC. [online], .
2.2 Demand for Chlorine and Sodium Hydroxide
The previous section described supply side elements of the chlorine industry—how
chlorine and its co-product, sodium hydroxide, are produced and what the costs of production
are. This section addresses the demand side—the uses and consumers of chlorine and
sodium hydroxide.
2.2.7 Chlorine Demand
Early uses of powdered and liquid chlorine included bleaching of textiles and paper,
cleaning, and disinfecting (Gerhartz, 1992). Since 1950, chlorine has achieved increasing
importance as a raw material in synthetic organic chemistry. Chlorine is an essential
component of a multitude of end products that are used as materials for construction,
solvents, and insecticides, hi addition, chlorine is a component of intermediate goods used to
make chlorine-free end products. These uses of chlorine generally influence chlorine
production quantities in a given year.
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Table 2-2. Capital Costs for 500 Ton per Day Chlorine Production Plant (106 $1990)
Average Total Cost8
Cells $25.5
Utilities and offsites $22.5
Overhead , $11.7
Engineering $11.7
Caustic evaporation $8.3
Brine purification $7.5
Miscellaneous $6.7
Chlorine collection $6.5
Caustic storage $5.4
Rectifiers $3.4
Hydrogen collection $2.0
Total $111.0
* Capital costs for mercury cell plants were not available and are not included in the calculation of averages.
Source: Kroschwitz, Jacqueline. 1991. Kirk-Othmer Encyclopedia of Chemical Technology, 4th Ed. New
York: John Wiley & Sons.
2.2.7.7 Chlorine Uses
Consumers use chlorine in three major categories:
• organic chemicals,
• inorganic chemicals, and
• direct applications.
Chlorine is used as a material input into the production of organic and inorganic
chemicals, which in turn are used in other production processes and/or products. Organic
chemicals (those containing carbon) are typically used either as chemical intermediates or
end products. Inorganic chemicals are used in the production of a wide variety of products,
including basic chemicals for industrial processes (i.e., acids, alkalies, salts, oxidizing agents,
industrial gases, and halogens); chemical products to be used in the manufacturing products
(i.e., pigments, dry colors, and alkali metals); and finished goods for ultimate consumption
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(i.e., mineral fertilizers, glass, and construction materials) (EPA, 1995). Chlorine is also used
in several direct applications, including bleaching (pulp and paper), waste water treatment,
and sanitizing and disinfecting (i.e., for municipal water supplies and swimming pools).
As shown in Table 2-3, the composition of chlorine demand is expected to remain
fairly stable, with a slight decrease in the percentage of chlorine consumed in direct
applications.
Table 2-3. U.S. Chlorine Consumption
Percentage of Total Production
Use 1995 . 1998 2003
Organic^hernicals 74% 76% 80%
PVC 26% 30% 33%
Inorganic chemicals 14% 14% 13%
Direct applications 12% 10% 7%
Pulp and paper 6% 4% 1%
Water treatment 4% 4% 4%
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
2.2.1.2 Major Chlorine Consumers3
Industry accounts for most of the direct chlorine consumption in the United States.
The chemical industry consumes chlorine as an intermediate good in the production of other
chemicals, such as polyvinyl chloride (PVC) resin. The pulp and paper and waste treatment
industries use chlorine in direct applications. Households consume chlorine indirectly, as a
component of other products such as PVC pipe, clean water, or cleaning products.
Consumers of chlorine in 1998 are pfesented in Figure 2-5 and summarized below
(Berthiaume, Anderson, and Yoshida, 2000).
3The material in this section draws heavily from Kroschwitz (1991) and-Gerhartz (1992). Any exceptions to
this or specific references within these two sources are noted accordingly.
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Water Treatment
Industry
4%
Pulp and Paper
Industry
4%
Other Direct
Applications
2%
Inorganic Chemical
Industry
14%
Organic Chemical Industry
Bother than PVC producers)
46%
PVC Producers
30%
Figure 2-5. U.S. Chlorine Consumers, 1998
PVC Industry. In 1994, PVC accounted for approximately 34 percent of total chlorine
demand. Chlorine is used primarily to manufacture ethylene dichloride, which is used in
PVC production. More than 60 percent of PVC is used in building and infrastructure. Thus,
construction and housing starts influence demand for chlorine. In developing countries,
demand is particularly strong for pipes needed to upgrade areas to improve sanitation.
Propylene Oxide and Epichlorohydrin Industry. During the production of the organic
chemical propylene oxide, chlorine reacts with propylene to make propylene chlorohydrin.
After further processing, propylene oxide is made with other by-products (sodium or calcium
chloride). Average annual growth of propylene oxide is between 1.5 and 2 percent per year
and is based mostly on the growing demand for polyether polyol, a propylene oxide
derivative used in urethane foam manufacturing. Epichlorohydrin, another organic chemical,
is produced from dechlorinated allyl chloride and is primarily used to produce epoxy resins
for the surface coating and_composite industries. Chlorine consumption for epichlorohydrin
is expected to grow between 2 and 2.5 percent annually and will be driven by the increased
construction demand for epoxy resins.
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Phosgene Industry. Phosgene, a chlorinated organic, is used primarily in
polycarbonate production. Phosgene accounts for nearly 6 percent of chlorine consumption,
and production is expected to grow around 3 percent annually. Polycarbonate resin is used
for glazing and sheeting, polycarbonate composites, and alloys. Alloys are used to replace
metal parts for the electronic and automobile industries.
C, Derivatives Industry. Industrial producers of carbon derivates (e.g., chlorinated
methanes, chloroform, methylene chloride, arid carbon tetrachloride) use chlorine as a
material input during the production process. Aggregate growth in many of these organic
compounds is expected to remain flat through the decade. Use of carbon tetrachloride in
chlorofluorocarbon manufacture will be phased out because of its contribution to ozone
depletion. Some positive growth is expected for the use of chloroform in alternative CFCs,
which have Hot43een4inkedAvith ozone depletion,
Titanium Tetrachloride Industry. A majority of titanium dioxide production uses the
chloride process where chlorine reacts with titanium to produce titanium tetrachloride.
Titanium tetrachloride, an inorganic chemical, is further processed to create titanium dioxide,
which is used primarily as a filler in pulp and paper manufacture and as a pigment in paint
and plastics manufacture.
The Pulp and Paper Industry. In 1994, the pulp and paper industry accounted for 9
percent of U.S. chlorine consumption. However, concerns over chlorine's potential to form
toxic chlorinated organics has had a negative effect on the use of chlorine in this industry.
Growth in chlorine use in the pulp and paper industry has been negative in the 1990s, and
recent substitutions of oxygen, hydrogen peroxide, and particularly chlorine dioxide for
chlorine indicate the decline will be significant (Kroschwitz, 1991).
The Water Treatment Industry. Chlorine is an excellent bacteriostat unsurpassed for
use in residual water treatment. Because of efforts by municipal and industrial water
treatment facilities to increase chemical efficiency and concerns over chlorine's involvement
in the formation of undesirable organic compounds, little growth is projected for chlorine
used in water treatment. Chlorine demand in 1994 for use in water treatment was 5 percent
of all uses, and demand in the year 2010 is projected to remain at 5 percent.
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2.2.1.3 Substitutes for Chlorine
Because environmental regulations in general, and the proposed NESHAP in
particular, have the potential to raise the price (and/or alter the quality) of the regulated
commodities, the economic impact of the regulations may depend on the extent to which
users of the commodity can substitute other commodities for the regulated one.. To the extent
that chlorine is used as a chemical ingredient in the production of a particular product,
substitution of other materials is limited. However, factors that raise the price of a given
chemical ingredient can lead to chemical reformulations that substitute away from that
ingredient either by reducing its use per unit of output or by completely switching to another
ingredient.
For example, chlorine is widely used as a bleaching agent. However, the
characteristics that make chlorine a superb cleaning/bleaching agent also contribute to its
adverse impact on surrounding environments when released from the production process.
This has been particularly pronounced in the use of chlorine in pulp and paper productions,
which leads to water effluents containing dioxin, a highly toxic substance. A combination of
regulatory and voluntary efforts has led the pulp and paper industry to substantially reduce its
releases of chlorine derivatives, partly through waste stream treatment improvements and
partly through reduced use of chlorine. In recent years, many pulp makers have switched to
elemental chlorine-free (ECF) pulp, which uses chlorine dioxide rather than elemental
chlorine because the former essentially avoids the release of dioxin as a pollutant (Alliance
for Environmental Technology, 1996).
Sodium hypochlorite is also a substitute for chlorine in waste water treatment and
drinking water disinfection applications. Sodium hypochlorite is easier to handle than
gaseous chlorine or calcium hypochlorite. It is, however, very corrosive and must be stored
with care and kept away from equipment that can be damaged by corrosion. Hypochlorite
solutions also decompose and should not be stored for more than 1 month (Minnesota Rural
Water Association [MRWA], 2000).
2-14
-------
2.2.2 Sodium Hydroxide Demand4
Three forms of sodium hydroxide are produced to meet marketplace demands
(Kroschwitz, 1991). These are purified diaphragm sodium hydroxide (50 percent) grade, 73
percent sodium hydroxide, and anhydrous sodium hydroxide. Fifty percent grade sodium
hydroxide accounts for 85 percent of the sodium hydroxide consumed in the United States.
Five percent of sodium hydroxide produced on a yearly basis is concentrated to 73 percent
solutions for special usage in rayon, for example. Seventy-three percent sodium hydroxide is
a derivative of 50 percent sodium hydroxide and is stored in liquid tanks. The remainder is
used to produce anhydrous sodium hydroxide. Anhydrous sodium hydroxide is produced
from either 50 or 73 percent sodium hydroxide.
2.2.2.1 Sodium Hydroxide Uses
Sodium hydroxide has a wide variety of industrial applications, including its use as a
cleaning agent, catalyst, anticorrosive compound, and an agent for maintaining alkaline pH
levels.
The majority of 73 percent sodium hydroxide and anhydrous sodium hydroxide is
used to manufacture rayon and for the synthesis of alkyl aryl sulfates. The majority of
sodium hydroxide uses refer to 50 percent sodium hydroxide (Kroschwitz, 1991).
2.2.2.2 Major Sodium Hydroxide Consumers
As Figure 2-6 shows, sodium hydroxide is consumed by many of the same industries
that consume chlorine, but it is consumed by a larger variety of industries than chlorine.
Table 2-4 shows that the composition of sodium hydroxide demand is expected to remain
stable for the next 5 years. Households consume sodium hydroxide only indirectly, when it is
a component of other goods. The major industrial consumers of sodium hydroxide are
discussed below.
The Chemical Industry. Chemical manufacturing accounts for over half of all U.S.
sodium hydroxide demand. It is used primarily for neutralization, in off gas scrubbing, and
as a catalyst. A large part of this category is used in the manufacture of organic
4The material in this section draws heavily from Kroschwitz (1991) and Gerhartz (1992). Any exceptions to
this or specific references within these two sources are noted accordingly.
2-15
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Water Treatment
Industry
2%
Organic Chemical Industry
Industry
11%
Other Direct
Applications
27%
Figure 2-6. U.S. Sodium Hydroxide, 1998
Table 2-4. U.S. Sodium Hydroxide Consumption
Percent of Total Production
Use
Organic chemicals
Inorganic chemicals
Direct applications
Pulp and paper
Soaps and detergents
Water treatment
1995
36%
11%
53%
19%
6%
2%
1998
35%
11%
54%
19%
6%
2%
2003
35%
11%
54%
16%
6%
2%
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
intermediates, polymers, and end products. The majority of sodium hydroxide required here
is for the production of propylene oxide, polycarbonate resin, epoxies, synthetic fibers, and
surface-active agents.
2-16
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The Pulp and Paper Industry. Pulp and paper manufacture accounts for about a
quarter of total U.S. sodium hydroxide demand. The sodium hydroxide is used to pulp wood
chips, to extract lignin during bleaching, and to neutralize acid waste streams. Changes in
technologies aimed at decreasing chlorine use will also serve to decrease sodium hydroxide
requirements. In addition, sodium hypochlorite, which requires sodium hydroxide in its
manufacture, is under increased scrutiny in pulp and paper applications because of potential
chloroform formation.
The Cleaning Product Industry. Sodium hydroxide is used in the production of a
wide variety of cleaning products. This segment of the industry accounts for less than
10 percent of total consumption, but it is expected to continue growing by a small amount.
Sodium hydroxide use in this segment goes into the production of soap and other detergent
products, household^bleaehesT-peHshesv-and cleaning goods.
