United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington DC 20460
EPA 440/2-82-015
October 1982
Water
Economic Impact Analysis
of Effluent Guidelines
and Standards for the
Pulp, Paper, and
Paperboard Industry
QUANTITY
-------
This document is available at EPA Regional offices.
Copies may he obtained from the National Technical
Information Service, Springfield, Virginia 22161.
-------
ECONOMIC IMPACT ANALYSIS OF EFFLUENT
LIMITATIONS""AND STANDARDS
FOR THE PULP, PAPER AND PAPERBOARD INDUSTRY
Prepared for
U.S. Environmental Protection Agency
Office of Water Regulations and Standards
Washington, D.C. 20460
Contract Number
68-01-6162
October 1982
-------
PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA).
The purpose of the study is to analyze the economic impact which could
result from the application of effluent standards and limitations issued
under Sections 3-1, 304, 306 and 307 of the Clean Water Act to the Pulp,
paper, and paperboard industry.
The study supplements the technical study (EPA Development Document)
supporting the issuance of these regulations. The Development Document
surveys existing and potential waste treatment control methods and technology
within particular industrial source categories and supports certain standards
and limitations based upon an analysis of the feasibility of these standards
in accordance with the requirements of the Clean Water Act. Presented in
the Development Document are the investment and operating costs associated
with various control and treatment technologies. The attached document
supplements this analysis by estimating the broader economic effects which
might result from the application of various control methods and technologies.
This study investigates the effect in terms of product price increases,
effects upon employment and the continued viability of affected plants,
effects upon foreign trade and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA. This report was submitted in
fulfillment of Contract No. 68-01-6162 by Meta Systems, Inc. The analysis
was completed in October 1982.
-------
Table of Contents
Page No.
List of Tables ii
List of Figures iv
1. Executive Summary 1-1
2. The Economic Assessment Methodology 2-1
Introduction 2-1
Costs of Compliance 2-3
Demand/Supply Analysis 2-4
Total Costs of Compliance 2-12
Capital Availability 2-12
Closure Analysis 2-13
Employment and Indirect Effects 2-14
Small Business Analysis 2-17
3. Industry Structure, Financial Profile, Pricing 3-1
Industry Structure 3-1
Financial Profile 3-3
Pricing 3-3
4. Effluent Control Guidelines 4-1
Introduction 4-1
Option Descriptions 4-1
5. Economic Impact Analysis 5-1
Introduction 5-1
Base Case Forecast 5-1
BAT Impacts 5-3
PSES Impacts 5-7
PSNS Impacts 5-7
NSPS Impacts 5-9
Capital Availability Analysis 5-20
Employment and Indirect Impacts 5-23
Small Business Analysis 5-27
6. Limits of the Analysis 6-1
Base Case Projections 6-1
Costs of Compliance 6-2
Demand/Supply Analysis 6-2
Total Costs of Compliance 6-3
Mill-Level Impacts and Closure Analysis 6-6
Capital Availability 6-6
Employment and Indirect Impacts 6-6
Appendix A. Capital Recovery Factor A-l
Appendix B. The 308 Survey B-l
Appendix C. Demand/Supply Methodology C-l
Appendix D. Simplified Demand Curves D-l
-------
List of Tables
Page No.
Section 1; Executive Summary
1-1 Results of BAT and PSES Analysis 1-9
1-2 Definition of NSPS Economic Options 1-10
1-3 NSPS, Capital Availability and Employment and
Indirect Impact Summary Table 1-11
Section 2; The Economic Assessment Methodology
2-1 Relationship of Analyses and Regulations 2-3
2-2 Relationship of Subcategories to Product Sector
Capacity Expansion 2-7
Section 5; Economic Impact Analysis
5-1 Summary of Base Case Forecast, 1985-90: Product Sectors . . . 5-2
5-2 Summary of Base Case Forecast: Subcategories 5-4
5-3 BAT and NSPS Toxic and Non-Conventional Pollutant
Monitoring Costs at Direct Discharging Mills 5-5
5-4 Results of BAT, PSES Analysis 5-6
5-5 PSES and PSNS Toxic and Nonconventional Pollutant
Monitoring Costs of Indirect Discharging Mills 5-8
5-6 Cost Estimates for NSPS and PSNS Zinc Control 5-10
5-7 Cost Estimates for NSPS Conventional Pollutant Control
(Technical Option A) 5-11
5-8 Cost Estimates for NSPS Conventional Pollutant Control
(Technical Option B) 5-13
5-9 Definition of Economic Options 5-14
5-10 NSPS Costs of Compliance for Model Mills: Option 1 5-15
5-11 NSPS Costs of Compliance for Model Mills: Option 2 5-16
5-12 Total Costs of Compliance, Price, Output Impacts
Due to NSPS Option 1: Product Sectors 5-18
5-13 Total Costs of Compliance by Subcategory: NSPS Option 1. . . 5-19
5-14 Total Costs of Compliance, Price, Output Impacts
Due to NSPS Option 2: Product Sectors 5-21
5-15 Total Costs of Compliance by Subcategory: NSPS Option 2. . . 5-22
5-16 Capital Availability Analysis: NSPS Option 1, 1985 5-24
5-17 Capital Availability Analysis: NSPS Option 2, 1985 5-25
5-18 Employment and Indirect Impacts 5-26
Section 6; Limits of Analysis
6-1 Price and Output Changes from the Base Case With
Different Values for the Capital Recovery Factor 6-4
6-2 Alternative Assumptions about New Source Capacity Expansion . 6-5
ii
-------
List of Tables
(continued)
Page No.
Appendices
A-l Alternative Derivations of Capital Recovery Factor A-5
C-l Summary of Demand Elasticities C-20
C-2 Average Annual Percent Change of Economic Variables
in DRI Control Forecast C-22
D-l Parameters for the Product Sector Demand Curves D-2
111
-------
List of Figures
Page No.
Section 2; The Economic Assessment Methodology
2-1 Major Elements of the Analysis 2-2
2-2 Base Case Demand/Supply 2-11
2-3 Impact of Treatment Costs 2-15
Appendices
C-l Demand/Supply- Analysis C-3
C-2 Shift in Supply Curve Due to Treatment Costs C-4
C-3 Example of Marginal Cost and Average Cost Curves C-5
C-4 Example Where Marginal Cost Squals Average Cost C-5
C-5 An Example of a Constructed Supply Curve C-7
C-6 Supply Curve Resulting from the Reranking
of Mills with Treatment Costs C-ll
C-7 Modeling Capacity Expansion Using the
Product Sector Supply Curves C-14
IV
-------
Section 1
Summary
Introduction
This report analyzes the economic impacts of effluent limitations and
standards on the Pulp, Paper and Paperboard Industry, including Best
Available Technology (BAT), Pretreatment Standards for Existing Sources
(PSES), New Source Performance Standards (NSPS) and Pretreatment Standards
for New Sources (PSNS). The impacts analyzed are: total costs of compliance,
the resulting increase in production costs, changes in prices, quantity
produced and capacity, capital availability, mill closures, impacts on the
number of persons employed, indirect impacts, and small business impacts.
Following this Summary, Section 2 gives a detailed discussion of the
methodology used in the economic analysis. Section 3 presents descriptions
and analysis of the structure of the industry, financial profiles of firms
and mills, and the pricing structure of the Pulp, Paper and Paperboard
Industry. This section is based on data from various sources, including a
financial survey of the industry, Data Resources, Inc., the EPA Development
Documents*, the American Paper Institute, Standard and Poor's Corp., U.S.
Department of Commerce, the Federal Trade Commission, and trade literature.
Section 4 presents a description of the regulatory contols analyzed. The
last two sections present the results of the economic analysis and the
limits of the analysis.
Section 2; Methodology - Economic Impacts
This section presents the methodology, assumptions and data sources
used in the economic assessment of the effect of BAT, PSES, PSNS, and NSPS
regulations on the Pulp, Paper and Paperboard Industry. Because expected
compliance costs resulting from BAT, PSES, and PSNS regulations are minor,
the bulk of the analysis is devoted to NSPS regulations. A methodology
using demand/ supply analysis was developed to determine the likely effect
of these regulations on price, output and capacity in the industry given
Base Case estimates of these variables and unit costs of compliance for new
source mills. Since some existing mills incur costs to comply with BAT and
PSES, a mill closure methodology was developed to analyze the impacts of
these costs. The results of the capital availability, employment and
indirect impacts analyses flow directly from the results of the demand/
supply and plant-level analyses. No costs are expected to occur from BPT
regulations.
*U.S. Environmental Protection Agency, Effluent Guidelines Division,
"Development Document for Proposed Effluent Limitations Guidelines and New
Source Performance Standards and Pretreatment Standards for the Pulp,
Paper and Paperboard and Builder's Paper and Board Mills Poing Source
Categories," Washington, DC, December 1980, EPA 440/1-80/025-6, and the
Final Development Document, October 1982.
-------
Costs of Compliance
Before examining expected impacts of the Final Regulation on price,
output and capacity expansion, EPA estimated unit costs of compliance for
mills in each subcategory based on model mill sizes for each subcategory and
an assumption of 330 operating days per year.
Results for three kinds of costs are presented: capital, operating
and maintenance, and total annual costs. Total annual costs are the sum
of operating and maintenance costs and capital costs multiplied by a
capital recovery factor (CRF). The capital recovery factor indicates how
many dollars per year a company must earn per dollar of invested capital
to cover taxes, depreciation and the required return on capital. The
value of the CRF used is .22. Real costs of compliance are assumed to
remain unchanged between 1978 and 1985.
The assessment of monitoring costs in this analysis is significantly
overstated and should be disregarded. The analysis and pertinent tables
estimate costs if all plants monitor for trichlorophenol and
pentachlorophenol to check compliance with BAT, NSPS, PSES and PSNS.
However, the regulation provides that monitoring is not required if mills
do not use chlorophenolic-containing slimicides and biocides. Since most,
if not all, mills are expected to comply with the regulation by using
other substitute biocides, little or no monitoring costs are expected to
be incurred.
Demand/Supply Analysis
The core of the approach to estimating the impact of NSPS regulations
on the industry is a microeconomic demand/supply analysis for each market
(product) sector of the industry. (Analyses of regulations for existing
sources do not use demand/supply analysis.) The analysis produces both a
Base Case (assuming no NSPS regulations) forecast of price, output, and
capacity expansion for each product sector and forecasts of the effects of
the cost of various treatment options on those variables. The approach
assumes that prices are determined by the costs of new mills. In particular,
the increase in unit total annual costs at new mills due to compliance costs
is assumed to result in an increase in price. The demand curve then deter-
mines the reduction in output needed to accommodate that price increase. The
decrease in output is assumed to be absorbed entirely by an equivalent reduc-
tion in the amount of new source capacity expansion subject to the NSPS
Regulation. In the post-control cases, variable costs are assumed to include
total annual costs of pollution control. Unit compliance costs for each
sector are an average of the compliance costs for each subcategory producing
that product weighted by production shares. Market or product sectors rather
than subcategories are used because the relevant set of competing products
depends on product type, not manufacturing process. The organization of the
industry into product sectors corresponds closely to product groups used by
The American Paper Institute (API).