Petroleum and Natural Gas. The sodium hydroxide used in the petroleum and
natural gas industry is used to process oil and gas into marketable products, especially by
removing acidic contaminants. The remainder is used primarily to decrease corrosion of
drilling equipment and to increase the solubility of drilling mud components by maintaining
an alkaline pH.
Cellulosics Producers. Rayon and other cellulose products such as cellophane and
cellulose ethers also require sodium hydroxide. There are several very competitive substitute
products and sodium hydroxide use in this area has decreased over the last 10 years.
2.2.2.3 Substitutes for Sodium Hydroxide
As discussed in Section 2.2.2.2, the NESHAP's effect on the price and quantity
demanded of sodium hydroxide will be influenced by the availability of substitutes for
sodium hydroxide. The more likely that sodium hydroxide consumers will substitute away
from the product as its price rises, the more likely it is that the burden of regulatory costs will
fall mostly on the producers of a commodity. Several close substitutes exist for sodium
hydroxide, including other alkalies and, in particular, soda ash and lime. Sodium hydroxide
has some attractive properties over substitute inputs for many uses, but it is usually more
expensive. Many firms use sodium hydroxide until the price increases too much; then they
switch to lower-priced substitutes (Berthiaume, Anderson, and Yoshida, 2000).
2-17
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2.3 Organization of the Chlor-Alkali Industry
This section identifies the major sources of chlorine and sodium hydroxide production
and describes how these suppliers are organized in the respective markets. Firm-level data
for owners of the production facilities are presented, where available. Market structure issues
are also discussed in the context of key estimates of industry concentration.
2.3.7 Market Structure
Market structure is of interest because it determines the behavior of producers and
consumers in the industry. In perfectly competitive industries, no producer or consumer is
able to influence the price of the product sold. In addition, producers are unable to affect the
price of inputs purchased for use in their products. This condition most likely holds if the
industry has a large number of buyers and sellers, the products sold and inputs used in
production are homogeneous, and entry and exit of firms are unrestricted. Entry and exit of
—firmware-unrestricted for most industriesrexcept in cases where the government regulates
who is able to produce output, where one firm holds a patent on a product, where one firm
owns the entire stock of a critical input, or where a single firms is able to supply the entire
market. In industries that are not perfectly competitive, producer and/or consumer behavior
can have an effect on price.
Concentration ratios (CRs) and Herfindahl-Hirschmann indices (HHIs) can provide
some insight into the competitiveness of an industry. The U.S. Department of Commerce
reports these ratios and indices for the four-digit SIC code level for 1992, the most recent
year available. Table 2-5 provides the value of shipments, the four- and eight-firm
concentration ratios, and the HHI that have been calculated for the alkalies and chlorine
industry (SIC 2812). It has been suggested that an industry be considered highly concentrated
if the four-firm concentration ratio exceeds 50 percent, and in this industry, it far surpasses
this threshold.
The criteria for evaluating the HHIs are based on the 1992 Department of Justice's
Horizontal Merger Guidelines. According to these criteria, industries with HHIs below 1,000
are considered unconcentrated (i.e., more competitive), those with HHIs between 1,000 and
1,800 are considered moderately concentrated (i.e., moderately competitive), and those with
HHIs above 1,800 are considered highly concentrated (i.e., less competitive). In general,
firms in less concentrated industries are more likely to be price takers, while those in more
2-18
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Table 2-5. Share of Value of Shipments by Number of Companies: Alkalies and
Chlorine in 1992 (SIC 2812; NAICS 325181)
Percentage Accounted for
by
Companies
(number)
34
Total Value of Shipments
($10*) CR4
2,786.9 75
CR8
90
HHI"
1,994
a Herfindahl-Hirschmann Index is for the 50 largest companies.
Source: U.S. Department of Commerce, Bureau of the Census. 1999. Concentration Ratios in Manufacturing.
MC92-5-2. Washington, DC. . Last
revised February 4, 1999.
concentrated industries have more ability to influence market prices. Based on these criteria,
the alkalies and chlorine industry is considered highly concentrated. The HHI data support
the conclusion drawn from the concentration ratio data.
Though the concentration ratios and HHI indicate a highly concentrated market,
several factors may mitigate the market power of chlorine companies. For the baseline year
of 1997, EPA classified the 43 facilities as producing for either the merchant or captive
markets. Vertically integrated firms produce the vast majority of chlorine as an input for a
variety of final products (referred to as "captive production"). Only 27 percent of chlorine is
sold on the merchant market, although 75 percent of the facilities affected by the proposed
regulation operate in the merchant market. The HHI for the 12 companies that participated in
the merchant market in 1997 is 1,693—somewhat lower than the HHI for the industry as a
whole, and no merchant firm commands more than 25 percent of the merchant market.
Furthermore, demand for chlorine is projected to grow slowly and the trend in the industry is
towards vertical integration (Dungan, 2000), again potentially limiting the market power of
chlorine producers.
Unlike the chlorine market, several close substitutes for sodium hydroxide exist, in
particular soda ash, and this limits the ability of sodium hydroxide producers to significantly
raise prices. Because most chlorine is produced for captive use and it is difficult to store,
demand for chlorine dominates production decisions (Berthiaume, Anderson, and Yoshida,
2-19
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2000). Thus, despite the concentrated nature of production, the market for sodium hydroxide
appears to be competitive.
2.3.2 Manufacturing Facilities
EPA identified 43 facilities in the United States engaged in chlorine production. The
facilities are listed in Table 2-6 (EC/R Incorporated, 1996). As mentioned previously, the
majority of chlorine production plants use the electrolyte processes (diaphragm, mercury, or
membrane cells). These processes account for approximately 97 percent of chlorine
production. Seven plants use a combination of two types of chlor-alkali cells. More
specifically, diaphragm cells are used at 23 plants, mercury cells are used at 13 plants, and
membrane cells are used at 8 plants. In addition, the HoltraChem facility in Acme, NC,
facility recently converted from a mercury process to the diaphragm process. Figure 2-7
shows the distribution of chlorine production facilities across the United State's. The
facilities are concentrated in the Gulf Coast area because of the proximity of brine, a major
input into chlorine production, and chemical companies that use chlorine as an input.
2.3.3 Industry Production and Capacity Utilization
Recent historical data on production capacity are presented in Tables 2-7 and 2-8 for
chlorine and sodium hydroxide, respectively (Berthiaume, Anderson, and Yoshida, 2000; The
Chlorine Institute, 2000). Because chlorine and sodium hydroxide are produced together and
in fixed proportions, the capacity data possess very similar levels and trends.
Capacity increased slightly during the 1990s especially since 1995. Production levels
rose steadily throughout the decade. Capacity utilization remained above 90 percent for most
of the 1990s, reaching a peak in 1995. As a result, any future expansion in domestic output
will likely need to come from new sources, either new plants or capacity expansion at
existing plants.
2.3.4 Industry Employment
Table 2-9 lists data on employment and hours per worker for the chlor-alkali industry.
Total and production-related employment both dropped between 1990 and 1997, following
trends in the previous two decades. In 1997, there were roughly 4,900 total workers and
3,300 production workers engaged in chlor-alkali production.
2-20
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Table 2-6. Summary of Chlorine Production Facilities by Location, Process, Age, and
Type in 1997
Parent Company
ASHTA
Bayer AG
Dow Chemical
Dow Chemical
Dupont Chemical
Elf Aquitaine
Formosa Plastics
Formosa Plastics
Fort James
Fort James
Fort James
General Electric
General Electric
Georgia Gulf
Georgia Pacific
HoltraChem
HoltraChem
LaRoche Chemical
Magnesium Corporation
Occidental
Occidental
Occidental
Occidental
Occidental
Occidental
Occidental
Occidental
Occidental
Olin
Olin
Olin
Olin
Facility Location
Ashtabula
Baytown
Plaquemine
Freeport
Niagra Falls
Portland
Baton Rouge
Point Comfort
Rincon
Muskogee
Green Bay
Burkville
Mt. Vernon
Plaquemine
Bellingham
Orrington
Acme
Grammercy
Rawley
Mobile
Muscle Shoals
Delaware City
Convent
Taft
Niagra Falls
Ingleside
Laporte
Deer Park
Mclntosh
Augusta
Niagra Falls
Charleston
OH
TX
LA
TX
NY
OR
LA
TX
GA
OK
WI
AL
IN
LA
WA
ME
NC
LA
UT
AL
AL
DE
LA
LA
NY
TX
TX
TX
AL
GA
NY
TN
Process
Mercury
HCL electrolysis
Diaphragm
Diaphragm
Downs sodium
Diaphragm/membrane
Diaphragm
Membrane
Membrane
Membrane
Diaphragm
Diaphragm
Diaphragm
Diaphragm
Mercury1"
Mercury
Mercury0
Diaphragm
Magnesium production
Membrane
Mercury
Mercury
Diaphragm
Diaphragm/membrane
Diaphragm
Diaphragm
Diaphragm
Diaphragm/mercury
Diaphragm
Mercury
Membrane
Mercury
Year Built
1963
1987
1958
1940
1898
1947
1937
1993
1990
1980
1968
1987
1976
1975
1965
1967
1963
1958
NA
1964
1952
1965
1981
1966
1898
1974
1974
1938
1952
1965
1987
1962
Type-
Merchant
Captive
Merchant
Merchant
Captive
Merchant
Captive
Captive
Captive
Captive
Captive
Captive
Captive
Captive
Merchant
Merchant
Merchant
Merchant
Captive
Merchant
Merchant
Merchant
Captive
Captive
Captive
Captive
Merchant
Captive
Merchant
Merchant
Merchant
Merchant
(continued)
2-21
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Table 2-6. Summary of Chlorine Production Facilities by Location, Process, Age, and
Type in 1997 (continued)
Facility
Pioneer
Pioneer
Pioneer
PPG
PPG
Vicksburg Chemical
Vulcan
Vulcan
Vulcan
Westlake Monomers Corp
Weyerhauser
Facility Location
St. Gabriel
Henderson
Taco'ma
Lake Charles
Natrium
Vicksburg
Wichita
Geismar
Port Edwards
Calvert City
Longview
LA
NV
WA
LA
WV
NY
KS
LA
WI
KY
WA
Process
Mercury
Diaphragm
Diaphragm/membrane
Diaphragm/mercury
Diaphragm/mercury
Nitric acid salt
Diaphragm/membrane
Diaphragm
Mercury
Mercury
Diaphragm
Year Built
1970
1942
1929
1947
1943
1962
1952
1976
1967
1966
1957
Type'
Merchant
Merchant
Merchant
Captive
Merchant
Merchant
Captive
Captive
Merchant
Captive
Captive
a Primary
b Closed 1999.
c Plant has recently converted to the process.
Sources: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
The Chlorine Institute. 2000. Chlor-Alkali Industry Plants and Production Data Report.
Washington, DC.
EC/R Incorporated. September 12, 1996. Background Information Document; Chlorine Production
Summary Report. Prepared for the U.S. Environmental Protection Agency. Durham, NC: EC/R Inc.
Taken together, Tables 2-7 through 2-9 indicate an increasing level of industry output
being produced by a progressively smaller labor force. There are two reasons for this. First,
annual hours worked per production employee have increased over time, and secondly, labor
productivity per hour has risen steadily (see Figure 2-8).
2.3.5 Companies
Companies affected by the proposed NESHAP include entities that own and operate
one or more chlor-alkali production plants that use the mercury cell process. The chain of
ownership may be as simple as one plant owned by one company or as complex as multiple
plants owned by subsidiary companies. The Agency identified 21 ultimate parent companies
that own and operate 43 chlorine manufacturing facilities. Eight of these companies, or
2-22
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Figure 2-7. Distribution of Affected and Unaffected Chlorine Production Facilities by
State
Note: The highlighted states contain affected facilities.
2-23
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Table 2-7. U.S. Operating Rates for Chlorine (103 short tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Capacity
12,332
12,256
12,232
12,889
12,684
13,207
13,700
14,000
14,408
NA
Production
11,487
11,490
11,656
11,983
12,613
12,990
13,168
13,685
13,533
13,807
Capacity Utilization
93.1%
93.8%
95.3%
93.0%
99.4%
98.4%
96.1%
97.8%
93.9%
NA
NA = not available
Sources: The Chlorine Institute. 2000. Chlor-Alkali Industry Plants and Production Data Report.
Washington, DC.
Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
38 percent, own plants that use the mercury cell process. For the economic analysis, EPA
obtained company sales and employment data from one of the following sources:
• Gale Research, Inc. (1998),
• Hoover's Incorporated (2000),
• Information Access Corporation (2000), and
• Selected company 10-K reports.
Sales data were available for all 21 companies and employment data were available for 20
companies. All affected companies had sales and employment observations. Occidental
(three facilities), Olin (two,facilities), and PPG (two facilities) own approximately 60 percent
of the mercury cell plants in the United States. Company size is likely to be a factor in the
distribution of the regulation's financial impacts. Across all chlorine companies, the average
2-24
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Table 2-8. U.S. Operating Rates for Sodium Hydroxide (103 short tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
Capacity
13,091
13,273
13,442
14,147
13,771
13,771
14,285
14,598
15,585
Production
12,459
12,151
12,336
12,623
13,293
13,688
13,857
14,328
14,183
Capacity Utilization
95.2%
91.5%
91.8%
89.2%
96.5%
99.4%
97.0%
98.2%
91.0%
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
(median) annual sales were $12 billion ($2.4 billion). The average (median) employment is
44,000 (8,900) employees.
2.3.5.1 Small Business Identification
The proposed environmental regulation potentially affects large and small chlorine
manufacturers using mercury cells, but small firms may encounter special problems with
compliance. The Regulatory Flexibility Act (RFA), as amended by the Small Business
Regulatory Enforcement and Fairness Act of 1996 (SBREFA), requires EPA to consider the
economic impacts of this regulatory action on these small entities. Companies operating
chlorine manufacturing plants can be grouped into "large" and "small" categories using the
Small Business Administration's (SBA) general size standard definitions (SBA, 2000). For
this analysis, the SBA size standard for the chlor-alkali industry (SIC 2812; NAICS 325181)
is 1,000 employees. Based on this standard, six firms can be classified as small. Three of
these small firms own and operate facilities using the mercury cell process. As Table 2-10
shows, the six small firms' average (median) sales are $146 ($85) million; average (median)
2-25
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Table 2-9. Employment in the Chlor-Alkali Industry (SIC 2812; NAICS 325181) (103):
1990-1997
Year
1990
1991
1992
1993
1994
1995
1996
1997
Total
Employment
6.8
7.5
8.0
7.7
6.2
6.1
5.9
4.9
Production
Workers
4.7
5.2
5.4
5.3
4.2
4.2
4.0
3.3
Annual Hours of
Production Workers
10,100
11,000
11,300
11,100
8,900
8,400
8,400
' 7,085
Sources: U.S. Department of Commerce, Bureau of the Census. 1999. 7997 Economic Census—
Manufacturing Industry Series: Alkalies and Chlorine Manufacturing. EC97M-3251 E.
Washington, DC. .
U.S. Department of Commerce, Bureau of the Census. 1996-1998. Annual Survey of
Manufactures: Statistics for Industry Groups and Industries, .
U.S. Department of Commerce, Bureau of the Census. 1996. 7992 Census of Manufactures
Industry Series: Industrial Inorganic Chemicals. MC92-I-28A. Washington, DC: [online].
.
employment is 477 (435) employees. In contrast, the 15 large firms have average (median)
sales of $17 ($8) billion, and average employment of 59,000 (34,000) employees.
2.4 Market Data and Industry Trends
This section presents historical market data, including foreign trade and market prices
for chlorine by the major industry segments. Historical market data include U.S. production,
foreign trade, and apparent consumption of chlorine across the industry segments for the
years 1990 through 1997. The importance of foreign trade is measured by concentration
ratios (i.e., the relation of exports to U.S. production and the relative importance of imports
to U.S. apparent consumption). Furthermore, this section presents the quantities, values, and
market prices of chlorine and sodium hydroxide in recent years.
2-26
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1990 1991 1992 1993 1994 1995 1996 1997
Year
Figure 2-8. Labor Productivity Index for the Chlor-Alkali Industry: 1990-1997
Table 2-10. Summary Statistics for Chlorine Manufacturing Companies
Annual Sales ($106)
Companies
Small
Large
All
Average Median
$146 $85
$16,857 $8,016
$12,082 $2,410
Employment
Average
477
58,841
44,274
Median
435
33,800
8,973
2-27
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2.4.1 Value of Shipments
Table 2-11 lists recent historical data (1990-1997) on total value of shipments for the
chlor-alkali industry. In real terms, the industry's value of shipments increased through 1992,
then mostly followed a downward trend to reach approximately $2.5 million in 1997.
Table 2-11. Value of Shipments for the Chlor-AIkali Industry (SIC 2812; NAICS
325181) ($106): 1990-1997
Year Value of Shipments
1990 $2,710
1991 $2,729
1992 $2,787
1993 $2,481
1994 $2,171
1995 $2,730
1996 $2,850
1997 $2,465
Sources: U.S. Department of Commerce, Bureau of the Census. 1999. 7997 Economic
Census—Manufacturing Industry Series: Alkalies and Chlorine Manufacturing. EC97M-3251 E.
Washington, DC. .
U.S. Department of Commerce, Bureau of the Census. 1996-1998. Annual Survey of Manufactures:
Statistics for Industry Groups and Industries, .
U.S. Department of Commerce, Bureau of the Census. 1996. 7992 Census of
Manufactures—Industry Series: Industrial Inorganic Chemicals. MC92-I-28A. Washington, DC.
.
2.4.2 U.S. Production and Apparent Consumption
Tables 2-12 and 2-13 present historical data on the respective quantities of chlorine
and sodium hydroxide produced, imported, exported, and (apparently) consumed.
"Apparent" domestic consumption is not directly observed in the data; rather it is calculated
as total domestic production less exports plus imports. For chlorine, domestic consumption
has increased slightly more than domestic production since 1990, indicating a 16 percent
2-28
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Table 2-12. Production, Imports, Exports, and Consumption of Chlorine (103 short
tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
Average Annual
Growth Rate
Production
11,487
11,490
11,656
11,983
12,613
12,990
13,168
13,685
13,533
2.1%
Imports
357
296
275
323
394
396
419
453
413
2.6%
Exports
69
45
38
41
30
26
19
27
25
-9.4%
Apparent
Consumption
11,775
11,741
11,893
12,265
12,977
13,360
13,568
14,111
13,921
2.1%
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRJ International.
increased slightly more than domestic production since 1990, indicating a 16 percent increase
in (net) imports of chlorine. Nonetheless, foreign trade plays a fairly minor role in chlorine
trade, with net imports less than 3 percent of apparent consumption.
Foreign trade plays a larger role in the sodium hydroxide market, because the United
States is a net exporter of this commodity. Gross exports accounted for 11.6 percent of U.S.
production in 1998; net imports accounted for 5 percent of apparent consumption that year.
However, the 1998 numbers mask the fact that exports (gross and net) had dropped rather
dramatically from 1979 through 1994, with a rebound through 1998. Throughout the period
observed, exports are highly variable in the sodium hydroxide market.
2-29
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Table 2-13. Production, Imports, Exports, and Consumption of Sodium Hydroxide
(103 short tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
Average Annual
Growth Rate
Production
12,459
12,151
12,336
12,623
13,293
13,688
13,857
14,328
14,183
1.7%
Imports
565
474
569
502
568
553
550
560
596
1.3%
Exports
1,658
1,555
1,265
965
894
1,697
1,886
1,481
1,643
4.3%
Apparent
Consumption
11,366
11,070
11,640
12,160
12,967
12,544
12,521
13,407
13,136
1.9%
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook—SRI International.
2.4.3 Market Prices
Price data for chlorine and sodium hydroxide are presented in Table 2-14.
Unfortunately, these data are list prices and their lack of variation obscures the actual
movement in transaction prices. Transactions prices are not readily available, so general
inferences must be drawn from the list price data.
The data indicate a sharp decline in chlorine prices, yet a steady rise in sodium
hydroxide prices in the early 1990s. The chlorine price rebounded in 1994, and the sodium
hydroxide price continued to^ise,-declining slightly in 1997 and 1998.
2.4.4 Future Outlook
f
Global growth forecasts for chlorine range from 0.8-1.5 percent per year (Chemical
Week, 1996). New demand is being driven by growth in PVC. PVC growth is projected at 4
to 5 percent per year, but declining use in pulp and paper, chlorofluorocarbons, and solvents
2-30
-------
will keep growth in check the next few years. The United States and the Mideast are widely
viewed as the most attractive sites for new capacity because of low power rates and easy
access to world markets. In 1995, operating rates continued to exceed 95 percent, which
could lead to an increase in price if demand rises.
Table 2-14. U.S. List Prices for Chlorine and Sodium Hydroxide ($/short tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
Chlorine (Gas)
$190-$200
$125-$200
$1254200
$1254200
$2254255
$200
$1554160
$2454250
$245-255
Sodium
Solid
$560
$560
$560
$580
$580
$600
$600
$595
$575
Hydroxide
Liquid
$2904320
$3004330
$3004330
$3004330
$3004330
$3004330
$3004330
$3004330
$3004330
Source: Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 200. Chlorine/Sodium Hydroxide. CEH
Marketing Research Report. Chemical Economics Handbook - SRI International.
2-31
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SECTION 3
ENGINEERING COST ANALYSIS
Section 112 of the CAA requires the Agency to list and regulate categories of sources
that account for 90 percent of the aggregate emissions of several pollutants, including
mercury. This section presents the Agency's estimates of the national compliance costs
associated with the regulation of mercury emissions from 12 mercury cell chlor-alkali
manufacturing plants. A detailed discussion of the methodologies used to develop these
estimates is provided in the Background Information Document (EC/R Incorporated, 1996).
3.1 National Control Cost Estimates
The Agency developed facility-specific estimates of total annual compliance costs
associated with pollution control equipment or control system enhancements needed by the
point sources to meet the MACT emission limits:
• Ten mercury cell chlor-alkali plants were assumed to add a new finishing device to
one or more existing vent control systems. The devices included a nonregenerative
carbon adsorber (with a specialty carbon medium for mercury removal) for the
hydrogen by-product stream control system or mercury thermal recovery control
system and a packed hypochlorite scrubber for the end-box ventilation control
system.
• Five plants were assumed to require more frequent replacement of carbon media in
existing carbon adsorbers.
The nationwide annual compliance cost estimate for these is estimated to be $ 1.46 million, or
$0.91 per ton of chlorine (see Table 3-1). Note, however, that these cost estimates do not
account for behavioral responses (i.e., changes in price and output rates). Instead these
estimates are inputs to the economic model as described in Section 4.
3-1
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Table 3-1. Emissions Control and Monitoring, Recordkeeping, and Recording Costs of the MACT for Mercury
Cell Chlor-Alkali Plants
Emissions Control Costs
Facility
OxyChem —
Muscle Shoals, AL
HoltraChem —
Orrington, ME
OxyChem —
Delaware City, DE
Pioneer —
St. Gabriel, LA
Vulcan —
Port Edwards, WI
OxyChem —
Deer Park, TX
PPG—
Lake Charles, LA
Westlake—
Calvert City, KY
PPG—
Natrium, WV
Olin—
Charleston, TN
Olin—
Augusta, GA
ASHTA—
Ashtabula, OH
Total
Total
Capital
Costs
$166,272
$0
$16,897
$94,761
$45,613
$50,478
$94,761
$0
$58,560
$131,454
$14,537
$50,756
$724,089
Annualized
Capital
Costs
$16,293
$0
$1,932
$10,404
$5,884
$5,767
$10,404
$0
$7,139
$13,113
$1,596
$5,589
$78,121
O&M
Costs
$104,046
$0
$28,187
$30,467
$49,090
$75,514
$30,467
$161,840
$46,039
$117,048
$24,708
$57,220
$724,628
Total
Annual
Control
Costs
$120,339
$0
$32,144
$40,872
$54,974
$81,282
$40,872
$161,840
$53,178
$130,162
$26,304
k
$62,809
$802,749
Monitoring,
Total
Capital
Costs
$33,937
$33,937
$84,841
$33,937
$50,905
$33,937
$50,905
$33,937
$33,937
$67,873
$33,937
$33,937
$526,016
Recordkeeping,
Annualized
Capital
Costs
$4,832
$4,832
$12,079
$4,832
$7,248
$4,832
$7,248
$4,832
$4,832
$9,664
$4,832
$4,832
$74,893
and Recording Costs
O&M
Costs
$47,042
$47,042
$54,811
$47,042
$49,632
$47,042
$49,632
$47,042
$47,042
$52,222
$47,042
$47,042
$582,636
Total
Annual
MRR
Costs
$51,874
$51,874
$66,891
$51,874
$56,880
$51,874
$56,880
$51,874
$51,874
$61,885
$51,874
$51,874
$657,529
Total
Annual
Costs
$172,213
$51,874
$97,010
$92,746
$111,854
$133,156
$97,751
$213,714
$105,052
$192,047
$78,178
$114,683
$1,460,279
U)
K)
-------
SECTION 4
ECONOMIC IMPACT ANALYSIS
The proposed NESHAP requires mercury cell chlor-alkali facilities to install additional
control technologies to meet emission standards for releases of HAPs to the atmosphere. The
additional costs imposed by the new control requirements will have financial implications for
the affected producers and broader societal implications as these effects are transmitted
through market relationships to other producers and consumers. The sections below describe
the methodology and results Tor the El A.