1-2
-------
The long-run supply curve is assumed to be a horizontal line with
marginal cost equal to the unit production costs (including annualized
capital costs) of new capacity. This reflects the assumption of long-run
equilibrium that output expands to meet any demand for it at a price equal
to or greater than its full unit costs of production. This implies a growth
rate of new capacity which is used to estimate total costs of compliance for
new sources. Rather than attempting to estimate Base Case production costs
for each product sector explicitly, it is assumed that the 1985 Base Case
price estimates already reflect these costs, i.e., that the 1985 Base Case
forecasts depict a long-run equilibrium situation. This assumption allows
much simplification and is not crucial to the analysis because we are
interested primarily in the incremental impacts of the regulation.
The demand for each product sector is modeled using demand equations
estimated by Data Resources, Inc. and linked with DRl's macroeconomic
forecasts over the period of the analysis. The growth rate of demand is
the stimulus which leads to corresponding growth in capacity to meet
demand at the constant long-run cost.
The interaction between supply and demand is modeled by solving the
system of supply and demand equations for each product sector for equili-
brium values of price and output for each year of the forecast period.
Base Case Forecast. Base Case estimates of price, output, capacity
expansion, new source capacity and cash flow are made for each product
sector for the period 1985-90. Given predicted relationships between
product sectors and technical subcategories, rates of capacity expansion
over the period are also estimated for product sectors.
Total Costs of Compliance
Costs of compliance for BAT and PSES are computed by imputing average
costs of compliance for each subcategory to individual mills or by using
mill-specific costs computed by the EPA where available. (See Final EPA
Development Document.) These costs are then summed over all existing
mills to determine total costs of compliance.
Total costs of compliance for new sources are found by multiplying
total new source capacity (product sector or subcategory) by the relevant
value for unit costs of compliance.
Capital Availability
The capital availability analysis examines the ability of the industry
to finance investments in new capacity both without and with pollution
controls. The analysis compares the cash flow available in a given year
for investment with the total capital costs of normal capacity expansion
and the capital and variable costs of compliance with the Regulation.
1-3
-------
Unit capacity costs and capacity expansion forecasts are used to estimate
the total costs of capacity expansion. This corresponds to a worst-case
"capital squeeze" situation.
Closure Analysis
In the closure analysis, the estimated compliance costs for individual
existing mills are compared with estimated mill sales to determine if the
impact is significant. Comparing the total annual costs of compliance
with the annual sales value of the production of a mill gives a rough
measure of the size of the economic impact. We have assumed that a cost
to sales ratio of less than one percent implies a negligible impact, while
a ratio of greater than four percent may indicate a significant impact,
i.e., the possibility of closure.
Employment and Indirect Impacts
Employment Impacts. Changes in output due to changes in capacity
expansion also may cause changes in employment relative to the Base Case.
(At least some of this loss will be offset due to increased purchases and
investment in other industries.) Rough estimates of these employment
changes can be obtained by multiplying the change in the value of output
by average sales per employee figures. The change in sales is obtained by
multiplying the total change in output by the Base Case industry average
price.
Indirect Effects on Earnings and Employment. Direct impacts from
pollution control regulations such as output reductions can be expected to
have indirect effects, arising from the reduction in demand for inputs and
reductions in consumption because of both direct and indirect losses in
earnings. Input/putput analysis provides a straightforward framework for
accounting for these indirect effects as long as the direct effects are
small and a number of other important limitations are recognized. An
earnings/sales multiplier is developed to relate changes in industry sales
due to the Regulation to changes in value-added (earnings) in other sec-
tors of the economy. An average earnings per worker ratio is applied to
these changes to obtain impacts on indirect employment.
Small Business Analysis
The Regulatory Flexibility Act of 1981 requires agencies to conduct a
small business analysis to determine whether a substantial number of small
entities (in this case paper mills) are expected to be significantly
affected. If so, a formal Regulatory Flexibility Analysis is required.
The definition of small entity used in this analysis is a mill with less
than $10 million in annual sales. The method used is to classify all
1-4
-------
mills in the data sample either as large or small and then to compare the
distribution of impacts on mills belonging to the two sets. Impacts
examined are the cost-to-sales ratio and mill closures.
Section 3: Industry Structure, Financial Profile, Pricing
Industry Structure
The general structure of the industry was analyzed in terms of 26
product sectors. A single mill can have production in more than one
product sector. Detailed descriptions of each of these product sectors is
presented in Volume II of the December 1980 Report.
A number of important product sector characteristics were found to be
associated with the overall production level. The small volume producers
are: Glassine and Greaseproof, Cotton Fibre, Special Industrial, and Thin
Papers. Many produce specialized products. Several suffer from competi-
tion from plastics or other papers. In general, productivity growth has
been low, and expansion plans are minimal.
Medium volume paper producers are Solid Bleached Bristols, Uncoated
Groundwood, and Bleached Kraft Paper. These mills tend to have somewhat
newer capital stock and more widespread regional distribution than the
smaller, specialty mills. Their productivity growth rates are moderate
with some mills planning expansion.
Large volume paper producers are Uncoated Freesheet, Coated Printing,
Unbleached Kraft Paper, Newsprint, and Tissue. These firms tend to be
publicly owned and multi-mill. The mills are generally new, with high
productivity growth rates and large planned expansions.
Paperboard producers are grouped on the basis of furnish as well as
size. Recycled material-based paperboard includes: Molded Pulp Products
(small volume), Recycled Corrugating Medium and Recycled Linerboard (medium
volume), and Recycled Foldingboard and Construction Paper and Board (large
volume).
Wood-based paperboard includes: Bleached Kraft Linerboard (small
volume), Bleached Kraft Foldingboard and Solid Bleached Board (medium
volume), and Unbleached Kraft Linerboard and Semi-Chemical Corrugating
(large volume). They tend to be new, with high productivity growth rates
and large expansion plans.
Only two pulp product sectors were considered in this study:
Dissolving Pulp and all other Market Pulp. Dissolving Pulp is treated
separately since it is a highly specialized product with uses that are not
connected to the rest of the paper industry.
1-5
-------
Financial Profile
Using data compiled by Standard and Poor Corporation, the financial
condition of various firms and the different subcategories were analyzed
in terms of long-run, non-liquid asset ratios. Twelve firms which have
high ratios of net income to total assets were compared with ten firms
which have low ratios and seventeen small firms. While a few of the small
firms are clearly in financial trouble, small firms are not necessarily
weak firms.
Subcategories were compared in terms of three ratios: working capital
to total assets, investment in the past five years to fixed assets, and
general, sales and administrative expenditures to cost of goods sold.
Pricing
This section addresses the question of how cost increases due to BCPCT
and BATEA treatment requirements are likely to affect prices in the Pulp,
Paper and Paperboard Indusrry. First, the historical relationship between
costs and prices is reviewed, both for the industry as a whole and for
smaller segments. The results emphasize the effect of capacity utilization
rates on the ability to cover cost increases. Next, the effects of demand
growth and elasticity of supply and demand on likely price impacts are
discussed. Data on predicted end-use market growth and demand and supply
elasticities in each product sector are used to assess expected price
behavior under the assumption of competitive markets.
Section 4: Effluent Control Guidelines*
Best Available Treatment for Existing Sources (BAT)
BAT effluent limitations for direct dischargers are for the control of
the toxic pollutants trichlorophenol (TCP) and pentachlorophenol (PCP) and
zinc. Substitution to the use of slimicides and biocides not containing
chlorophenolics is the basis of BAT limits for TCP and PCP. Based on
inquiries to chemical suppliers, no definable cost differences will result
from this substitution. BAT effluent limitations are also proposed to
control the discharge of zinc from mills in the three groundwood sub-
categories. Control is based on chemical substitution. However, since
the BAT effluent limitation for zinc and the technology basis for zinc
control for the groundwood subcategories are identical to BPT, there are
no incremental costs associated with implementation of this option.
*See the EPA Development Document for a full description of controls
for individual subcategories.
1-6
-------
Pretreatment Standards for Existing Sources (PSES) and Pretreatment
Standards for New Sources (PSNS)
Pretreatment standards for existing and new sources cover pentachlorophenol,
trichlorophenol and zinc. The PSES technology basis for trichlorophenol and
pentachlorophenol is the same as for BAT and has no incremental cost. The PSES
technology basis for zinc control is chemical substitution. One mill is
expected to incur costs because of the cost differential in chemical prices. No
incremental costs are expected for PSNS because the technology basis is the same
as for PSES.
New Source Performance Standards (NSPS)
For NSPS, the pollutants regulated will be pentachlorophenol,
trichlorophenol, zinc, and conventional pollutants. For the three priority
pollutants, substitution is also the basis of control, as it is for BAT,
PSES, and PSNS. The basis for the control of conventional pollutants BOD5
and TSS is contact stabilization (CS), conventional activated sludge (AS),
or chemically assisted primary clarification (CAPC), depending on the
particular subcategory. (See Final EPA Development Document.)
Section 5; Economic Impact Assessment
Base Case Forecast
A Base Case forecast for 1985 is estimated for price, output, capacity
expansion and cash flow. These variables are then forecast through 1990
based on a constant real price and constant annual growth rates for each
product sector. The 1985 overall price is $547 per ton (in 1982 $), total
1985 output is 80.3 millions of tons, total cash flow is $8.49 billion,
total 1985-90 capacity expansion is 15.5 million tons per year, and the
overall average growth rate of output is three percent per year.
BAT and PSES Impacts
No impacts are associated with controls of trichlorophenol and
pentachlorophenol for direct and indirect discharging existing sources.
One indirect discharger has expected costs due to zinc control, but these
are not expected to have a significant effect. While all mills may not
have to monitor, EPA has included monitoring costs for all mills. In
fact, few mills will have to monitor. Overall costs of compliance for BAT
are
1-7
-------
estimated at $8.68 million in total annual costs; costs for PSES are
estimated at $1.29 million in total annual costs. See Table 1-1.
PSNS Impacts
Pretreatment standards for new sources (PSNS) are the same as PSES.
No impacts are associated with PSNS because, as a conservative assumption
and based on industry trends, all new sources were assumed to be
classified as direct dischargers.
NSPS Impacts
Definition of Options. Pollutants subject to NSPS controls are
pentachlorophenol and trichlorophenol (PCP/TCP), zinc and conventional
pollutants BODS and TSS. Treatment technologies for all pollutants except
conventional pollutants are equivalent to BAT; therefore, no incremental
cost is expected.
For conventional pollutant control EPA estimated two sets of costs of
compliance based on the two technical options for NSPS:
(1) Effluent limitations obtained by existing best performing
mills in each respective subcategory.
(2) Effluent limitations based on the application of
production process controls to reduce wastewater
discharges and raw waste loadings and end of pipe
treatment in the form of biological treatment, except in
the non-integrated subcategories.
The above costs for PCP/TCP, zinc and conventional pollutants are combined
to define two economic options whose impacts are are to be analyzed. The
definition of the options is given in Table 1-2.