To measure the size and distribution of the economic impacts of the regulation, EPA
compared baseline conditions of chlorine and sodium hydroxide markets in 1997 with those
for the counterfactual or with-regulation conditions expected to result from implementing the
regulation. The main elements of this analysis are
• economic characterization of the regulated facilities in terms of cost of production
and whether they are a merchant or captive producer;
• characterization of baseline demand for chlorine and sodium hydroxide;
• development of economic models that evaluate behavioral responses to additional
costs of the regulation in a market context; and
• presentation and interpretation of economic impact estimates generated by the
models.
4.1 Economic Impact Methodology: Conceptual Approach
Regulatory costs increase the costs of production for the affected facilities. If the
firms choose to continue to use the mercury production process, the marginal cost curves for '
these facilities will shift upwards by an amount determined by the variable costs of complying
with the regulation. The firms may shift to an alternative production process; however, it is
estimated that switching to an alternative production process (most likely membrane cells)
4-1
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would be more expensive than complying with the regulations, at least in the short run
(Dungan, 2000).
The chlorine industry has a number of special characteristics that this analysis
addresses. First, the chlorine market appears to be concentrated, although other features of
the industry may mitigate the effects of concentration on firm behavior (see discussion of
concentration in Section 2). Second, a majority of the processes for producing chlorine
(including the mercury process, the target of the proposed regulation) result in the joint
production of sodium hydroxide at a fixed rate. Finally, the merchant market for chlorine is
small in size compared to production devoted to captive uses (internal uses by the producing
firm), and 75 percent of the facilities affected by the proposed regulation operate primarily in
the merchant market.
As discussed in Section 2, the chlorine industry appears to be concentrated, with 75
percent of production carried out by four firms and a high HHI (1,900). However, much of
the production takes place in vertically integrated firms that use the chlorine internally. It is
possible that the merchant market for chlorine is competitive, because many of the largest
chlorine producers are vertically integrated and use most of the chlorine they produce to
satisfy internal demand. The merchant market accounts for approximately 27 percent of total
chlorine production, and the HHI for the participants in the merchant market is lower (1,693).
Furthermore, the chlorine market is growing slowly, and the trend is toward vertical
integration. To provide a range of alternatives, EPA calculated welfare losses two ways:
under the assumption that the merchant market for chlorine is competitive and under the
assumption that the merchant market for chlorine is concentrated.
For the concentrated model, EPA used a Cournot model to characterize the market.
In the Cournot model, one of several models of monopolistic competition, firms are modeled
as choosing production quantities. Unlike a competitive market, in which the market price
equals the marginal cost of production and firms take the market price as given, the Cournot
model reflects the fact that chlorine suppliers may have market power and can charge a price
in excess of marginal cost by producing a quantity that is less than the competitive optimum.
f
Unlike the chlorine market, the market for sodium hydroxide appears to be
competitive. Several close substitutes for sodium hydroxide prevent producers from raising
prices. Much less sodium hydroxide is dedicated to captive uses, and the market for sodium
hydroxide appears to move cyclically under the influence of demand for chlorine.
4-2
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Chlorine and sodium hydroxide are joint products of a production process that starts
with brine and separates it into these two chemicals. To address the issue of joint production,
EPA modeled a joint marginal cost (supply) function for both chlorine and sodium hydroxide
that interacts with separate demand curves. Because chlorine and sodium hydroxide are
produced at a fixed ratio, sodium hydroxide can be expressed in chlorine units and the
decision to produce chlorine with revenue streams from the two separate markets can be
modeled.
Finally, for purposes of this analysis, EPA modeled the merchant and captive markets
independently. Over the long run, if prices increase in the merchant market, one would expect
to see firms engaged in captive production enter the merchant market. However, given the
small size of the compliance costs it is unlikely that the proposed regulations will change the
balance between the merchant and captive markets. Furthermore, the industry trend is
towards vertical integration in chlorine production.
Given the capital in place, each chlorine facility will be assumed to face an upward-
sloping marginal cost function. The facility owner is willing to supply chlorine and sodium
hydroxide according to this schedule as long as the market prices of the two products are high
enough to cover average variable costs. If revenue falls below average variable costs, then the
firm's best response is to cease production because total revenue does not cover total variable
costs of production. In this scenario, producers lose money on operations as well as capital.
By shutting down, the firm avoids additional losses from operations. Demand is characterized
by a downward-sloping demand curve, which implies that demand is low when prices are high
and demand is high when prices are low.
Figure 4-1 (a) shows how the market prices and quantities of chlorine (or sodium
hydroxide) are determined by the intersection of market supply and demand curves in a
perfectly competitive market, but basic intuition is similar to the concentrated (not perfectly
competitive) market model. The baseline consists of a market price and quantity (P, Q) that is
determined by the downward-sloping market demand curve (DM) and the upward-sloping
market supply curve (SM) that reflects the sum of the individual supply curves of chlorine
facilities. Any individual supplier would produce amount q (at price p) and the facilities
would collectively produce amount Q, which equals market demand.
4-3
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Chlorine Market:
Individual Chlorine
Facility
Merchant Chlorine
Market
a) Baseline Equilibrium
Chlorine Market:
S' / S
P' —-
P
i i
I I
q' q
Chlorine Facilities
Directly Affected by
Regulation
q q'
Chlorine Facilities Indirectly
Affected by Regulation
b) With-Regulation Equilibrium
Q' Q
Merchant Chlorine
Market
Figure 4-1. Market Equilibrium Without and With Regulation
Now consider the effect of the regulatory control costs. Incorporating the regulatory
control costs will involve shifting the supply curve upward for each regulated mercury cell
chlor-alkali facility by the per-unit variable compliance cost. The supply curve of
nonregulated facilities will remain unaffected.
4-4
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The supply function of the affected facilities shifts upward from S to S', causing the
market supply curve to shift upward to SM'. At the new equilibrium with the regulation, the
market price increases from P to P' and market output (as determined from the market
demand curve, DM) declines from Q to Q' (see Figure 4-1 [b]). This reduction in market
output is the net result of output reductions at directly affected facilities and output increases
at indirectly affected facilities. This illustrates the theory underlying estimation of the cost
impacts of the MACT standards on the chlor-alkali facilities that use the mercury cell process.
4.2 Operational Model
The proposed regulation will increase the cost of production for existing mercury
process chlor-alkali plants. The regulated facilities may alter their current levels of production
or even close the facility in response to the increased costs. These responses will in turn
determine the impact of the regulations on total market supply and ultimately on the
equilibrium price and quantity. To determine the impact on equilibrium price and quantity,
EPA
• characterized the merchant and captive supply of chlorine and sodium hydroxide at
the facility and company level;
• characterized demand for chlorine and sodium hydroxide;
• developed the solution algorithm to determine the new with-regulation equilibrium;
and
• computed the values for all the impact variables.
This section and the appendices describe how the Agency calculated market supply,
market demand, and the impact of additional regulatory control costs on the market
equilibrium. Supply is calculated for the merchant market for chlorine first under the
assumption that the merchant chlorine market is competitive and next under the assumption
that the merchant chlorine market is concentrated. The captive supply is calculated
separately.
4.2.1 Market Supply
In each case, market supply calculations were conducted at the facility level and then
summed to provide company and industry-level information. Based on the best available data,
4-5
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facilities were characterized as supplying to either the merchant or captive chlorine market.1
This section and the appendices describe how the supply curve was constructed for each
market.
4.2.1.1 Competitive Merchant Markets
In the competitive market, firms are assumed to be price-takers—changes in the
output of any one firm will not affect the market price. Furthermore, the market price equals
the marginal cost of producing the last unit. Figure 4-2(a) depicts a perfectly competitive
market. The Agency modeled the chlorine and sodium hydroxide markets at the facility level
with upward-sloping supply curves, reflecting increasing marginal costs as output increases.
Facility-level supply curves were estimated for both the firms directly affected by the
regulation (the mercury cell chlor-alkali facilities) and those facilities that are indirectly
affected by the regulation through changes in the amount supplied by the regulated firms. For
this analysis, a Leontief specification was used to derive the supply curves for the individual
facilities (see Appendix A for details about the calculation of the supply curves). The supply
function parameters were calibrated using baseline 1997 production, capacity, and price data.
4.2.1.2 Concentrated Merchant Market for Chlorine and Competitive Market for
Sodium Hydroxide
To model the merchant chlorine market as a concentrated market, the Agency used a
Cournot model in which firms exercise some control over the price of chlorine. In these
noncompetitive models, each supplier recognizes its influence over market price and chooses a
level of output that maximizes its profits, given the output decisions of the others. Employing
a Cournot model assumes that suppliers do not cooperate. Instead, each supplier evaluates
the effect of its output choice on market price and does the best it can given the output
decision of its competitors. Thus, given any output level chosen by other suppliers there will
be a unique optimal output choice for a particular supplier.
'Facilities that produce for both the merchant and the captive markets were classified as wholly producing for
which ever market received the majority of the supply based on EPA's interpretation of the best available
data.
4-6
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p*
MC
M
(a) Perfectly Competitive Market
P*
MC
D
M
Q* x MRC Q
(b) Imperfectly Competitive Market
Figure 4-2. Perfectly Competitive and Imperfectly Competitive Markets
4-7
-------
The basic oligopoly model considered is the "many firm Cournot equilibrium" model,
described in Varian (1993). As is the case in all imperfectly competitive models of profit-
maximizing behavior, each oligopolist chooses an output level where marginal revenue equals
marginal cost (total marginal cost is the sum of the preregulation marginal cost per unit plus
the per-unit compliance costs). For the monopolist, marginal revenue is simply a function of
the demand elasticity. In the Cournot model, marginal revenue is a fraction, Z,, of the market
price: Z( = (1 - s/£d), where s; = q/Q. Equilibrium is defined by qj*, such that marginal
revenue = marginal cost (see Figure 4-2[b]). Because the quantity produced for each facility
depends on the market share of the parent company, production from the directly and
indirectly affected suppliers was summed to determine the company's market share. Appendix
B provides the details on calculating marginal cost and supply.
The Agency assumed a competitive sodium hydroxide market in both scenarios.
4.2.2 Captive Market for Chlorine and Competitive Market for Sodium Hydroxide
Three of the affected facilities produce chlorine used by the parent companies
internally to produce other downstream products (captive chlorine producers). For these
facilities, the engineering compliance costs will equal the welfare costs to society. The
chlorine produced at these facilities is used to make a large variety of downstream products,
and good data are lacking on the specific downstream products produced, the amount of
chlorine devoted to specific downstream products, and the markets for these products. If
these downstream product markets are competitive, it will be very difficult for the three
affected facilities to pass on the higher cost of chlorine to consumers of the downstream
products. Instead, EPA assumed that the very small compliance costs will not alter the
production decisions of captive producers of chlorine, and the firm will simply receive a lower
producer surplus for the final, downstream products.
4.2.3 Market Demand
The Agency modeled separate demand curves for chlorine and sodium hydroxide. The
two products are jointly produced under the same marginal cost structure, but the demand
curves for chlorine and sodium hydroxide are different. EPA modeled one aggregate
consumer with a downward-sloping demand curve for chlorine and one aggregate consumer
for sodium hydroxide in the merchant market that are consistent with the theory of demand
(i.e., consumption of the commodity is high at low prices and low at high prices, reflecting the
4-8
-------
opportunity costs of purchasing these products). The Agency developed these curves using
the same equation and baseline quantity, price data, and assumptions about the responsiveness
to changes in price (demand elasticity). Appendix C presents the details for calculating the
demand curves. For domestic demand, a demand elasticity of—1.0 was used (i.e., a 1 percent
increase in the price of the commodity would result in a 1 percent decrease in quantity
demanded, and vice versa), although sensitivity analysis was conducted to determine the
impact of this assumption on the model results.
4.2.4 Control Costs and With-Regulation Equilibrium for Merchant Market
Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased production costs due to compliance, which causes
facility-specific production responses (i.e., output reduction). The cumulative effect of these
responses leads to an increase in the market price that all producers (directly affected and
indirectly affected) and consumers face. This increase leads to further responses by all
producers and consumers and, thus, new market prices. The new with-regulation equilibrium
is the result of a series of these iterations between producer and consumer responses and
market adjustments until a stable market price equilibrium in which total market supply equals
total market demand (i.e., Qs = Qd). Appendix D details how the Agency modeled the change
in market equilibrium to produce estimates of the economic impacts described below.