Units Costs of Compliance, Demand Supply Impacts, Total Costs of
Compliance. Total NSPS 1985-90 capacity expansion for both options is
about 9.7 million tons per year. The results of the NSPS impact analyses
of unit costs of compliance, price and output impacts from the demand/
supply analysis, and total costs of compliance are summarized in Table 1-3
for the two economic options.
Option 1. Overall production-weighted average unit capital costs are
$18.6 per ton and total annual costs are $6.5 per ton. The average
price is $553.1 per ton, or 1.20 percent higher than the Base Case
price. The total reduction in output is 597,400 tons per year, or .65
1-8
-------
Table 1-1. Results of BAT and PSES Analysis
BAT
PSES
Estimated Number of Hills
With Costs:
Monitoring
Zinc Control
Total Costs of Compliance
Monitoring
Zinc Control
356
0
1 Total
1 Capital 1 Annual
0.0 8.68
0.0 0.0
1
1 Capital
0.0
0.0
229
1
Total
1 Annual
1.26
0.03
Total
0.0
8.68
0.0
1.29
Distribution of Mill Treatment
Cost-to-Sales Ratio
0-1%
1-2%
2-4%
>4%*
356
0
0
1 ° 1
229
0
0
0
Source: EPA estimates.
*Indicates significant impact.
All costs in January 1982 dollars. EPA originally estimated compliance
costs in first quarter 1978 dollars (ENR Construction Cost index = 2683).
The value of this index in January 1982 is 3726. The conversion factor is
3726/2683 = 1.389.
1-9
-------
Table 1-2. Definition of NSPS Economic Options
A. NSPS Technical Option 1;*
o best performing mill costs for conventional pollutants (Table
5-7); plus
o zinc control costs (Table 5-6); plus
o monitoring costs (Table 5-3).
B. NSPS Technical Option 2;*
o proposed NSPS costs for conventional pollutants (Table 5-8),
where this option defined, otherwise best performing mill costs
(Table 5-7); plus
o zinc control costs (Table 5-6); plus
o monitoring costs (Table 5-3).
Economic Option
(Cell Entry Shows Relevant NSPS Technical Option)
Subcategory
Group 1 2
Integrated except
Dissolving Kraft;
Deink A B
Dissolving Draft;
Secondary Fibers
except Deink;
Nonintegrated A A
* The Final EPA Development Document gives technical treatment costs in
going from raw waste loadings to final effluent. Because the regulatory
increment is from BPT controls promulgated in 1977, these costs were
modified to account for BPT control in place. See Section 6, Limits of
Analysis.
1-10
-------
Table 1-3. NSPS, Capital Availability, and
Employment and Indirect Impact Summary Table
Industry Averages and Totals, 1985-90
i NSPS
1 Option 1
1
1 NSPS
1 Option 2*
1
Unit Costs of Compliance
($/ton)
Capital
Total Annual
Demand/Supply Impacts
Price ($/ton)
Percent Change
Production Loss, 1990 (1000 t/y)
Percent Change
Cumulative New Source Capacity
Expansion, 1985-90 (1000 t/y)
Percent Change
Total Costs of Compliance, 1985-90
(Millions of $)
Capital
Total Annual
Capital Availability Analysis, 1985
(Millions of $)
Capacity Expansion Costs
One-Year Compliance Costs
BAT and PSES
NSPS
Total Demand for Funds
Cash Flow
Employment and
Indirect Impacts, 1990
Employment (no. jobs)
Indirect Earnings (Mill. $)
Indirect Employment (no. jobs)
18.6
6.5
553.1
1.20
597.4
0.65
9658
6.7
168.9
59.7
2342
10.0
29.3
2381
8493
2285
130.8
4708
18.1
6.4
553.0
1.18
582.2
0.63
9675
6.5
163.5
58.5
2342
10.0
28.5
2381
8493
2227
127.5
4588
* Selected Option.
All costs in January 1982 dollars.
Source: EPA estimates.
See note, Table 1-1.
1-11
-------
percent. Total capital costs are $168.9 million and total annual costs are
$59.7 million for NSPS capacity expansion 1985-90.
Option 2. Overall average unit capital costs are $18.1 per ton and total
annual costs are $6.4 per ton. The average price is $553.0 per ton, or
1.18 percent higher than the Base Case price. The total re- duction in
output is 582,200 tons per year, or 0.63 percent. Total capital costs are
$163.5 million and total annual costs are $58.5 million.
Capital Availability. Results of the capital availability are also shown
in Table 1-3. Total Base Case cash flow is $8.49 billion and the capital
costs of Base Case capacity expansion are $2.34 billion. In comparison/ the
highest 1985 one-year compliance costs for any option are $39.3 million.
Therefore capital availability is not judged to be a problem.
Employment and Indirect Impacts
The results of the employment and indirect analyses for all options
are also shown in Table 1-3. Industry employment reductions relative to
the Base Case due to output reductions range from 2227 to 2285 for both
options. Indirect earnings range from $127.5 to $130.8 million, and
indirect employment from 4588 to 4708 jobs.
Small Business Analysis
Small mills are defined as having less than $10 million in annual
sales. Using this definition, only one existing source has compliance
costs other than monitoring costs under PSES regulations, and none has
other costs under BAT regulations. The impact of those costs is not
judged to be significant. Monitoring costs are also shown not to have a
significant disproportionate impact on small mills.
Limits of the Analysis
Limits of the analysis are discussed for five major parts: Base Case
forecast; unit costs of compliance; the demand/supply methodology; total
costs of compliance; and other analyses. Sensitivity analyses are per-
formed to determine the most important parameters which affect the impact
estimates. Total costs of compliance are most affected by the share of
new capacity subject to NSPS and-the growth rates of the individual pro-
duct sectors. The effect of different estimates of the capital recovery
factor on unit costs and price increases is relatively small.
1-12
-------
Section 2
The Economic Assessment Methodology
Introduction
This section presents the methodology, assumptions and data sources
used in the economic assessment of BAT, PSES, NSPS and PSNS effluent limi-
tations on the Pulp, Paper and Paperboard Industry. Figure 2-1 shows the
major elements and information flows of the analysis. Because compliance
costs resulting from BAT, PSES and PSNS regulations are minor, the bulk of
the analysis is devoted to NSPS regulations. A methodology using demand/
supply analysis was developed to determine the likely effect of these
regulations on price and output in the industry given Base Case estimates
of price and output and unit costs of compliance for new source mills.
Since some existing mills are expected to incur compliance costs, a mill
closure methodology was developed also to analyze the impacts of BAT and
PSES costs. The results of the capital availability, employment and
indirect impacts and small business analyses flow directly from these
results.
Much of the data and methodology used here is derived from that developed
in the 1980 Proposal Document.* Because the analysis here covers much less
ground, reference will sometimes be made to that document, rather than
reproducing the methodology in full.
Not all the analyses are performed for each of the regulations being
analyzed in this study; this section describes the procedures used for each
regulation. These relationships are summarized in Table 2-1. Essentially,
only mill-level analyses are performed for BAT and PSES, since only a small
number of mills have costs other than monitoring costs, and only a few
mills have significant impacts which may lead to output changes. On the
other hand, the effects of NSPS and PSNS on price, output, and capacity
expansion are more pervasive and warrant explicit analysis of these
impacts. Capital availability employment and indirect impacts and small
business analyses are performed for all regulations.
BAT, PSES
Only one mill is expected to incur direct compliance costs as the
result of BAT and PSES. No monitoring costs will be required.
NSPS/PSNS
The NSPS and PSNS regulations potentially raise the costs of new
capacity classified as new source. Since in the long run new capacity earns
*U.S. Environmental Protection Agency, Office of Water Regulations and
Standards, "Economic Impact Analysis of Proposed Effluent Limitations
Guidelines, New Source Performance Standards and Pretreatment Standards
for the Pulp, Paper and Paperboard Mills Point Source Category (2
vols.)." EPA 440/2-80-086, December 1980.
-------
Figure 2-1. Major Elements of the Analysis
Base Case
Forecasts of
Price, Output,
Cash Flow
Pollution
Control
Costs of
Compliance
Mill
Production
and Financial
Data
NSPS
Demand/Supply
Analysis
z
BAT Mill
Closure
Analysis
Price and
Output Impacts
Costs of
Compliance
Capital
Availability
Analysis
Employment
and Indirect
Impacts
2-2
-------
a normal rate of return, price and output must adjust to cover the added
costs of compliance. Therefore, the full demand/supply analysis is done.
Since these regulations apply only to new sources, the closure analysis is
not relevant, although reductions in new source capacity are estimated as
part of the demand/supply analysis.
Table 2-1. Relationship of Analyses and Regulations
BAT PSES NSPS PSNS
Demand/Supply (including capacity reduction) X X
Total Costs of Compliance X X X X
Capital Availability X X X X
Closure X X
Employment X X X X
Indirect X X X X
Small Business X X X X
Costs of Compliance
Before examining impacts of the Regulation on price, output and capacity
expansion, EPA estimated unit costs of compliance for mills in each sub-
category. These unit costs were developed from costs provided in the Final
EPA Development Document based on standard mill sizes for each subcategory
and a standard assumption of 330 operating days per year. For example,
suppose costs of compliance for a 500 ton/day mill are $1 million/year Then
average costs per ton are $1 million/year divided by (500 ton/day x 330
days/year) which equals 6.06 $/ton.
Results for three kinds of costs are presented: capital, operating and
maintenance, and total annual costs. Total annual costs are the sum of
operating and maintenance costs and capital costs multiplied by a capital
recovery factor (CRF). The capital recovery factor indicates how many
dollars per year a company must earn per dollar of invested capital to
cover taxes, depreciation and the required return on capital. The method-
ology used to develop the CRF is described in Appendix A. The value of the
CRF used is .22. Real costs of compliance are assumed to remain unchanged
between 1978 and 1985.
2-3
-------
For NSPS costs the technical costs were adjusted. These technical
costs were based on treatment from raw waste load to NSPS final effluent
limitations. The costs were adjusted to reflect only the incremental costs
in going from BPT to NSPS effluent limitations; this charge was achieved by
multiplying the total technical cost by a factor of 0.2. See Section 6,
Limits of the Analysis for a discussion.
Demand/Supply Analysis
Overview
The core of the approach to estimating the impact of NSPS regulations
on the industry is a microeconomic demand/supply analysis for each market
(product) sector of the industry. The BAT and PSES analyses do not include
a demand/supply analysis. The NSPS and PSNS analysis produces both a Base
Case (assuming no new regulations) forecast of price, output, and capacity
expansion for each product sector and forecasts of the effects of the cost
of various treatment options on those variables. The approach assumes that
prices are determined by the costs of new mills. In particular, the in-
crease in unit total annual costs at new mills due to compliance costs is
assumed to determine the increase in price. The demand curve then deter-
mines the reduction in output needed to accommodate that price increase.
The decrease in output is assumed to be absorbed entirely by an equivalent
reduction in the amount of new source capacity expansion. In the post-
control cases, variable costs are assumed to include total annual costs of
pollution control. Unit compliance costs for each sector are an average of
the compliance costs for each subcategory producing that product weighted
by production shares. Market or product sectors rather than subcategories
are used because the relevant set of competing products depends on product
type, not manufacturing process. The organization of the industry into
product sectors corresponds closely to product groups used by The American
Paper Institute (API).