4.3 Economic Impact Results
The theory presented above suggests that producers attempt to mitigate the impacts of
higher-cost production by shifting the burden onto other economic agents to the extent the
market conditions allow. Because of the small control costs, the model projects little upward
pressure on prices in the merchant market because producers reduce output rates only slightly
in response to higher costs. Higher prices reduce quantity demanded and output for the
commodity, leading to changes in economic surplus to consumers and profitability of firms.
These market adjustments determine the social costs of the regulation and its distribution
across stakeholders (producers and consumers). (As stated above, in the captive market the
Agency assumes that producers will not pass on the higher costs of chlorine to consumers of
the final end market products, so the change in welfare is the reduction in producer surplus.)
In this case, based on the Agency's characterization of the market, the directly affected
producers bear the brunt of the cost changes. This section reports impact results under both
the perfect competition and imperfect competition behavioral assumptions.
4-9
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4.3.1 Market-Level Results
The increased cost of production due to the regulation is expected to slightly increase
the price of chlorine and sodium hydroxide and only marginally reduce production and
consumption from baseline levels. As shown in Table 4-1, price is projected to only increase
less than 0.01 percent for both chlor-alkali products. The price impacts are attenuated by the
existence of unaffected producers (domestic and foreign). Only marginal changes in chlorine
output occur with the regulation. Domestic chlorine output is projected to decline by 24.9
tons, while foreign imports are projected to increase by 2.5 tons resulting in a net decline of
22.4 tons. Domestic sodium hydroxide output is projected to decline by 12.7 tons, while
foreign imports are projected to increase by 0.5 tons resulting in a net decline of 12.3 tons.
These small changes are the result of small per-unit compliance costs and their
distribution across merchant chlorine facilities. The per-unit compliance costs are small
relative to the market price of chlorine for all affected producers (less than 0.01 percent).
Additionally, the majority of market share is produced by facilities not subject to regulation
(i.e., domestic producers using the diaphragm or membrane process and foreign producers).
In the chlorine market and sodium hydroxide market, these producers account for over 75
percent of output. Thus, they limit the ability of directly affected producers to increase prices
in these markets.
There are only marginal differences in the market-level impacts between the two
behavioral assumptions (perfect competition and concentrated models). As discussed above,
the small size of the control costs and distribution of these costs contributes to this result. In
addition, although the domestic merchant chlorine market is concentrated, no affected
company accounts for more than 25 percent of total market production.
4.3.2 Industry-Level Results
Industry revenues, costs, and profitability change as chlor-alkali prices and production
levels adjust to with-regulation conditions. The projected change in operating profits is the
net result of changes for directly and indirectly affected companies that own merchant facilities
plus changes for directly affected companies that own captive facilities. Table 4-2 reports the
projected changes in revenue and costs for the directly and indirectly affected companies
operating in the merchant market. After accounting for market adjustments under perfect
4-10
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Table 4-1. Market-Level Impacts of the Mercury Cell Chlor-Alkali NESHAP: 1997
Chlorine
Price ($/ton)
Quantity (tons/yr)
Domestic production
Directly affected
producers8
Ifldtfeetly-affeeted
producers
Imports
Sodium Hydroxide
Price ($/ton)
Quantity (tons/yr)
Domestic production
Directly affected
producers8
Indirectly affected
producers
Imports
Baseline
$233.75
4,009,309
3,556,309
1,131,109
2,425,200
453,000
240.75
14,888,000
14,328,000
1,191,948
13,136,052
560,000
Perfect
Competition
Change
Absolute Relative
$0.0013
-22.4
-24.9
-25.0
0.1-
2.5
$0.0002
-12.3
-12.7
-21.5
8.7
0.5
0.001%
-0.001%
-0.001%
-0.002%
0,000%-
0.001%
0.000%
0.000%
0.000%
-0.002%
0.000%
0.000%
Concentrated Market
Change
Absolute
$0.0013
-22.4
-24.9
-25.0
—0.1
2.5
$0.0002
-12.3
-12.7
-21.5
8.7
0.5
Relative
0.001%
-0.001%
-0.001%
-0.002%
0.000%
0.001%
0.000%
0.000%
0.000%
-0.002%
0.000%
0.000%
a Reflects the aggregate production volumes from the nine merchant mercury cell facilities affected by the
proposed MACT.
competition and imperfect competition, the directly affected merchant producers are expected
to incur $1 million annually in regulatory compliance costs. As shown in Table 4-2, based on
projected individual and market responses, the economic analysis estimates the net effect of
revenue and cost changes for these producers to result in a decline in operating profits of $1
million per year. This reduction in profits is less than the regulatory costs they incur because
these producers reduce their production, resulting in higher market chlor-alkali prices, which
effectively shifts a very small portion of the regulatory burden onto consumers. The
4-11
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Table 4-2. National-Level Industry Impacts of the Mercury Cell Chlor-Alkali
NESHAP: 1997"
Chlorine Companies
(Directly Affected)1"
Revenue ($106)
Costs ($106)
Control
Production
Operating profits ($106)
Companies (#)
Facilities (#)
Employment (FTEs)
Chlorine Companies
(Indirectly Affected)
Revenue ($106)
Costs ($106)
Control
Production
Operating profits ($106)
Companies (#)
Facilities (#)
Employment (FTEs)
Baseline
$1,468.4
$644.0
$0.0
$644.0
$824.4
7
9
1,055
$304.7
$120.6
$0.0
$120.6
$184.1
4
12
218
Perfect
Competition
Change
Absolute Relative
-$0.007
$1.005
$1.016
-$0.011
-$1.011
0
0
0
$0.001
$0.000
$0.000
$0.000
$0.001
0
0
0
0.000%
0.156%
NA
-0.002%
-0.123%
0.000%
0.000%
0.000%
0.000%
0.000%
NA
0.000%
0.001%
0.000%
0.000%
0.000%
Concentrated Market
Change
Absolute
-$0.007
$1.006
$1.016
-$0.009
-$1.013
0
0
0
$0.001
$0.000
$0.000
$0.000
$0.001
0
0
0
Relative
0.000%
0.156%
NA
-0.001%
-0.123%
0.000%
0.000%
0.000%
0.000%
0.000%
NA
0.000%
0.001%
0.000%
0.000%
0.000%
NA = Not available
FTEs = Full-time equivalents
1 Merchant operations only.
b Includes the companies that own the 12 mercury cell facilities affected by the proposed MACT.
4-12
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unaffected merchant producers slightly increase their production in response to the higher
market prices and, thereby, experience gains a marginal increase in operating profits (0.001
percent). Lastly, by assumption the Agency projects directly affected captive facilities to incur
a loss in operating profits of $0.445 million annually, which is assumed to be equal to the
aggregate engineering estimate of compliance costs. "For these producers, the Agency did not
predict higher prices for their end products and, thus, captive producers bear the full costs of
compliance.
As a result of these changes, the regulation is projected to decrease industry operating
profits by $1.45 million (see Table 4-2).2 No facilities are projected to close with the rule,
and no losses in employment are attributable to the rule. This section discusses these
industry-level impacts in detail with additional emphasis on the rule's distributional impacts.
Additional distributional impacts of the rule within the directly affected merchant
producers are not apparent from the reported decline in their aggregate operating profits. The
regulation creates both gainers and losers within the merchant segment. As Table 4-3
indicates, 12 merchant facilities are projected to experience marginal profit increases under the
recommended alternative. None of these 12 facilities are directly affected by the regulation.
The nine facilities predicted to experience profit losses are the directly affected merchant
facilities. No facility is projected to cease operations and forego baseline operating profits.
The merchant facilities with profit gains tend to have higher chlorine output rates (average of
202,100 tons per facility per year) and no per-unit compliance costs. Facilities that experience
profit losses are generally lower-volume facilities (average of 125,676 tons per facility per
year) and positive per-unit compliance costs ($0.90 per pound).
The Agency projects only small changes in output in response to the regulation.
Therefore, it is unlikely that there will be significant changes in employment levels. Although
captive producers incur compliance costs that would potentially influence levels of
employment, EPA did not attempt to project changes in employment for these facilities.
2 The total change in operating profits is calculated by summing the loss in operating profits for the directly
affected merchant facilities and the gain in operating profits for the indirectly affected facilities (reported
in Table 4-2) plus the loss in operating profits for the directly affected captive producers of $0.445 million
(not reported in Table 4-2).
4-13
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Table 4-3. Distributional Impacts of the Mercury Cell Chlor-Alkali NESHAP Across Merchant Chlorine
Facilities: 1997
Facilities (#)
Chlorine production
Total (tons/yr)
Average
(tons/facility)
Control costs
Total ($106)
Average ($/ton)
Change in operating
profits ($106)
Change in employment
(FTEs)
With-
Profit
Gain
12
2,425,200
202,100
$0.00
NA
$0.00
0
Perfect
With-
Profit
Loss
9
Competition
Closure
0
1,131,084 0
125,676
$1.02
$0.90
-$1.01
0
NA
$0.00
NA
$0.00
0
Total
21
3,556,284
169,347
$1.02
$0.29
-$1.01
0
Concentrated
With-
Profit
Gain
12
2,425,200
202,100
$0.00
NA
$0.00
0
Market
With-
Profit
Loss Closure
9
1,131,084
125,676
$1.02
$0.90
-$1.02
0
0
0
NA
$0.00
NA
$0.00
0
Total
21
3,556,284
169,347
$1.02
$0.29
-$1.01
0
With-profit gain = Facilities become more profitable with-regulation.
With-profit loss = Facilities become less profitable with-regulation.
NA = Not available
FTEs = Full-time equivalents
-------
Table 4-4. Distribution of the Social Costs Associated with the Mercury Cell Chlor-
Alkali NESHAP: 1997
Perfect Competition
Value (S106)
Change in Consumer Surplus
Chlorine
Domestic
Foreign
Sodium hydroxide
Domestic
Foreign
Change in Producer Surplus
Domestic producers
Mercury cell facilities
Merchant
Captive
Other domestic producers
Foreign producers
Total Social Cost
-$0.008
-$0.005
-$0.005
$0.000
-$0.003
-$0.003 •
$0.000
-$.1.452
-$1.453
-$1.459
-$1.014
-$0.445
$0.006
$0.001
-$1.460
Concentrated Market
Value ($106)
-$0.008
-$0.005
-$0.005
$0.000
-$0.003
-$0.003
$0.000
-$1.454
-$1.454
-$1.460
-$1.016
-$0.445
$0.006
$0.001
-$1.462
4.3.3 Social Costs of Regulations
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. Welfare impacts, or the social costs required to achieve the
environmental improvements, resulting from this regulatory action will extend to the many
consumers and producers of chlor-alkali products. Consumers will experience welfare
impacts due to changes in market prices and consumption levels associated with imposition of
the regulation. Producers will experience welfare impacts resulting from changes in their
revenues associated with imposition of the regulation and the corresponding changes in
production and market prices. However, it is important to emphasize that this measure does
4-15
-------
not include benefits that occur outside the market, that is, the value of reduced levels of air
pollution with the regulation.
For this analysis, based on applied welfare economics principles, social costs as
described above are measured as the sum of the expected changes in consumer and producer
surplus (see Appendix E for a discussion of the calculation of social costs). Consumers
experience reductions in consumer surplus because of increased market prices. Producers
may experience either increases or decreases in producer surplus (i.e., profits) as a result of
increased market prices and changes in production and compliance costs.
The national estimate of compliance costs is often used as an approximation of the
social cost of the rule. The engineering analysis estimated annual costs of $1.460 million.
However, this estimate does not account for behavioral responses by producers or consumers
to imposition of the regulation (e.g., shifting costs to other economic agents,'shutting down
product lines or facilities). Accounting for these responses results in a social cost estimate
that differs from the engineering estimate as well as provides insights on how the regulatory
burden is distributed across society (i.e., the many consumers and producers of chlor-alkali
products). As described earlier in this section, the economic impacts are projected to be
small. Therefore, there is only a slight difference between the engineering cost estimate and
social cost estimate based on the market analysis described above. The annual social costs of
the recommended controls are projected to be approximately $1.460 million under the
competitive model (slightly lower than the baseline control cost estimates when rounded to
more digits) and $1.462 under the concentrated model (slightly higher than the baseline
control cost estimates, see Table 4-4).3
3Under a perfectly competitive model, the social costs estimates ($1,460,261) are slightly smaller than the
engineering cost estimate ($1,460,275). However, under a concentrated model, the social cost estimate
($1,461,926) is larger than the engineering cost estimate because the regulation exacerbates the pre-
existing social inefficiency.