The long-run supply curve is assumed to be a horizontal line with
marginal cost equal to the unit production costs (including annualized
capital costs) of new capacity. This reflects the assumption of long-run
equilibrium that output expands to meet any demand for it at a price equal
to or greater than its full unit costs of production. This implies a
growth rate of new capacity which is used to estimate total costs of com-
pliance for new sources. Rather than attempting to estimate Base Case
production costs for each product sector explicitly, it is assumed that the
1985 Base Case price estimates already reflect these costs, i.e., that the
1985 Base Case forecasts depict a long-run equilibrium situation. This
assumption allows much simplification and is not crucial to the analysis
because we are interested primarily in the incremental impacts of the
regulation.
2-4
-------
The demand for each product sector is modeled using demand equations
estimated by Data Resources, Inc. and linked with DRI's macroeconomic
forecasts over the period of the analysis. The growth rate of demand is
the stimulus which leads to corresponding growth in capacity to meet
demand at the constant long-run cost.
The interaction between supply and demand is modeled by solving the
system of supply and demand equations for each product sector for equili-
brium values of price and output for each year of the forecast period.
Supply Curves
The supply curve shows the supply response of the industry to a given
price. The analysis of the impacts of new source costs focuses on the
long-run response of the industry without being concerned about shorter
run adjustments. The key assumption is that investment in new capacity
adjusts so that marginal new capacity earns a competitive return on its
capital costs. This implies that long-run price is equal to the unit
costs of marginal new capacity, including annualized capital costs, both
before and after the imposition of treatment requirements. It follows
that, in the long-run, incremental costs of compliance are fully passed
through in the form of higher prices so that new capacity continues to
earn a competitive return. Therefore, both pre- and post-impact supply
curves are represented as horizontal lines with marginal cost equal to
the full units costs of new capacity.
The supply curve methodology has two major tasks for each product
sector:
o estimate capacity expansion, both overall and new source;
o estimate unit costs of compliance.
No attempt is made to estimate unit production costs of new capacity
explicitly. Instead, it is assumed that the Base Case price forecasts for
each product sector for 1985 reflect these full production costs (O&M
costs plus annualized capital costs).* This assumption is not crucial for
the analysis, since we are mainly interested in the incremental effect of
the regulation.
Capacity Expansion. Given the assumption of long-run equilibrium and
constant real price and unit cost, capacity grows at the same rate as
demand. This growth rate is applied to the 1984 level of capacity in each
product sector to determine the required increment to capacity for each
year of the period 1985-90. Capacity expansion in year t for product
*These price estimates were derived from the more complex demand/supply
methodology used in the 1980 Proposal Document. See Appendix C.
2-5
-------
sector j is denoted as DELCAPjt. Only capacity increases due to
"greenfield" mills or major alterations of existing plants are assumed to
be subject to NSPS/PSNS requirements. Thus, it is necessary to forecast
what fraction of new capacity would be classified as a "new source." This
is done using information on installation of new machines from the
American Paper Institute's (API) capacity forecasts and planned capacity
increases in existing plants from the Economic 308 Survey. The estimated
share of new capacity in each product sector classified as "new source" is
shown in Table 2-2. The estimates presented here have a great deal of
uncertainty. Therefore, sensitivity analyses using alternative estimates
are given in Section 6. Kew source capacity for product sector j is
NSDELCAPjt = (i-v-j) DELCAPjt (2-1)
where Vj is the share of non new source capacity.
Compliance Costs. The compliance costs added to the supply curves are
total annual costs per ton. Total annual costs are defined as O&M and
energy costs plus annualized capital costs (capital costs multiplied by
the capital recovery factor, .22). Unit costs are found by dividing model
mill costs by annual production (daily mill capacity x 330 days per year) .
Because costs of compliance are defined on the basis of subcategories
rather than product sectors, it is necessary to relate capacity expansion
in each product sector with specific subcategories. Because announced
capacity expansion plans are usually described in terms of product sectors
rather than subcategories, a number of assumptions must be made to obtain
these estimates. The approach taken is to assume that expansion comes
primarily from integrated mill subcategories, and that it follows the
current mix of integrated subcategories in each product sector.*
The resulting estimates are given in Table 2-2, which shows the share
of new source capacity expansion in each product sector contributed by
each subcategory. Note that these shares should be interpreted as shares
of new capacity which are subject to new source standards. A preliminary
analysis indicated that several other subcategories would contribute new
capacity to various product sectors. However, the product sector capacity
expansion estimates together with the new source and subcategory share
coefficients in Table 2-2 all implied annual additions to capacity for
these subcategories which were small (less than 20 percent) relative to
their model mill sizes. Therefore, it was deemed unlikely that new source
mills in these subcategories would be built. The share coefficients of
these subcategories were dropped from Table 2-1 and the shares of the
remaining subcategories adjusted accordingly.**
*This distribution is described in detail in the 1980 Proposal
Document, pp. 3-24 to 3-28.
*The remaining shares were adjusted upwards by equal percentage
amounts so that they summed to unity for each product sector.
2-6
-------
Table 2-2. Relationship of Subcategories to
Product Sector Capacity Expansion
Product
I New |
1 Source I
1 Share of |
iCapacity I
I Expansion!
Subcategories Contributing
New Source Capacity to
Product Sector
I Fraction of
I Product Sector
I New Source
(Capacity Met by
[Each Subcategory
Paper
Unbleached Kraft
1.00 Unbleached Kraft & Semi-
, Chemical
1.00
Bleached Kraft
Glassine
Spec. Industrial
Newsprint
Coated Printing
Uncoated
Freesheet
Uncoated
Groundwood
Thin Papers
Solid Bleached
Bristols
Cotton Fibre
Tissue
. 0 , Fine Bleached Kraft & Soda ,
. 0 . Papergrade Sulfite .
. .21 . Fine Bleached Kraft & Soda ,
.89 Groundwood: Coarse, Molded,
Newsprint
. . Deink (Newsprint) .
.52 Fine Bleached Kraft & Soda
. Groundwood: Fine Papers .
.59 Fine Bleached Kraft & Soda
. . Papergrade Sulfite .
.51 Groundwood: Fine Papers
1 1 1
. 0 . Non-Integrated Lightweight .
0 Fine Bleached Kraft & Soda
1 1 1
. 0 . Non-Integrated Fine Papers (C) .
.82 Non-Integrated Tissue Papers
Papergrade Sulfite
Deink (Tissue)
1.00
1.00
1.00
0.80
0.20
0.56
0.44
0.73
0.27
1.00
1.00
1.00
1.00
0.50
0.34
0.16
2-7
-------
Table 2-2. Relationship of Subcategories to
Product Sector Capacity Expansion
(continued)
1 New 1 I Fraction of
1 Source 1 I Product Sector
1 Share of 1 Subcategories Contributing I New Source
(Capacity 1 New Source Capacity to (Capacity Met by
Product {Expansion 1 Product Sector (Each Subcategory
Board
Unbleached Kraft
Liner
1
Bleached Kraft
Liner
Bleached Kraft
Folding
Semi-Chemical
Corrugating
1
Recycled Liner .
Recycled
Corrugating ,
Recycled Folding .
Construction Paper
& Board .
Molded Pulp
1
Solid Bleached
Board .
All Other Board
1
Pulp
Dissolving
1
Market .
.82 Unbleached Kraft (Liner)
Unbleached Kraft & Semi-
. Chemical .
0 None
1 1
0 None
1 1
.78 Semi-Chemical
Unbleached Kraft & Semi-
. Chemical .
0 . None ,
0 None
1 1
0 - None .
.68 Builder's Paper
1 1
0 Wastepaper Molded Products
Groundwood: Coarse, Molded,
. Newsprint .
0 None
1 1
.46 Unbleached Kraft & Semi-
. Chemical .
0 Dissolving Sulfite Pulp
I Dissolving Kraft ,
" " 1 1
0.71
0.29
^ ^
« ~_
0.63
0.37
- -
^ »
- -
1.00
0.51
0.49
"™ ^
1.00
0.52
0.48
— —
Source: EPA estimates.
2-8
-------
Unit costs for each product sector are weighted averages of the costs
for each subcategory. Let:
unit treatment cost for subcategory i (i =1,..., n)
share of subcategory i in new source capacity expansion of
product sector j
Then the unit cost for product sector j is
n
OTAC. - I a.. UTAC. (2-2)
3 = 1D X
The share coefficients are also used to determine capacity expansion
in each subcategory, which is the sum of its shares of capacity expansion
in each product sector. The total increment to capacity for subcategory i
is:
m
DELCAP. - £ ai> DELCAP. (2-3)
j = 1
and the increment of new source capacity is
m
NSDELCAP. = £ a.. NSDELCAP.. (2-4)
" j - 1 13 JC
Demand Curves
A separate demand curve is estimated for each product sector. The
demand curves used in the NSPS methodology are simplified versions of
those used in the 1980 Proposal Document. The methodology used to develop
the original demand curves is described in Appendix C. The simplified
demand curves take the following form:
4 t-T
Q. - (c +Z d. P ) (1+s)^ (2-5)
* i-0 L
2-9
-------
where:
Qt = quantity demanded (thousand tons/year)
Pt = price (cents/lb.)
s = average annual growth rate of demand
T = last year before NSPS takes effect (1984)
Although much simplified, these curves preserve the essential behavioral
features of the original demand curves: price elasticity of demand and
growth of end-use demand. The values of c and d^ are obtained by
inserting the 1984 values for all other variables in the right-hand side
of the original demand equation besides the real price terms, setting all
the price terms equal to the 1984 level (to be consistent with long-run
equilibrium) and solving. The 1984 demand curves are given in Appendix
D. The structure of the equation implies that if capacity also grows at
rate s, long-run equilibrium is maintained, with price remaining at the
real 1984 level and output growing at rate s. This is consistent with the
assumptions originally used to develop the capacity expansion forecasts,
and provides a convenient baseline against which to measure the impact of
treatment costs for new capacity on price and output.
Solution of the Model
The supply and demand curves for each sector are combined to form a
product sector model which can be solved to predict the equilibrium paths of
price and output over time. The system is closed by assuming the relationship:
Pt = MCt (2-6)
i.e., the competitive assumption of price being equal to long-run marginal
cost. The model is started by inputting the initial five values of
present and lagged price.
Figure 2-2 shows the determination of base case price and output. The
intersection of the demand curve DD and the supply curve SS yields price P
and output Q. Figure 2-3 shows the impact.of adding treatment costs S'S
to the supply curve, causing it to shift upward to line S'S1. The price
increase is P'P (equal to S'S) and the change in output is Q'Q.
It is assumed that the reduction in output in 1990 due to the price
increase causes an equal drop in cumulative new source capacity expansion
over the forecast period 1985-90. This implies that all existing capacity,
except for normal retirement, stays open. This is plausible, since price
increases while the costs of almost all existing mills do not. Given this,
the marginal ton of new source capacity just earns a competitive return
while covering the added costs of compliance; any greater capacity
expansion would depress price below the required level.
2-10
-------
Price
Price
Figure 2-2. Base Case Demand/Supply
Output
Figure 2-3. Impact of Treatment Costs
P1
P1
S1
Q' Q
Output
2-11
-------
Denoting NSCAP*ifgQ as the cumulative Base Case amount of new source
capacity in 1990, the post-impact amount of new source capacity is:
NSCAPi,90 • NSCAP*i,90 - Q'Qgo (2-7)
Assuming that new source capacity still grows of rate s over the forecast
period, this implies that the 1985 post-impact amount of new source
capacity:
NSDELCAPif85 = NSCAPif90 / S \ (2-8)
Total Costs of Compliance
Costs of compliance for existing sources are computed by imputing
average costs of compliance for each subcategory to individual mills
(e.g., for monitoring costs) or by using mill-specific costs computed by
EPA. These costs are then summed over all existing mills to determine
total costs of compliance.
Total costs of compliance for new sources are found by multiplying
total new source capacity (product sector or subcategory) by the relevant
value for unit costs of compliance. For example, total annual costs of
compliance for subcategory i are:
TTAC. = UTAC. X NSDELCAP. (2-9)
Total capital costs are determined in the same way.
Capital Availability
The capital availability analysis examines the ability of the industry
to finance investments in new capacity and capital costs of compliance for
existing and new capacity. The analysis compares the cash flow available
in a given year for investment with the total capital costs of normal
capacity expansion and the capital and variable costs of compliance with
the BAT, PSES, NSPS, and PSNS regulations.
Cash flow for a given product sector is defined as:
CASH = (1-t) x (R-C-RV-B) (2-10)
where:
t = corporate income tax rate
R = total revenue
C = variable costs
RV = reinvestment (assumed equal to depreciation)
B = interest payments.
2-12
-------
It is difficult to obtain estimates of total reinvestment and interest
payments for a given product sector. The method used here is to take the
1978 values of these variables for all mills from the Economic 308 Survey,
and then to add the imputed amounts for new capacity based on the estimates
of new capacity costs and the cost of capital used in this study.
Costs of capacity expansion are obtained by multiplying unit capital
costs by the increment to capacity for each product sector in a given year.
Unit capital costs are estimated from responses to the 308 Survey. In
algebraic terms,
TXCAPfc » UXCAP x DELCAPfc (2-11)
where TXCAPt is total expansion cost, UXCAP the capital cost per ton of
new capacity, and DELCAPt the total increment to capacity in yearfc.
Costs of compliance to be met out of cash flow are capital costs of
compliance for the year's new source capacity expansion plus total variable
compliance costs of all new source capacity already installed, i.e.:
CCOST = DELCAP (l-v)UCAP + (CAP - CAP )(l-v)OM + XSTCAP + XSTOM (2-12)
where: fc C t 1
CCOSTt = Compliance costs met out of cash flow in year t
T = Last year before NSPS is effective
UCAP = Unit capital costs of compliance
QM = Unit O&M costs of compliance
CAPfc a Total capacity in year t
XSTCAP * Capital costs of compliance for existing sources
XSTOM - O&M costs of compliance for existing sources
Closure Analysis
EPA has estimated compliance costs for individual existing mills, which
are compared with estimated mill sales to determine if the impact is sign-
ificant. In addition, profit and loss statements are developed for mills
which also have financial data available from the Economic 308 Survey to
determine the effect of treatment costs on their profitability. These
results are used to evaluate the results for the other mills using the
simpler treatment costs to sales impact ratio.
Comparing the total annual costs of compliance with the annual sales
value of the production of a mill gives a rough measure of the size of the
economic impact. We assumed that a cost to sales ratio of less than one
percent implies a negligible impact, while a ratio of greater than four
percent indicates a significant impact, i.e., the possibility of closure.
These numbers should only be taken as rough guides, however; in the absence
of further information there is no definite cutoff for a significant impact.
2-13
-------
Mill sales are estimated as the product of annual production and the
average 1985 price (in 1978 dollars) of the products assumed to be pro-
duced at the mill. Daily production figures from the Technical 308 Survey
are multiplied by an assumed 330 days per year to yield annual production.
Product prices are taken from the Base Case estimates.
Financial data from the Economic 308 Survey are available for some
mills that submitted surveys directly to EPA. This allows a more detailed
analysis of the effects of costs of compliance on mill profitability, and
provides a means to check the results of the cruder analysis based on the
cost to sales ratio. A profit and loss statement is computed for each
mill, showing revenues, variable and fixed costs, margin (revenues less
variable costs), after tax earnings, and cash flow. The margin indicates
whether the mill is covering its variable costs of production; if not it
may close. After tax earnings and cash flow indicate whether the mill is
covering its fixed costs and earning the required rate of return. The
effect of treatment costs on these measures is examined.
Although the methodology is very simple, some inconsistencies exist
because the data come from different sources. The source of the Base Case
financial estimates is, as mentioned above, the Economic 308 Survey, while
incremental treatment costs are estimated based on the Technical 308 Survey.
Estimates of production vary between the two sources, and have to be ad-
justed to make meaningful comparisons. The basic strategy adopted is to put
all costs on a per ton basis.
Employment and Indirect Effects
Employment Impacts
Changes in output also cause changes in employment relative to the Base
Case. (At least some of this loss is offset due to increased purchases and
investment in other industries.) Rough estimates of these employment changes
can be obtained by multiplying the change in the value of output (sales) by
average sales per employee figures. The change in sales is obtained by multi-
plying the change in output by the Base Case average price for each product
sector. (Employment increases associated with costs of compliance are not
counted.) Average sales per employee are obtained for general pulp, paper and
paperboard categories, based on 1977 U.S. Census of Manufactures data on total
employment and sales:
Total Sales
Value of Shipments Employment Employee
(millions $) (1,000) ($1. OOP/employee)
Pulp and paper 14,679 143.9 102
Paperboard 7,114 68.3 104
2-14
-------
These figures are adjusted to 1978 dollars by multiplying the ratios by the
percent change in the GNP deflator from 1977 to 1978, 7.3 percent. No
adjustment is made for real productivity changes between 1977 and 1985.
In mathematical terms, for a given product sector:
dEMP = dSALES/LPROD (2-13)
where:
BMP = Employment in product sector
LPRDD = Average sales/employee
SALES = PQ
and the prefix "d" denotes a change due to the Regulation.
These numbers have a number of weaknesses. Sales per employee may vary
significantly for different kinds of products. There is a balancing effect,
however. Large mills tend to have low employee per ton ratios, but also low
value per ton products, and vice versa for small mills. Therefore, the
ratio-of-sales to employees may vary less. New capacity tends to be more
capital intensive than existing capacity, so using averages based on
existing mills will underestimate the sales/employment ratio, and hence
overestimate employment impacts for new source regulations.
Indirect Effects on Earnings and Employment
Direct impacts from pollution control regulations such as output
reductions can be expected to have indirect effects, arising from reduction
in demand for inputs and reductions in consumption because of both direct and
indirect losses in earnings. Input/output analysis provides a straight-
forward framework for accounting for these indirect effects as long as the
direct effects are small and a number of other important limitations are
recognized.*
The measure of net impact used by the Bureau of Economic Analysis (BEA)
and adopted here is earnings, defined as the sum of wage and salary income,
other labor income, and payments to proprietors. It does not include returns
to capital.** The impact on earnings can be calculated by multiplying the
*See U.S. Water Resources Council, Guideline £: Regional Multipliers
(Industry Specific Gross Output Multipliers for BEA Economic Areas) prepared
by Regional Economic Analysis Division, Bureau of Economic Analysis, U.S.
Department of Commerce, Washington, D.C., January 1977.
**This is a more reasonable assumption for regional impact analysis since
owners of capital are likely to be outside the region. Use of this measure
would underestimate impacts at the national level. The extent of this error
is unclear since it depends on the effect of changes in wealth on consump-
tion. These effects are likely to be less than those of earnings on
consumption.
2-15
-------
demand change in each sector by the ratio of earnings to gross output in
that sector and then summing earnings changes over sectors.
This procedure has been used by BEA to calculate a ratio of change in
total earnings to changes in final demand for the "paper and related
products" industry, i.e.,
d Total Earnings _
d Total Demand " >88 (2"14)
This number includes direct earnings changes. Deducting average industry
value added per dollar final sales of .48 yields the indirect earnings
multiplier:
d indirect Earnings =
d Total Demand v '
This must be taken with some caution, because it represents a national
average. However, it was not feasible to use state-specific gross output
multipliers to obtain similar earnings/final demand ratios for each state.
First, doing so would underestimate impacts, since state multipliers only
capture indirect impacts in that state. Therefore, summing over state
impacts would not yield the national impact because out-of-state impacts
would not be captured. Second, the only existing complete set of state
multipliers is very outdated. More recent work on a few states indicates
that those multipliers are off by as much as 30 percent.*
The total indirect earnings impact of a change in output is just:
d INDEARN = .40 x dSALES (2-16)
where
INDEARN = indirect earnings.
Indirect employment impacts can be calculated from regional employment/
earnings ratios for the indirect impacts. The formula is:
dINDEMP = dINDEARN x INDLPROD (2-17)
where INDLPROD is a national average value for the employment/earnings
ratio.
This approach does have a number of limitations. Output in other sectors
may expand because of substitution. Second, the use of a single national
* Private communication, Joseph Cartwright, BEA.
2-16
-------
earnings/final demand ratio ignores regional differences in costs and input
mixes. Finally, the effects of changes in wealth on consumption have been
ignored, thereby underestimating impacts somewhat.
Small Business Analysis
The regulatory Flexibility Act of 1981 requires agencies to conduct a
small business analysis to determine whether a substantial number of small
entities (in this case, paper mills) will be significantly affected. If
so, a formal Regulatory Flexibility Analysis is required. The method used
is to classify all mills in the data sample as either large or small and
then to compare the distribution of impacts on mills belonging to the two
sets. The impacts include the number of mills with compliance costs, the
distribution of the costs-to-sales ratio and the number of closures.
The Small Business Administration (SBA) provides a general definition
of a small business as a concern
" which is independently owned and operated and which is not
dominant in its field of operation. In addition to the
foregoing criteria, the Administration (of the SBA), in making
a detailed definition, may use these criteria, among others:
number of employees and dollar volume of business**
To fulfill the need for additional specificity, the SBA has published
specific guidelines for identifying small businesses in various business
activities including manufacturing, based on the number of employees. The
most relevant set of guidelines for the small business analysis is given
in the Code of Federal Regulations, Title 13, Section 121.2-10 (definition
of small business for SBA loans). For companies in SIC group 2621 (paper
mills, except for building paper mills) the SBA defines a small firm as
one with fewer than 750 employees.
For the small business analysis, we believe that a cutoff figure of 750
employees is too high. Based on 1977 U.S. Census of Manufactures data, the
average number of employees per mill for paper mills is 349.** Given the
skewed distribution of mill sizes, with most mills smaller than the average
size, the SBA definition would include well over half the number of mills in
the industry. The analysis is primarily concerned with small firms with
* Small Business Act, Section 3.
** U.S. Department of Commerce, 1977 Census of Manufactures; Paper
Mills Except Building Paper; Preliminary Report, November 1977, p. 2.