4-16
-------
More importantly, the economic analysis reveals how the burden of the social costs is
divided between consumers and producers once behavioral changes are modeled.4 Table 4-4
provides the social costs and their distribution across stakeholders under competitive and
concentrated market models. This distribution of social costs depends critically on'the
relationship between the responsiveness of consumers and producers to prices changes (i.e.,
supply/demand elasticities). Generally, the stakeholder with the less-elastic response (in
absolute value) will bear a higher share of the costs associated with the regulation. The
economic analysis of the chlor-alkali industry suggests that chlorine producers have limited
ability to pass on the regulatory costs to consumers. The Agency estimates a loss in directly
affected producer surplus of $1.46 million annually. Although indirectly affected producers
potentially would benefit from higher prices without additional control costs, these benefits
are expected to be extremely small (less than $50,000). Thus, the net change in producer
surplus is projected to be $1.46 million. The Agency estimates minimal impacts for
consumers (less than $10,000 annually). Note, however, an important model parameter
affecting the estimated consumer surplus losses is the elasticity of demand for the chlor-alkali
products. Sensitivity analysis revealed that in this case even very small demand elasticities do
not result in significantly greater losses to consumers.
4In the long run, it is expected that all costs of the rule would be passed on to consumers in the form of higher
product prices. This is because investors will not invest in new plants and equipment unless they expect
to cover all their costs of production and earn a return on investment appropriate for the risk they are
incurring. However, currently fixed assets specific to chlor-alkali production are the result of past
investment decisions that cannot be reversed today. Thus, over the next 10 to 20 years owners of these
facilities will have to decide how best to use these resources.
4-17
-------
SECTION 5
SMALL BUSINESS IMPACTS
The proposed NESHAP protects air quality and promotes public health by reducing
the current levels of HAP emissions generated by mercury cell chlor-alkali manufacturers.
However, this regulatory action will also affect the economic welfare of owners of the chlor-
alkali facilities that use the mercury cell process. These individuals may be owners/operators
who directly conduct the business of the firm (i.e., "mom and pop shops" or partnerships) or,
more commonly, investors or stockholders who employ others to conduct ^he business of the
firm on their behalf (i.e., privately held or publicly traded corporations). Although
environmental regulations like this rule potentially affect all businesses, large and small, small
businesses may have special problems in complying with such regulations.
The Regulatory Flexibility Act (RFA) of 1980 requires that special consideration be
given to small entities affected by federal regulation. The RFA was amended in 1996 by the
Small Business Regulatory Enforcement Fairness Act (SBREFA) to strengthen the RFA's
analytical and procedural requirements. Under SBREFA, the Agency implements the RFA as
written with a regulatory flexibility analysis required only for rules that will have a significant
impact on a substantial number of small entities. This section identifies the businesses that
this proposed rule will affect and provides a preliminary screening-level analysis to assist in
determining whether this rule is likely to impose such an impact within this industry. The
screening-level financial analysis employed here is a "sales test," which computes the
annualized compliance costs as a share of sales for each company. In addition, the economic
analysis provides information about the impacts on merchant small businesses after accounting
for producer responses to the regulation and the resulting changes in market prices and output
for chlor-alkali products.
5.1 Identifying Small Businesses
As described in Section 2 of this report, the Agency identified six small businesses that
manufacture chlorine, or 30 percent of the total. However, only three of these firms are
5-1
-------
subject to the proposed rule—ASHTA, Holtrachem Mfg Co., and Pioneer Chlor-Alkali
Co.—because they own and operate facilities using the mercury cell process.
5.2 Screening-Level Analysis
For the purposes of assessing the potential impact of this rule on small businesses, the
Agency calculated the share of annual compliance cost relative to baseline sales for each
company (CSR). When a company owns more than one affected facility, the costs for each
facility it owns were summed to develop the numerator of the test ratio. For this
screening-level analysis, annual compliance costs were defined as the engineering control costs
imposed on these companies; thus, they do not reflect the changes in production expected to
occur in response to imposing these costs and the resulting market adjustments. The
engineering analysis estimates the aggregate compliance costs for small businesses total
$0.259 million, or 18 percent of the total industry costs of $1.460 million. As shown in
Table 5-1, the average CSR is 0.05 percent for small businesses and 0.01 percent for large
businesses. Thus, the analysis shows that no company (small or large) is expected to incur
costs greater than 1 percent of their sales.
Table 5-1. Summary Statistics for SBREFA Screening Analysis
Total companies (#)
Annual compliance costs ($106)
Companies with sales data (#)
Affected <1%
Affected ^1%
Affected ^3%
Cost-to-sales ratios
Average
Median
Minimum
Maximum
Small
6
$0.259
6
6
0
0
0.05%
0.02%
0.00%
0.22%
Large
15
$1.201
15
15
0
0
0.01%
0.00%
0.00%
0.11%
Total
21
$1.460
21
21
0
0
0.02%
0.00%
0.00%
0.22%
5-2
-------
Data on industry-wide profitability ratios were not available from Dun & Bradstreet or
other secondary data sources. Only one of the three small firms subject to the regulation
(Pioneer Chlor-Alkali Co.) reported profitability data publicly in company 10-K reports. The
operating income1 for this company equaled 7.7 percent of sales in 1997. However, this ratio
declined to -13.1 percent in 1999. The company's net income measures that account for
interest and tax expenses ranged from -$24.5 million in 1997 to -$50.4 million in 1999.
5.3 Economic Analysis
The Agency also analyzed the economic impacts on merchant2 small businesses (five
total) under with-regulation conditions expected to result from implementing the MACT (see
Table 5-2). Unlike the screening-level analysis described above, this approach examined small
business impacts in light of the expected behavioral responses of producers and consumers to
the regulation. After accounting for market adjustments, the operating profits for three
directly affected small firms are projected to decline by $0.258 million under both perfectly
competitive and oligopoly scenarios, only slightly smaller than the engineering cost estimates
of $0.259 million. Although, the other small merchant companies would potentially benefit
from increased prices without additional control costs, price increases are projected to be very
small. Therefore, with-regulation profitability for these firms is expected to be nearly identical
to baseline conditions.
5.4 Assessment
This analysis suggests the proposed rule will not have a significant impact on a
substantial number of small entities. The screening analysis shows that no company (small or
large) is expected to incur costs greater than 1 percent of their sales. The economic analysis,
which includes market responses to the regulation, shows operating profits for small
companies will decline by $0.258 million. EPA continues to be interested in the potential
impacts of the propose rule on small entities and welcomes comments on issues related to
such impacts.
'Operating income = sales less cost of goods sold, selling, general, and administrative expenses, and unusual
charges.
The remaining small firm does not use the mercury cell process and is assumed to perform captive operations
for this analysis.
5-3
-------
Table 5-2. Small Business Impacts of the Mercury Cell Chlor-Alkali Production
NESHAP: 1997a
Small Chlorine Companies
(Directly Affected)1"
Revenue ($106)
Costs ($106)
Control
Production
Operating profits ($106)
Companies (#)
Facilities (#)
Employment (FTEs)
Other Small Chlorine Companies
(Indirectly Affected)
Revenue ($106)
Costs ($106)
Control
Production
Operating profits ($106)
Companies (#)
Facilities (#)
Employment (FTEs)
Baseline
$402.7
$173.0
$0.0
$173.0
$229.7
4
6
289
$137.9
$61.4
$0.0
$61.4
$76.4
2
2
99
Perfect Competition
Change
Absolute Relative
-$0.002 0.000%
$0.256 0.148%
$0.259 NA
-$0.003 -0.002%
-$0.258 -0.112%
0 0.000%
0 0.000%
0 0.000%
$0.000 0.000%
$0.000 0.000%
$0.000 NA
$0.000 0.000%
$0.000 0.001%
0 0.000%
0 0.000%
0 0.000%
Concentrated
Market
Change
Absolute Relative
-$0.002 0.000%
$0.257 0.148%
$0.259 NA
-$0.003 -0.002%
-$0.258 -0.112%
0 0.000%
0 0.000%
0 0.000%
-
$0.000 0.000%
$0.000 0.000%
$0.000 NA
$0.000 0.000%
$0.000 0.001%
0 0.000%
0 0.000%
0 0.000%
NA = Not available
FTEs = Full-time equivalents
a Merchant operations only.
b Includes the small companies that own mercury cell facilities affected by the proposed MACT.
5-4
-------
REFERENCES
Alliance for Environmental Technology, Press release, April 15, 1996.
Berthiaume, Sylvie, Eric Anderson, and Yuka Yoshida. 2000. Chlorine/Sodium Hydroxide.
CEH Marketing Research Report. Chemical Economics Handbook—SRI
International.
Chemical Week. 1996.
-The Chlorine Institute.- 2QQQ.-Ghfar-A4kali^ndits1ryPlants-andProduction Data Report.
Washington, DC: The Chlorine Institute.
Dungan, Arthur, The Chlorine Institute. June 2, 2000. Personal communication with Carol
Mansfield, Research Triangle Institute. Chlorine discussion.
EC/R Incorporated. September 12, 1996. Background Information Document: Chlorine
Production Summary Report. Prepared for the U.S. Environmental Protection
Agency. Durham, NC: EC/R Inc.
"Facts and Figures for the Chemical Industry." Chemical and Engineering News. June 24,
1996.
Gale Research. 1998. Ward's Business Directory of U.S. Private and Public Companies.
Detroit, MI: Gale Research.
Hoover's Incorporated. 2000. Hoover's Company Profiles. Austin, TX: Hoover's
Incorporated, .
Information Access Corporation. 2000. Business & Company ProFile [computer file].
Foster City, CA: Information Access Corporation.
Kroschwitz, Jacqueline. 1991. Kirk-Othmer Encyclopedia of Chemical Technology, 4th Ed.
New York: John Wiley & Sons.
R-l
-------
Shakhahiri, B.Z. 2000. Chemical of the Week: Sulfuric Acid, . Obtained June 6, 2000.
Selected company 10-K reports.
Ullman 's Encyclopedia of Industrial Chemistry. 1992.
U.S. Small Business Administration (SBA). 2000. Size Standards by SIC Industry.
.
U.S. Department of Commerce, Bureau of the Census. 1999. Concentration Ratios in
Manufacturing. MC92-5-2. Washington, DC. . Last revised February 4, 1999.
U.S. Department of Commerce. Current Industrial Reports, Series MA-28A. Washington,
DC, U.S. Department of Commerce, Bureau of the Census.
U.S. Department of Commerce, Bureau of the Census. 1996. 1992 Census of Manufactures
Industry Series: Industrial Inorganic Chemicals. MC92-I-28A. Washington, DC:
[online]. .
U.S. Department of Commerce, Bureau of the Census. 1999. 1997 Economic Census—
Manufacturing Industry Series: Alkalies and Chlorine Manufacturing. EC97M-
3251E. Washington, DC: [online], .
U.S. Department of Commerce, Bureau of the Census. 1993-1996. Annual Survey of
Manufactures: Statistics, for Industry Groups and Industries.
.
U.S. Department of Commerce, Bureau of the Census. 1996-1998. Annual Survey of
Manufactures: Statistics for Industry Groups and Industries. Washington, DC:
Government Printing Office.
U.S. Department of Energy, Energy Information Administration. 1998. Electric Power
Annual 1997, Volume I. Washington, DC: U.S. Department of Energy.
. Last updated
July 30, 1998.
R-2
-------
U.S. Environmental Protection Agency (EPA). 1995. Inorganic Chemicals Sector Notebook.
Washington, DC. U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 1996. Economic Analysis of Pollution
Regulations: Pharmaceutical Industry. Research Triangle Park, NC: U.S.
Environmental Protection Agency, Office of Air Quality Planning and Standards.
U.S. Environmental Protection Agency (EPA). 1999. OAQPS Economic Analysis Resource
Document. Research Triangle Park, NC: EPA, Innovative Strategies and Economics
Group.
Varian, Hal. 1993. Microeconomic Analysis, 3rd Edition. New York: W.W. Norton &
Company.
R-3
-------
Appendix A
Supply of Chlorine and Sodium Hydroxide to the
Merchant Market Assuming Competitive Merchant
Markets for Chlorine and Sodium Hydroxide
-------
Production of chlorine (or sodium hydroxide) can be expressed as the amount
produced for sale on the domestic merchant market and foreign supply (or imports), that is,
where Qs is the total supply of chlorine to the merchant market, qm is the amount produced for
sale on the domestic merchant market, and q, is the foreign supply (or imports). Because of
the fixed production relationship between chlorine and sodium hydroxide, we can express
sodium hydroxide in units of chlorine (1 ton of chlorine =1.1 tons of sodium hydroxide).