2-17
-------
limited resources or those which would face barriers to entry due to
regulation. Such criteria are not likely to apply to such a large number
of mills. Because the pulp and paper mills tend to be capital intensive,
we believe that the employee criterion is inappropriate. Because pro-
duction is a better indication of size, we have elected to use annual
revenues as the basis of our small business definition.
In light of these considerations, we have defined small businesses to
be mills having less than $10 million in annual sales. Based on data from
the U.S. Census of Manufactures and the Economic 308 Survey, this defini-
tion covers about 20 percent of all mills in the Pulp, Paper and
Paperboard Industry.
2-18
-------
Section 3
Industry Structure, Financial Profile, Pricing
Industry Structure
This section provides a description of the Pulp, Paper and Paperboard
Industry.* Attention is given to productive and financial characteristics
relevant to the economic analysis.
The general structure of the industry was analyzed in terms of 26
product sectors. A single mill can have production in more than one pro-
duct sector. Detailed descriptions of each of these product sectors is
presented in Volume II of the 1980 Proposal Document.
A number of important product sector characteristics were found to be
associated with the overall production level. The small volume producers
are: Glassine and Greaseproof, Cotton Fibre, Special Industrial, and Thin
Papers. The median mill size for these sectors range from about 50 to 100
tons per day. They tend to be older mills, located near urban areas and
in the Northeast or North Central regions. Many produce specialized pro-
ducts. Several suffer from competition from plastics or other papers. In
general, productivity growth has been low, and expansion plans are minimal.
Medium volume paper producers are Solid Bleached Bristols, Uncoated
Groundwood, and Bleached Kraft Paper. The median mill size ranges from
about 420 -to 550 tons per day. These mills tend to have somewhat newer
capital stock and more widespread regional distribution than the
smaller,specialty mills. Their productivity growth rates are moderate
with some mills planning expansion.
Large volume paper producers are Uncoated Freesheet, Coated Printing,
Unbleached Kraft Paper, Newsprint, and Tissue. The median mill size ranges
from 140 to 890 tons per day. These firms tend to be publicly owned and
multi-mill. The mills are generally new, with high productivity growth
rates and large planned expansions.
Paperboard producers are grouped on the basis of furnish as well as
size. Recycled material-based paperboard includes: Molded Pulp Products
(small volume), Recycled Corrugating Medium and Recycled Linerboard (medium
volume), and Recycled Foldingboard and Construction Paper and Board (large
volume). Median mill size ranges from about 70 to 190 tons per day. Com-
pared to virgin wood-based paperboard, recycled-based firms tend to have a
higher degree of private ownership and, except for Construction Paper and
Board, their economic future appears less promising. Recycled-based mills
tend to be older, and to be located in the Northeast and North Central
regions of the country, near their fiber suppliers.
Wood-based paperboard includes: Bleached Kraft Linerboard (small
volume), Bleached Kraft Foldingboard and Solid Bleached Board (medium
volume), and Unbleached Kraft Linerboard and Semi-Chemical Corrugating
*See the 1980 Proposal Document for a more detailed description.
-------
(large volume). The median mill size ranges from about 860 to 1,600 tons
per day. These mills primarily are located in rural areas of the South-
east. They tend to be new, with high productivity growth rates and large
expansion plans.
Only two pulp product sectors were considered in this study:
Dissolving Pulp and all other Market Pulp. Dissolving Pulp is treated
separately since it is a highly specialized product with uses that are not
connected to the rest of the paper industry. These mills have a median
size of about 640 tons per day, and primarily are located in the Southeast
and the Northwest. They face decreasing demand, have experienced high pro-
ductivity growth and do not plan to expand. Market Pulp is any other pulp,
such as Bleached Kraft. Pulp, which is not used in the production of paper
or paper board by the firm manufacturing it but is purchased by another
firm. These mills have a median size of about 890 tons per day, and are
located primarily in the Southeast. The ages of the mills vary with the
processes used. Expansion plan data was not available.
Product sectors vary in terms of degree of integration from pulp to
papermaking. For purposes of this economic analysis, mills are classified
into three categories: integrated, nonintegrated and secondary fiber. In
general, the degree of integration is related to the value of the end pro-
duct. Mills producing low-price-per-unit products are usually integrated,
while mills making specialized, high value products frequently are noninte-
grated. Integrated mills are usually located in rural areas, while noninte-
grated and secondary fiber mills tend to be located in urban areas.
This analysis divides the United States into five regions. While the
Northeast has more mills than any other region, the Southeast has more
capacity. Also, more investment has been taking place in the Southeast
than in any other region.
The United States clearly dominates world production and consumption
of pulp, paper and paperboard products. However, over the past several
years, U.S. production as a percent of world production has been declining
slowly. Given the size of our industry, our relatively low-cost timber
supply, and current expansions, the U.S. can be expected to maintain its
major role in world production levels.
Research and development has never been a major activity for this
industry. On average, it allocates about 0.7 percent of its sales revenues
to this area. Research funds are divided between process development,
including pollution control, and product development. The most commercially
attractive innovations in the future are likely to be those which reduce
fiber requirements, effluent loads or energy requirements. However, new
technologies related to product development, such as fluff pulp, air
layering, and supercalendaring have recently led to new products.
3-2
-------
Financial Profile
The Pulp, Paper, and Paperboard Industry entered 1980 expecting a major
downturn along with the rest of the U.S. economy. Data Resources, Inc.
predicts a drop of 3.5 percent in total U.S. paper and board production in
1980, but expects the future to be very good. The general financial per-
formance of paper and allied industries during the last several years has
been better than that during the late 1960's and early 1970's.
One of the distinguishing characteristics of this industry is the high
level of capital investment required. A majority of the capacity expansion
has occurred at existing facilities as opposed to greenfield mills which
tend to be more expensive. Much of this expansion has been financed
internally.
Using data compiled by Standard and Poor Corporation, the financial
condition of various firms and the different subcategories. were analyzed
in terms of long-run, non-liquid asset ratios. Twelve firms which have
high ratios of net income to total assets were compared with ten firms
which have low ratios and seventeen small firms. The high ratio firms
tend to be less dependent on paper sales than the low ratio firms, and
are more likely to be producers of paper as opposed to board. The high
and low ratio groups have nearly the same ranking in terms of total
sales. While a few of the small firms are clearly in financial trouble,
small firms are not necessarily weak firms.
Subcategories were compared in terms of three ratios: working capital
to total assets, investment in the past five years to fixed assets, and
genera, sales and administrateve expenditures to cost of goods sold. Work-
ing capital as a percent of total assets tends to be highest for small and/
or secondary fiber mills and nonintegrated mills. Generally, sales and
administrative expenditures as a percent of cost of goods sold also tend to
be high for mills producing highly differentiated products and for secondary
fiber and nonintegrated mills, although this relationship is less strong.
Investment over the last five years as a percent of fixed assets tends to be
higher for integrated mills, with both large-mill and small-mill
subcategories experiencing heavy investment.
Pricing
This section addresses the question of how the pricing behavior of the
Pulp, Paper and Paperboard Industry might affect NSPS capacity expansion. A
review of the history of price and cost shows that a key factor in industry
pricing is the capacity utilization rate for the industry. When capacity
utilization is 92 percent or greater, the industry is usually able to raise
prices faster than costs increase.
Demand conditions have an important effect on the ability of the industry
to pass cost increases through to customers. In general, consumption is
3-3
-------
strongly related to the overall level of business activity of the economy.
Among the exceptions to this are Unbleached Kraft, Uncoated Groundwood and
Solid Bleached Board.
The structure of the pulp and paper industry combines both competitive
and oligopolistic characteristics. In general, the industry can be described
as a commodity industry with minimal product differentiation. The Dissolving
Pulp, Molded Pulp, Uncoated Groundwood and Tissue sectors are fairly highly
concentrated. Most of the Board sectors have a low concentration and consist
of a large number of firms.
3-4
-------
Section 4
Effluent Control Guidelines
Introduction
This section describes the basis for the various control options considered
in the analysis of BPT, BAT, PSES, NSPS, and PSNS effluent guidelines for the
control of toxic and conventional pollutants.*
Option Descriptions
Best Available Technology Economically Achievable (BAT) Effluent
Limitation
The toxic pollutants addressed by BAT technologies include the 124
"priority pollutants" designated by EPA. For the Pulp, Paper and Paperboard
Industry, only three priority pollutants will be controlled under the BAT
regulations: pentachlorophenol, trichlorophenol, and zinc. For each
pollutant, the costs of compliance are zero except for monitoring costs.
Pentachlorophenol and Trichlorophenol Control. BAT effluent
limitations are for the control of the toxic pollutants trichlorophenol
and pentachlorophenol. Substitution to the use of slimicides and biocides
not containing chlorophenolics is the basis of BAT limits for these com-
pounds. Based on inquiries to chemical suppliers, no definable cost
differences will result from this substitution.
Zinc Control. BAT effluent limitations are set to control the discharge
of zinc from mills in the three groundwood subcategories. The technology
basis for controlling zinc under BPT was precipitation with lime. The
technology actually employed at mills in these subcategories was the substi-
tution of the bleaching chemical zinc hydrosulfite with sodium hydrosulfite.
However, since the BPT effluent limitation for zinc and the technology basis
for zinc control for the groundwood subcategories are identical to BAT,
there are no incremental costs associated with implementation of this option.
Pretreatment Standards for Existing Sources (PSES) and Pretreatment
Standards for New Sources (PSNS)
Pretreatment standards for existing and new indirect discharging sources
are the same. Three priority pollutants are controlled: pentachlorophenol,
trichlorophenol, and zinc.
*See the EPA Development for a full description of the controls for
individual subcategories.
-------
Pentachlorophenol and Trichlorophenol Control. Pentachlorophenol and
trichlorophenol were considered for control under PSES and PSNS. Substitu-
tion to the use of slimicides and biocides not containing chlorophenolics is
the basis of PSES and PSNS limits for these compounds. Based on inquiries
to chemical suppliers, no definable cost differences will result from this
substitution. There will be no monitoring costs.
Zinc Control. The toxic pollutant zinc can be effectively controlled
through the substitution of the bleaching chemical sodium hydrosulfite for
zinc hydrosulfite. PSES and PSNS zinc limitations are established for the
three groundwood subcategories that have been known to utilize zinc hydro-
sulf ite for bleaching (groundwood-thermo-mechanical, groundwood-CMN
papers, and groundwood-fine papers). There will be monitoring costs.
New Source Performance Standards (NSPS)
For NSPS, the pollutants regulated will be Pentachlorophenol,
trichlorophenol, zinc, and conventional pollutants (BOD5 and TSS). For
the first three priority pollutants, the control is based on chemical
substitution as in the BAT, PSES and PSNS regulations.
Pentachlorophenol and Trichlorophenol Control. NSPS effluent limitations
are set for the control of the toxic pollutants trichlorophenol and penta-
chlorophenol. Substitution to the use of slimicides and biocides not con-
taining chlorophenolics is the basis of NSPS limits for these compounds.
Based on inquiries to chemical suppliers, no definable cost differences will
result from this substitution. There will be no monitoring costs.
Zinc Control. The toxic pollutant zinc can be effectively controlled
through the substitution of the bleaching chemical sodium hydrosulfite for
zinc hydrosulfite. NSPS zinc limitations are established for the three
groundwood subcategories.
Conventional Pollutant Control. Conventional pollutant effluent
limitations are established under NSPS. Two options were considered in
setting final NSPS limitations. See Final EPA Development Document for a
complete description of these options. EPA selected NSPS Option 2.
4-2
-------
Section 5
Economic Impact Analysis
Introduction
This section presents the results of the economic analysis of the
Regulation described in Section 4. Results for the following parts of the
analysis are included:
o Base Case Forecast: Price, output, cash flow and capacity
expansion for 1985; average growth rates of output and
capacity; cumulative capacity expansion 1985-90;
o BAT Impacts: Costs of compliance;
o PSES Impacts: Costs of compliance;
o PSNS Impacts: Costs of compliance;
o NSPS Impacts: Costs of compliance, effects on price, output,
and capacity expansion;
o Capital Availability: Effect of compliance costs on ability
of industry to finance new investment out of current cash
flow;
o Employment and Indirect Impacts: Effects of output changes
on employment, non-industry earnings, and non-industry
employment;
o Small Business Analysis.
The assessment of monitoring costs in this analysis is significantly
overstated and should be disregarded. The analysis and pertinent tables
estimate costs if all plants monitor for trichlorophenol and pentachloro-
phenol to check compliance with BAT, NSPS, PSES and PSNS. However, the
regulation provides that monitoring is not required if mills do not use
chlorophenolic-containing sliraicides and biocides. Since most, if not all,
mills are expected to comply with the regulation by using other substitute
biocides, little or no monitoring costs are expected to be incurred.
Base Case Forecast
This section presents a summary of the Base Case to provide a reference
point for the results of the impact analysis given in the following sections.
The Base Case describes the industry both in terms of product sectors and
subcategories. Table 5-1 presents the Base Case forecasts of price, output,
cash flow and capacity expansion in 1985, as well as the average growth rate
of output, cash flow and capacity over the period 1985-90 and cumulative
capacity expansion 1985-90. Given the assumption of long-run equilibrium
which underlies the analysis, and assuming that real costs do not change,
prices in real terms remain constant over the forecast period.
Capacity increases due to "greenfield" mills or major alterations of
existing plants were assumed to be subject to NSPS/PSNS requirements.
Thus it was necessary to forecast what fraction of new capacity would be
classified as a "new source." This was done using information on instal-
lation of new machines from the American Paper Institute's (API) capacity
-------
0
*l
V
JS
O
£
esr
:8 =
f * m »4
• 6
-------
forecasts and planned capacity increases in existing plants from the 308
Survey. The estimated share of new capacity in each product sector clas-
sified as "new source" is shown in Table 5-1. The estimates presented
here have a great deal of uncertainty. Therefore, sensitivity analyses
are given in Section 6.
Because costs of compliance are defined on the basis of subcategories
rather than product sectors/ and because the bulk of the analysis focuses
on new capacity, it is necessary to relate capacity expansion in each
product sector with specific subcategories. The methodology for doing
this was described in Section 2. Table 5-2 shows the resulting cumulative
1985-90 value of capacity expansion for all capacity and for new sources
alone and the annual rate of capacity growth over the period for each
subcategory.
BAT Impacts
Toxic pollutants regulated by BAT technologies for the industry are
pentachlorophenol, trichlorophenol, and zinc. There are no expected direct
costs of compliance associated with controls for these pollutants because
substitution of the chlorophenols with other biocides and slimicides is not
expected to entail higher costs, and the zinc controls for groundwood
subcategories are identical to those for BPT.
Nevertheless, mills may face monitoring costs for these pollutants if
they do not certify that they do not use chlorophenols. Monitoring costs
for each subcategory are independent of the size of the mill. The costs
include shipping and testing for each relevant priority pollutant. The
cost estimates for each subcategory (assuming that all mills must monitor)
are shown in Table 5-3,* and vary from $16,500 to $26,000 per year, de-
pending on the pollutants present. Total BAT costs of compliance for
monitoring were estimated based on the number of direct discharger mills
in each subcategory contained in the Economic 308 Survey. (Self-contained
mills were excluded, since they have no discharges.) A total of 356
direct dischargers was obtained. This count may not be completely up to
date, but should give a good approximation. Total annual costs of
compliance are estimated to be $6.25 million. See Table 5-4.
Although these costs are insignificant for large mills, they may cause
impacts on smaller mills. The size distribution of mills was investigated
in the 1980 Proposal Document.** The product sectors with the smallest
median size mills are Glassine and Greaseproof, Cotton Fiber, Special
Industrial, and Thin Papers. The small size of such mills tends to be
offset by the high unit value of their products, ranging, on average, from
660 to 1486 $/ton. For example, the median size of mills producing
*The values shown here are the upper bounds of ranges, to give the most
conservative estimate.
**See the 1980 Proposal Document, Section 3.
5-3
-------
Table 5-2. Summary of Base Case Forecast, 1985-90: Subcategories
1 1985-90 Cumulative Capacity
1 Expansion
1 (1000 tons/year)
Subcategory 1
1
Integrated
Dissolving Kraft
Market Bleached Kraft
BCT Bleached Kraft
Fine Bleached Kraft and Soda
Unbleached Kraft (Liner board)
Unbleached Kraft (Bag)
Semi-Chemical
Unbleached Kraft and Semi-Chem.
Dissolving Sulfite Pulp
Papergrade Sulfite
Groundwood-Thermomechanical
Groundwood CMN
Groundwood Fine Papers
Misc. Integrated Mills
Secondary Fiber
Deink (Fine Papers)
Deink (Newsprint)
Deink (Tissue)
Tissue From Wastepaper
Paper board From Wastepaper (Noncorr.)
Paper board From Wastepaper (Corr.)
Wastepaper Molded Products
Builders Paper and Roofing Felt
Misc. Secondary Fiber Mills
Nonintegrated
Nonintegrated Fine Papers (Noncotton)
Nonintegrated Fine Papers (Cotton)
Nonintegrated Tissue Papers
Nonintegrated Lightweight
Nonintegrated Filter and Nonwoven
Nonintegrated Lightweight Elec. All.
Nonintegrated Paper board
Misc. Nonintegrated Mills
Total .
Total
0.0
0.0
527.9
2011.0
3123.8
348.1
973.3
2256.0
0.0
614.3
0.0
2043.5
1231.7
0.0
0.0
531.6
50.6
0.0
0.0
1219.0
0.0
298.6
0.0
43.4
0.0
151.8
0.0
39.9
0.0
0.0
0.0
15,464.0
1 New Source
1
0.0
0.0
0.0
1099.2
2563.3
0.0
758.8
2260.8
0.0
392.0
0.0
1842.3
633.3
0.0
0.0
472.9
44.3
0.0
0.0
0.0
0.0
147.0
0.0
0.0
0.0
138.4
0.0
0.0
0.0
0.0
0.0
10,352.0
Source: EPA estimates.
5-4
-------
Table 5-3. BAT and NSPS Toxic and Non Conventional Pollutant
Monitoring Costs at Direct Discharging Mills
Subcateqory
Integrated
Dissolving Kraft
Market Bleached Kraft
BCT Bleached Kraft
Fine Bleached Kraft & Soda
Unbleached Kraft (Liner board)
Unbleached Kraft (Bag)
Semi -Chemical
Unbleached Kraft and Semi-Chem.
Dissolving Sulfite Pulp
Papergrade Sulfite
Groundwood: Thermo-Mechanical
Ground wood: Coarse/ Molded, Newsp.
Groundwood: Fine Papers
Secondary Fiber
Deink (Fine Papers)
Deink (Newsprint)
Deink (Tissue)
Tissue from Wastepaper
Paper board from Wastepaper
— Non-corrugating Furnish
— Corrugating Furnish
Wastepaper Molded Products
Builders Paper & Roofing Felt
Nonintegrated
Nonintegrated Fine Papers
— Non-cotton Furnish
— Cotton Furnish
Nonintegrated Tissue papers
Nonintegrated Lightweight
Nonintegrated Filter & Nonwoven
Nonintegrated Lightweight
— Electrical Allowance
Nonintegrated Paper board
1 Cost to Mill
1 1
IPCP/TCP 1 Zinc
1 Analysis 1 Analysis
13
13
13
13
13
13
13
13
13
13
13 0.8
13 0.8
13 0.8
13
13
13
13
13
13
13
13
13
13
13
13
13
13
13
(JlOOO/vr)
1
1 1 1
1 1 1
(Shipping (Total)
3.5
3.5
3.5
3.5
3. a
3.8
13
3.8
12
12
3.8
3.8
3.8
3.8
3.5
3.8
3.8
3.8
3.5
3.8
3.8
3.5
3.5
3.5
3.5
3.5
3.5
3.5
16.5
16.5
16.5
16.5
16.8
16.8
26
16.8
25
25
17.6
17.6
17.6
16.8
16.5
16.8
16.8
16.8
16.5
16.8
16.8
16.5
16.5
16.5
16.5
16.5
16.5
16.5
Total Cost
per Unit
Capacity
($/ton per yr)
.05
.07
.10
.07
.10
.05
.16
.03
.15
.10
.11
.11
.11
.10
.10
.51
5.09
.51
.10
1.02
.68
.20
1.67
1.00
1.00
2.00
1.00
1.00
Note: Costs were chosen so as to be high estimates of the likely cost. In every case the
upper limit of a range of costs was used. When a subcategory had model mills of
different sizes, the smallest one was used in computing per capacity cost.
Source: EPA estimates.
5-5
-------
Table 5-4. Results of BAT and PSES Analysis
BAT
PSES
Estimated Number of Mills With
Costs
Monitoring
Zinc Control
356
0
229
1
Total Costs of Compliance
(Millions of 1978 $)
Monitoring Costs
Zinc Control
Total
I I Total I I Total
I Capital I Annual I Capital I Annual
0.0
0.0
40.06
6.25
0.0
6.25
0.0
0.0
0.0
0.91
0.02
0.93
Distribution of Mill
Treatment Cost to
Sales Ratio
0-1%
1-2%
2-4%
>4%*
356
0
0
0
229
0
0
0
*Indicates significant impact.
Source: EPA estimates.
5-6
-------
Special Industrial Papers is 58 tons/day and the average price $942/ton.
Assuming 330 operating days per year, this yields an annual sales value of
$18.0 million per year. The highest monitoring costs for groundwood mills
are $16,700 per year, or about .1 percent of sales. Put another way, if
impacts were to be significant, say four percent of sales, sales would
only be $417,500 per year, implying a production rate of only 1.27 tons
per day. Therefore, monitoring costs alone are not judged to have
significant impacts.
PSES impacts
Three priority pollutants are controlled: pentachlorophenol,
trichlorophenol and zinc. Mo additional costs are expected to occur due to
the substitution of other biocides and slimicides for the chlorophenols.