Throughout this description, we refer to the production of "chlorine" and express sodium
hydroxide in units of chlorine. Conceptually, the firm will make a decision about the amount
of chlorine produced, which also determines the amount of sodium hydroxide produced. The
decision will be based on the joint cost function and revenue from the sale of both products.
The analysis was conducted at the facility level and then the results were summed across
facilities to get company and market-level results.
A.I Directly Affected Facilities
Producers of chlorine products have some ability to vary output in the face of
production cost changes. Production cost curves, coupled with market price, can be used to
determine the facility's optimal production rate, including zero (shutdown). For this analysis,
the generalized Leontief profit function was used to derive the supply curve for chlorine
products at each facility (see Chambers [1988] p. 172, for a description of the generalized
Leontief). By applying Hotelling's lemma to the generalized Leontief profit function, the
following general form of the supply functions for each chlorine product is obtained:
Y + - l
2
P' ' (A.2)
where pc is the market price for chlorine, pcs is the market price for sodium hydroxide, c} is
the cost of complying with the regulations (c, = 0 in the pre-regulation baseline), Pj and YJ are
model parameters, and j indexes producers (i.e., individual chlorine facilities). The
theoretical restrictions on the model parameters that ensure upward-sloping supply curves are
Yj > 0 and pj< 0. We can calculate YJ using data on production capacities at the affected
facilities. From this, we can calculate a firm-specific Pj calibrated to the 1997 baseline data
using Eq. (A.2).
A-l
-------
Figure A-l illustrates the theoretical supply function from Eq. (A.2). As shown, the
upward-sloping supply curve is specified over a productive range with a lower bound of zero
P2
that corresponds with a shutdown price, ps, equal to —'— and an upper bound given by the
4y;
productive capacity of q~ that is approximated by the supply parameter. The curvature of the
supply function is determined by the parameter pr
s/qj
PJ
-^-=Ps
= v
J vi
q /t
HJ
Figure A-l. Theoretical Supply Function for Chlorine and Sodium Hydroxide Facilities
A.2 Adjustment of 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, represented by the shaded areas in Figure A-2. This
area can be expressed where VC3 is the total variable cost of production at facility j, q* is the
level of production at the facility, f] (qj) is the inverse supply function, and qm is the minimum
economically feasible production level at the facility, which corresponds to the price p™.
A-2
-------
p*
.m
m
q.
Figure A-2. Model TVC Equal to Reported Value
VC = f
ftydq,
(A-3)
The variable q™ is unobserved but may be chosen to calibrate the shutdown points for
those facilities with estimated production cost data.' By integrating under the generalized
Leontief supply function,2 given the above relationships, we can express a facility's total
variable costs of production as a function of qj and q™:
vc= £
4
1
for-*;
(A.4)
'Variable cost data were estimated for each facility using data on electricity requirements per ton of chlorine
(Kroschwitz, 1991), state-level electricity costs (U.S. DOE, 1998), and industry-level variable cost share
data (Berthiaume, Anderson, and Yoshida, 2000).
2See Eq. (A.2).
A-3
-------
where q* is known, while q™ is unknown.
The problem can be reduced further if we assume that q™ is proportional to base year
output, q*, by a factor k, so that
qT = kq; (A.5)
Thus, the facility's total variable costs can be expressed as
1_
(kq; - Yj)2 (kq; - Yj) (q; - y;
(A.6)
Facility-specific q™ and p™ may be derived by solving Eq. (A.6) for the unknown
variable k and then backsolving through Eq. (A.4) to solve for q™ and using that result with
the inverse supply function to solve for p™.
Applying this technique for each facility resulted in the outcome summarized in
Figure A-2. First, as shown in Figure A-2, the value for k is determined to be greater than
zero and less than one (i.e., 0 < k < 1) so that q" is less than qj.3 Thus, the total variable costs
as measured by the area under the facility's product supply function matches the estimated
value for that facility.
A.3 Regulation-Induced Shift in Supply Functions
The regulation-induced control costs enter each affected facility's supply equation as
a net price change (c, > 0 in Eq. [A.2]).
A.4 Facility Closure Decision
A chlorine production facility may shut down because it is no longer profitable. The
sufficient condition for production at each facility is nonnegative profits (TI):
TC = TR - TC > 0 (A.7)
3For one facility, k > 1, which implies an erroneous baseline closure of this facility (i.e. current output level is
less than the shutdown level), as well as the selection of some arbitrary value for k that will be instrumental
in determining facility closures. For this facility, we assumed the minimum economically achievable output
level was equal to baseline output level (i.e. zero profit condition).
A-4
-------
where TR is the total revenue earned from the sale of chlorine and sodium hydroxide and TC
is the sum of the variable production costs (production and compliance) and total avoidable
fixed costs (annualized expenditure for compliance capital).
A.5 Indirectly Affected Merchant Suppliers
The indirectly affected facilities do not face additional costs of production with the
regulation. However, their output decisions are affected by price changes expected to result
from the regulation. The indirectly affected facilities were also modeled at the facility-level
using Eq. (A. 2) to compute supply curves. While data on the capacity of the unaffected
facilities exist, data on actual 1997 production levels does not. Facility-specific estimates
were computed as follows:
1 . Compute aggregate chlorine production level for indirectly affected merchant
producers using the following equation:
where
a = estimated merchant share of chlorine production (27 percent),
Qs = total chlorine production (captive and merchant) in 1 997 (13.7 million
tons), and
QDA = total directly affected merchant production (1.1 million tons).
2. Distribute Q]A across indirectly affected facilities using secondary data of facility-
specific merchant chlorine capacity.
A-5
-------
Appendix B
Supply of Chlorine and Sodium Hydroxide to the
Merchant Market Assuming a Concentrated
Merchant Market for Chlorine and a Competitive
Merchant Market for Sodium Hydroxide
-------
Much of the analysis is the same as in the competitive case. The Agency used the
same equation for marginal cost (although the parameter values differ). Below is a
discussion of the model's two components that differ from the competitive model — the
supply of chlorine from the directly affected suppliers and indirectly affected suppliers.
B.I Directly Affected Merchant Facilities
To model chlorine as a concentrated market, the Agency used a Cournot model in
which firms exercise some control over the price of chlorine. In these noncompetitive
models, each supplier recognizes its influence over market price and chooses a level of output
that maximizes its profits, given the output decisions of the others. Employing a Cournot
model assumes that suppliers do not cooperate. Instead, each supplier evaluates the effect of
its output choice on market price and does the best it can, given the output decision of its
competitors. Thus, given any output level chosen by other suppliers there will be a unique
optimal output choice for a particular supplier.
The basic oligopoly model considered is the "many firm Cournot equilibrium"
described in Varian (1 993). As the case with all imperfectly competitive models of profit-
maximizing behavior, each oligopolist chooses an output level where marginal revenue
equals marginal cost (where marginal cost is the sum of the preregulation marginal cost per
unit plus the per-unit compliance costs). For the monopolist, marginal revenue is simply a
function of the demand elasticity. In the Cournot model, marginal revenue is a fraction, Z,, of
the market price: Z, = (1 - s/|ed|), where s, = q/Q and i indexes the parent company of facility
j. Equilibrium is defined by q,*, such that marginal revenue = marginal cost:
P(QHl-s/|ed|) = MC(qJ*) + cJ (B.I)
In the baseline, Cj = 0. EPA has data on the merchant price of chlorine (P(Q)),
estimates of the total quantity produced for the merchant market (Q), and estimates of the
market share of the parent company in the merchant market (s,), the amount produced by the
facility (q*), and the price elasticity of demand (ed). Under this formula, MC will be
equalized across facilities with the same parent company. Because compliance costs are so
small, EPA assumed that the market share for each firm will not change as a result of the
regulation.
EPA assumed the same generalized Leontief marginal cost function as in the
competitive model, Eq. (A. 2). However the parameter values are different, specifically Pr In
this study's data, the Agency observed a single market price and quantity (p*, q*). In the
B-l
-------
competitive market, EPA assumed this price and quantity correspond to the point where the
marginal cost curve (or aggregate industry supply curve) crosses the demand curve, so the
competitive equilibrium price, p', equals the marginal cost (see Figure 4-2[a] in Section 4).
In the Coumot model, each firm chooses a level of output consistent with marginal cost equal
to a fraction of marginal revenue, MRC (see Figure 4-2[b] in Section 4). Given that the
demand curve is the same in both the competitive and Cournot models, this implies that the
marginal cost curves must be different. EPA calculated Pj using Eq. (B.I) where s, is the
share of the merchant market for the parent company of each facility, so facilities with the
same parent company will have the same market share. Lacking data from the literature,
EPA assumed that the price elasticity of demand is 1.
B.2 Indirectly Affected Merchant Suppliers
The indirectly affected facilities do not face additional costs of production with the
regulation. However, their output decisions are affected by price changes expected to result
from the regulation. In the Cournot model, firms with different market shares will react
differently to changes in the output decisions of other suppliers. Because EPA has some
facility-level data, the Agency modeled the indirectly affected merchant chlorine suppliers at
the facility level, but market shares were calculated at the company level. Marginal cost
curves were constructed using Eq. (A.2) and data on production capacities at the facility
level. Marginal revenue was calculated using the left-hand side of Eq. (B.I). The 1997
production data were only provided for the directly affected facilities. Production at the
indirectly affected facilities was estimated in the same manner as described for the
competitive model in Appendix A.
B-2
-------
Appendix C
Demand for Chlorine and Sodium Hydroxide
-------
EPA modeled separate markets for chlorine and sodium hydroxide. The two products
are jointly produced under the same marginal cost structure, but the demand curves for
cnlorine and sodium hydroxide are different. The following equations outline the Agency's
method for calculating the demand for chlorine, and the same equations were used to
calculate the demand for sodium hydroxide.
Market demand for chlorine (Qd) can be expressed as the sum of domestic and foreign
demand (similarly for sodium hydroxide):
Qd = qd + qx (c.i)
where qd is the domestic demand and q, is the foreign demand (or exports), as described
below.
C.I Domestic Merchant Demand
Domestic merchant demand for chlorine (or sodium hydroxide) can be expressed by
the following general formula:
qd = Bd[Prd (C.2)
where p is the market price of chlorine (or sodium hydroxide), r)d is the domestic demand
elasticity (assumed value), and Bd is a multiplicative demand parameter that calibrates the
demand equation for chlorine, given data on price and the domestic demand elasticity to
replicate the observed baseline year 1997 level of domestic consumption. This quantity is
estimated as follows:
qd = Qs-qx (c.3)
where Qs is the sum of domestic production and imports and qx is exports.
C.2 Foreign Demand (Exports)
Foreign demand, or exports, for chlorine (or sodium hydroxide) can be expressed by
the following general formula:
q* = BJPr (C.4)
C-l
-------
where p is the market price of chlorine, r|d is the assumed export demand elasticity (assumed
to be more elastic than domestic demand), and Bx is a multiplicative demand parameter that
calibrates the foreign demand equation, given data on price and the foreign demand elasticity
to replicate the observed baseline year level of exports.
C-2
-------
Appendix D
With-Regulation Market Equilibrium for
Chlorine and Sodium Hydroxide Markets
-------
The process for determining equilibrium price (and output) with the increased
production cost was modeled as a Walrasian auctioneer. The auctioneer calls out a market
price for each product (chlorine and sodium hydroxide) and evaluates the reactions by all
participants (producers and consumers in both markets), comparing total quantities supplied
and demanded to determine the next price that will guide the market closer to equilibrium
(i.e., where market supply equals market demand). Decision rules are established to ensure .
that the process will converge to an equilibrium, in addition to specifying the conditions for
equilibrium. The result of this approach is prices with the proposed regulation that
equilibrate supply and demand for each product.
The algorithm for deriving the post-compliance equilibria in all markets can be
generalized to five recursive steps:
1. Impose the control costs on each directly affected facility, thereby affecting their
supply decisions for chlorine and sodium hydroxide.
2. Recalculate the market supply for both chlorine and sodium hydroxide.
3. Determine the new prices in both markets via the price revision rule.
4. Recalculate the supply functions of all suppliers with the new prices in both
markets, resulting in a new market supply of chlorine and sodium hydroxide.
Evaluate market demand at the new prices in both markets.
5. Compare market supply and market demand in both markets. If different, return
to Step #3, resulting in new prices for chlorine and sodium hydroxide. Repeat
until equilibrium conditions are satisfied (i.e., the difference between supply and
demand is arbitrarily small in both markets).
D.I Concentrated Chlorine Market and Competitive Sodium hydroxide Market
Similar to the competitive case, facility responses and market adjustments can be
conceptualized as an interactive feedback process. Facilities face increased production costs
due to compliance, which causes facility-specific production responses (i.e., output
reduction). The cumulative effect of these responses leads to an increase in the market price
that all producers (directly affected and indirectly affected) and consumers face. This
increase leads to further responses by all producers and consumers and, thus, new market
prices. The new with-regulation equilibrium is the result of a series of these iterations
D-l
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between producer and consumer responses and market adjustments until a stable market price
equilibrium is reached in which total market supply equals total market demand (i.e., Qs =
Qd).
The process for determining equilibrium price (and output) with the increased
production cost is modeled somewhat differently. The algorithm for deriving the post-
compliance equilibria in all markets can be generalized to five recursive steps:
1. Choose a level of aggregate demand in the chlorine market that is smaller than
current aggregate demand.
2. Use the demand curve to calculate the associated price of chlorine; use the price
revision rule to calculate a new price for sodium hydroxide.
3. For each firm, use the market price of chlorine and aggregate demand quantity
for chlorine to determine marginal revenue according to Eq. (B.I). Set marginal
cost (including compliance costs) equal to marginal revenue for chlorine to
compute a firm-specific quantity of chlorine and sodium hydroxide.
4. Sum the firm-specific quantities to compute aggregate supply of chlorine and
sodium hydroxide.
5. Compare aggregate supply of chlorine to aggregate demand for chlorine;
compare the aggregate supply of sodium hydroxide to aggregate demand for
sodium hydroxide at that price; if either is unequal repeat the process starting in
Step 1 by revising aggregate demand for chlorine.
D-2
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Appendix E
Estimating Changes in Economic Welfare
with Regulation
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E.I Social Cost Effects Under Perfect Competition
The economic welfare implications of the market price and output changes with the
regulation can be examined using two slightly different tactics, each giving a somewhat
different insight but the same implications: (1) changes in the net benefits of consumers and
producers based on the price changes and (2) changes in the total benefits and costs of these
products based on the quantity changes. This analysis focuses on the first measure—the
changes in the net benefits of consumers and producers. Figure E-l depicts the change in
economic welfare in a competitive market by first measuring the change in consumer 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 change in economic welfare with the regulation 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" or profits. Producer surplus is measured as the area above
the supply curve and below the price of the product. These areas can be thought of as
consumers' net benefits of consumption and producers' net benefits of production,
respectively.
In Figure E-l, baseline equilibrium in the competitive market occurs at the
intersection of the demand curve, D, and supply curve, S. Price is P, with quantity Q,. The
increased cost of production with the regulation will cause the market supply curve to shift
upward to S'. The new equilibrium price of the product is P2. With a higher price for the
product, there is less consumer welfare, all else being unchanged as real incomes are reduced.
In Figure E-l (a), area A represents the dollar value of the annual net loss in consumers'
benefits with the increased price. The rectangular portion represents the loss in consumer
surplus on the quantity still consumed, Q2, while the triangular area represents the foregone
surplus resulting from the reduced quantity consumed, Q -Q2.
In addition to the changes in consumer welfare, producer welfare also changes with
the regulation. With the increase in market price, producers receive higher revenues on the
quantity still
E-l
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S/Q
Q2 Q, Q/t
(a) Change in Consumer Surplus with Regulation
$/Q
•2
PI
Q2 Q,
Q/t
(b) Change in Producer Surplus with Regulation
$/Q
•2
PI
Q2 Q, Q/t
(c) Net Change in Economic Welfare with Regulation
Figure E-l. Economic Welfare Changes with Regulation: Perfect Competition
E-2
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purchased, Q2. In Figure E-l(b), area B represents the increase in revenues due to this
increase in price. The difference in the area under the supply curve up to the original market
price, area C, measures the loss in producer surplus, which includes the loss associated with
the quantity no longer produced. The net change in producer welfare is represented by area
B-C.
The change in economic welfare attributable to the compliance costs of the regulation
is the sum of consumer and producer surplus changes, that is, - (A) + (B-C). Figure E-l(c)
shows the net (negative) change in economic welfare associated with the regulation as area
D. However, this analysis does not include the benefits that occur outside the market (i.e.,
the value of the reduced levels of air pollution with the regulation). Including this benefit
will reduce the net cost of the regulation, and may result in overall net positive benefits to
society.
E.2 Social Cost Effects Under a Imperfect Competition1
The conceptual framework for evaluating social costs and distributive impacts in a
concentrated market model is illustrated in Figure E-2. The baseline equilibrium is given by
the price, P0, and the quantity, Q0. In a pure monopoly situation, the baseline equilibrium is
determined by the intersection of the marginal revenue curve (MR) and the MC curve. In
imperfect competition, such as in the Cournot model used in this analysis, the baseline
equilibrium is determined by the intersection of MC with some fraction of MR. Without the
regulation, the total benefits of consuming the chlorine product is given by the area under the
demand curve up to Q0. This equals the area filled by the letters ABCDEFGHU. The total
variable cost to society of producing Q0 equals the area under the original MC function, given
by IJ. Thus, the total social surplus to society from the production and consumption of output
level Q0 equals the total benefits minus the total costs, or the area filled by the letters
ABCDEFGH.
The total social surplus value can be divided into producer surplus and consumer
surplus. Producer surplus accrues to the suppliers of the product and reflects the value they
receive in the market for the Q0 units of output less what it costs to produce this amount. The
market value of the product is given by the area DEFGHIJ in Figure E-2. Since production
'The Agency has developed this conceptual approach in a previous economic analysis of regulations affecting
the pharmaceutical industry (EPA, 1996).
E-3
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p,c
MC + Control Costs
MC
Output
Figure E-2. Economic Welfare Changes with Regulation: Imperfect Competition
costs IJ, producer surplus is given by area DEFGH. Consumer surplus accrues'to the
consumers of the product and reflects the value they place on consumption (the total benefits
of consumption) less what they must pay on the market. Consumer surplus is thereby given
by the area ABC.
The with-regulation equilibrium is P,, Q,. Total benefits of consumption are ABDFI
and the total variable costs of production are FI, yielding a with-regulation social surplus of
ABD.2 Area BD represents the new producer surplus and A is the new consumer surplus.
The social cost of the regulation equals the total change in social surplus caused by the
regulation. Thus, the social cost is represented by the area FGHEC in Figure E-2.
The distributive effects are estimated by separating the social cost into producer
surplus and consumer surplus losses. First, the change in producer surplus is given by
APS = B - F - (G+H+E)
(E.I)
2Fixed control costs are ignored in this example but are included in the analysis.
E-4
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Producers gain B from the increase in price, but lose F from the increase in production costs
due to regulatory control costs. Furthermore, the contraction of output leads to foregone
baseline profits of G+H+E.
The change in consumer surplus is
ACS = - (B + C) (E.2)
This reflects the fact that consumer surplus shrinks from the without-regulation value of ABC
to the with-regulation value of A.
The social cost or total change in social surplus shown earlier can then be derived
simply by adding the changes in producer and consumer surplus together
= -(F+G + H + E + C) (E.3)
E.3 Comparison of Social Cost with Control Cost
It is important to compare this estimate of social costs to the initial estimate of
baseline control costs and explain the difference between the two numbers. The baseline
control cost estimate is given by the area FGH, which is simply the constant cost per unit
times the baseline output level. In the case of imperfect competition, the social cost estimate
exceeds the baseline control cost estimate by the area EC. In other words, the baseline
control cost estimate understates the social costs of the regulation. A comparison with the
outcome under perfect competition helps illustrate the relationship between control cost and
total social cost.
Suppose that the MR curve in Figure E-2 were the demand function for a competitive
market, rather than the marginal revenue function for a monopolistic producer. Similarly, let
the MC function be the aggregate supply function for all producers in the market. The
market equilibrium is still determined at the intersection of MC and MR, but given our
revised interpretation of MR as the competitive demand function, the without-regulation
(competitive) market price, P0C, equals MC and Q0 is now interpreted as the competitive
level of product demand. In this type of market structure, all social surplus goes to the
consumer. This is because producers receive a price that just covers their costs of production.
In the with-regulation perfectly competitive equilibrium, price would rise by the per-
unit control cost amount to P,c. Now the social cost of the regulation is given entirely by the
loss in consumer surplus, area FG. As this is compared to the initial estimate of regulatory
E-5
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control costs, FGH, the control cost estimate overstates the social cost of the regulation. The
overstatement is due to the fact that the baseline control cost estimates are calibrated to
baseline output levels. With regulation, output is projected at Q,, so that control costs are
given by area F. Area G represents a monetary value from lost consumer utility due to the
reduced consumption, also referred to as deadweight loss (analogous to area C under the
monopolistic competition scenario).
Social cost effects are larger with monopolistic market structures because the
regulation already exacerbates a social inefficiency (Baumol and Gates, 1988). The
inefficiency relates to the fact that the market produces too little output from a social welfare
perspective. In the monopolistic equilibrium, the marginal value society (consumers) places
on the product, the market price, exceeds the marginal cost to society (producers) of
producing the product. Thus, social welfare would be improved by increasing the quantity of
the good provided. However, the producer has no incentive to do this because the marginal
revenue effects of lowering the price and increasing quantity demanded is lower than the
marginal cost of the extra units. The Office of Management and Budget (OMB) explicitly
mentions the need to consider these market power-related welfare costs in evaluating
regulations under Executive Order 12866 (Executive Office of the President, 1996).
E.4 Total Social Costs in the Chlorine and Sodium Hydroxide Markets
In the chlorine and sodium hydroxide markets the Agency calculated total social costs
as the sum of the social costs in the merchant chlorine market, the captive chlorine market,
and the merchant sodium hydroxide market. Social costs were calculated under the
assumption of both a perfectly competitive merchant chlorine and an imperfectly competitive
chlorine market.
E-6
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1 REPORT NO
EPA-452/R-01-002
3 RECIPIENT'S ACCESSION NO
4 TITLE AND SUBTITLE
5 REPORT DATE
December 2000
Economic Impact Analysis for the Proposed Mercury Cell
Chlor-Alkali Production NESHAP
6 PERFORMING ORGANIZATION CODE
7 AUTHOR(S)
8 PERFORMING ORGANIZATION REPORT NO.
9 PERFORMING ORGANIZATION NAME AND ADDRESS
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
Research Triangle Park, NC 27711
10 PROGRAM ELEMENT NO
11. CONTRACT/GRANT NO.
None
12 SPONSORING AGENCY NAME AND ADDRESS
Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
13 TYPE OF REPORT AND PERIOD COVERED
Proposed Regulation
14 SPONSORING AGENCY CODE
EPA/200/04
15 SUPPLEMENTARY NOTES
16 ABSTRACT
Pursuant to Section 112 of the Clean Air Act, the U.S. Environmental Protection Agency (EPA) is developing a National Emissions
Standard for Hazardous Air Pollutants (NESHAP) to control emissions released from chlorine production at mercury cell chlor-alkali
facilities. Of the 43 facilities EPA identified as engaging in the production of chlorine, there are 12 facilities that use the mercury cell process.
Eleven of these 12 mercury cell process facilities face positive costs of complying with this regulation.
The total annual costs of meeting the MACT standards for these facilities is $1.46 million. The economic impacts of this regulation were
examined using two models: a competitive market model and an oligopoly market model. The price of chlorine and its co-product sodium
hydroxide is expected to increase by less than 0.01% using either market model. Impacts on quantity produced of both chlorine and sodium
hydroxide are of similar magnitude.
The 43 chlorine manufacturing facilities are owned by 21 companies, six of which are considered small based on the Small Business
Administration's definitions for small businesses. A small business screening level analysis was conducted to determine if this regulation
would have a significant impact on a substantial number of small businesses. An examination of the compliance costs-to-sales ratios of 21
companies shows that costs are expected to be less than 1 percent of company revenues, thus this regulation is not anticipated to have a
significant economic impact on companies owing mercury cell chlor-alkali production plants.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b IDENTIFIERS/OPEN ENDED TERMS
COSATI Field/Group
Air Pollution control, environmental
regulation, economic impact analysis,
chlor-alkali, chlorine; sodium.hydroxide,
mercury cell
18 DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
21 NO OF PAGES
92
20 SECURITY CLASS (Page)
Unclassified
22 PRICE
EPA Form 2220-1 (Re*. 4-77)
PREVIOUS EDITION IS OBSOLETE
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