Zinc limitations apply to the three groundwood subcategories. One indirect
discharger groundwood mill has been identified as using zinc hydrosulfite
for bleaching. The cost of substitution of sodium hydrosulfite at this
mill has been estimated by EPA to be $23,000 per year. However, because
annual sales of this mill are around $10.0 million per year (implying a
cost/sales ratio of .23 percent), this impact is not judged to be
significant.
As with the BAT regulation, all indirect dischargers may be subject to
Zonitoring costs for priority pollutants if they do not certify that they do
not use chlorophenols. The annual costs for mills in each subcategory are
shown in Table 5-5. The estimated costs per mill range from $3,800 to
$7,400 per year, depending on the pollutants present. These costs are
significantly lower than those for direct dischargers. Therefore, the
impact is not judged to be significant. Based on the Economic 308 Survey,
229 indirect discharger mills are assumed to bear monitoring costs, with
total annual costs of compliance of $910,000. Including the zinc mill,
total annual costs of PSES are $933,000. See Table 5-4.
PSNS impacts
Pretreatment standards for new indirect dischargers are the same as
those for existing sources. Monitoring costs of compliance for mills in
each subcategory are shown in Table 5-5. It is difficult to determine the
share of new capacity which will be classified as indirect discharging.
As a broad generalization, most new capacity is occurring in the South-
east, Northwest and North Central areas, where direct dischargers predomi-
nate. As a conservative assumption, all new capacity is assumed to be
classified as direct discharging.
5-7
-------
Table 5-5. PSES and PSNS Toxic and Nonconventional Pollutant
Monitoring Costs of Indirect Discharging Mills
Subcategory
Integrated
Dissolving Kraft
Market Bleached Kraft
BCT Bleached Kraft
Fine Bleached Kraft & Soda
Unbleached Kraft (Liner board)
Unbleached Kraft (Bag)
Semi-Chemical
Unbleached Kraft and Semi-Chem.
Dissolving Sulfite Pulp
Papergrade Sulfite
Groundwood: Thermo-Mechanical
Groundwood: Coarse, Molded, Newsp.
Groundwood: Fine Papers
Secondary Fiber
Deink (Fine Papers)
Deink (Newsprint)
Deink (Tissue)
Tissue from Wastepaper
Paper board from Wastepaper
— Non-corrugating Furnish
— Corrugating Furnish
Wastepaper Molded Products
Builders Paper & Roofing Felt
Nonintegrated
Nonintegrated Fine Papers
— Non-cotton Furnish
— Cotton Furnish
Nonintegrated Tissue papers
Nonintegrated Lightweight
Nonintegrated Filter & Nonwoven
Nonintegrated Lightweight
— Electrical Allowance
Nonintegfated Paper board
I Cost to Mill
1 1
I PCP/TCP 1 Zinc
1 Analysis 1 Analysis
3
3
3
3
3
3
3
3
3
3
3 0.8
3 0.8
3 0.8
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
( $1000/yr)
1 1
1 1
1 Shipping 1
0.8
0.8
0.8
0.8
0.9
0.9
0.9
0.9
0.8
0.8
3.6
3.6
3.6
0.9
0.8
0.9
0.9
0.9
0.8
0.9
0.9
0.8
0.8
0.8
0.8
0.8
0.8
0.8
1
1
1
Total I
3.8
3.8
3.8
3.8
3.9
3.9
3.9
3.9
3.8
3.8
7.4
7.4
7.4
3.9
3.8
3.9
3.9
3.9
3.8
3.9
3.9
3.8
3.8
3.8
3.8
3.8
3.8
3.8
Total Cost
per Unit
Capacity
($/t per yr)
.01
.02
.02
.02
.02
.01
.02
.01
.02
.02
.04
.04
.04
.02
.02
.12
1.18
.12
.02
.24
.16
.05
.38
.23
.23
.46
.23
.23
Note: Costs were chosen so as to be high estimates of the likely cost. In every case the
upper limit of a range of costs was used. When a subcategory had model mills of
different sizes, the smallest one was used in computing per capacity cost.
Source: EPA estimates.
5-8
-------
NSPS Impacts
Costs of Compliance
Pollutants subject to NSPS controls are pentachlorophenol and
trichlorophenol (PCP/TCP), zinc, and conventional pollutants BODS and TSS.
Substitution of other biocides and slimicides for pentachlorophenol and
trichlorophenol is judged to result in no higher costs, except for moni-
toring. Control of zinc by substitution of sodium hydrosulfite for zinc
hydrosulfite imposes added costs (including monitoring) on the three
groundwood subcategories. Model mills costs for zinc control are shown in
Table 5-6.
Control of conventional pollutants also imposes costs. Although only
one level of control of conventional pollutants is considered in this
analysis, EPA considered two options for NSPS. The two options for
conventional pollutants are:
(1) Effluent limitations obtained by existing best performing
mills;
(2) Effluent limitations obtained by production process
control and end-of-pipe biological treatment, except for
non-integrated subcategories.
These costs are shown in Tables 5-7 and 5-8, respectively.
The above costs for PCP/TCP, zinc, and conventional pollutant control
are combined to define two economic options whose impacts are to be analyzed.
The definitions of the options are given in Table 5-9. The inclusion of
only twenty percent of zinc and conventional pollutant control costs in the
NSPS options reflects an adjustment for control costs which can be ascribed
to BPT rather than NSPS regulations. In other words, eighty percent of the
control costs is assumed to go simply to meeting the BPT standards.
Tables 5-10 through 5-11 show total costs and cost per ton of compliance
for each NSPS option for model mills in each subcategory. All costs are in
1978 dollars. In some cases, EPA estimated costs for more than one mill
size or configuration in each subcategory. The costs presented here are
those corresponding to the size or configuration with the highest unit
compliance costs, e.g., generally the smallest mill size. Total annual
costs are the sum of variable costs and capital costs multiplied by the
capital recovery factor .22. Unit costs are calculated assuming 330
operating days per year for each mill.
5-9
-------
Table 5-6. Cost Estimates for NSPS and PSNS Zinc Control
I I Cost
I I Increase Due to
Mill Size I Sodium Hydrosulfite Used I Substitution
Subcateqorv I
Gro undwood-Tfte rmo-
Mechanical
Groundwood-CMN Papers
Groundwood-Fine Papers
(ton/day) (1)
500
500
500
1 (kg/kkg) (2)
1.0
3.7
. 6'7
1 (kkg/vr) 1
158.9
594.6
! 1,073.8 !
($1000/yr)
63.0
232.6
422.6
(1) Multiply by 0.907 to obtain kkg/d.
(2) Multiply kg/kkg by 2 to obtain Ib/t.
Note: Costs are presented in year 1978 dollars; ENR index = 2683.
Source: EPA estimates.
5-10
-------
*tm^
n
4-
X
O
0 >i
o 01
rH M
4ft 4
«- C
u
4J
•H 0)
2 8 —
c
8 *
(4
•U O
C
«
4J
3
rH
S s
O rH
rH O 10
10 H 4J
C « -H
0 — ft
•H n
JJ 4J O
c < n
01 o
> c o
c o
83
ft
CO O 4J -—
fk» C CM
tO H 0> — '
z
U H to
(0 0)
0> IH
<0
E
•H oi
4J N -^
(0 -rl rH
w to —
.»— ^,
4-> r-( *O
W^j \.
*^ ^s
O -H JJ
0 S3 ~
1
0)
iH
JJ
*
tH
>•
M
0
O
10
|
CO
ao in co rH
. f«^ (n f**
rH r*» 01 rN
in ro Cn fH
CM r> in r~
in en in r-
VD CM VO 00
eo co vo vo
rH
rH CM CM PO
r^ ^ ro oo
CO f* ^* On
CO rH rH H
CM * en ro
o ro eft. ro
H 00 VO CM
ro rH r- O
ro CM rH CM
to to to CQ
o o o o
O 0 O 0
o in o m
o r- in P~
rH
4J
IM
10
M JJ
V* *l i
t»H 0) C
O 0) 03 rH
a> .*
^j
^^
|
I
a
rH
2 —
in
^^
t0 ft) 4If
ij "rH *^4
VM H IH 10 M
0) E O * >-"
•H rH 01 WO 0>
E ja cfl » < a
« C -H 10
CO D Q &,
r»mcM inr^ocM in in
inror*- o o oo in co ro
ro ro ro in CM ^ CM
^** *~*
vomr^ r^cnoocM r^ r»
*4* oo vo ^4* r*^ in rH *••* ^-^
CM iH iH CM rH
en ro I-H o vo in vo m M-
CM r- r-- voHoocn rH vo
OOO CMOOrHrH ro CO
H H H CM CM
cnincM vorHrH^r •-( vo
CM oo oo roenr-oo 'J1 r^
ro^ro inrHrHro in i^-
OCnrH rH in i-H rH CM VO
•-) rH rH rH
CO CO CO CO CO CO CO CO CO
ooo ooo< < <
ooo oooo o o
OOO OOOrH O 0
in m m m rH in rHin
VO 0) Q)
— rH rH
U O O
^** 0) J? ^i ^i
vo ft co u u
•~» 10 -r( 01 01
VI W ft C M M
gg M O> Ol u J3
41 Oi (0 W ptj C -fi C
| rt. |0 Q. M ^j f^j (y
O « ftl 0> S C7> 3 >-i D
SOl 4J C rH 3 rH
«> n ne-HMHCuVM
oi 2C M *-i >*-i
fjE-iH coo* SvitooiQnoi
rH O fa U ft UHrnC
«Tl 0> fl 4J 6 3dP-ridP
•OU'D'O ft D< C O >O i-i o jJ o
O -H o O (0 -H M u M m nj m
O C O O CU A) M iw (0 O m
CO C C .* C CO » 3 kiC-Hu-n
35 3 2 CTH-HOI W OlOSOS
O33 O O -HfatiJS CO ftZ-'O-'
M IH u 01 -H (0
U U U Q EH to
5-11
-------
o
M
4J
I
(0
4J
3
2
o
••H
JJ
C <
4)
> C
CO
04
O C H
01 4)
4) EH
10
•H
JJ
01
01
O
U
4)
iH
JO
-^
*^*
H
10
JJ
g
U
X
O
0 >
0 U
•-I VJ
S C
H
jJ
to
s —
32
o
o
O rH
0 10
H JJ
«» -H
*- a
(0
jj c_)
CO
8
_ _ —
•W *"•'«
C CN
4) —
e E
JJ 4)
(0 JJ
CD 01
VJ >
EH 01
_ . — .
4)
N .-*
•H rH
01 «—
*—l»
rH TJ
H X
•iH JJ
— _— • ^—
>
VJ
O
4)
&
04
41
JJ
01
ro
s
P«^
CN
CM
CM
*
rH
O
ro
CN
in
vo
CM
3
in
t"*"
•a
VJ J3
10 3 01
4) Vj VJ
C V 3
^ £ VJ
•O 4)
4) C .Q
JJ O -r4
ro -u CM
VJ JJ
o> q e
4) O 0
JJ 1 JJ
C C JJ
'^3
§
^*
CN
r*.
rH
•
00
"^
m
ro
5
VO
i-H
u
8!
u
o
m
co
4)
a
5s
04
4)
3
co
co
•H
1
•a
41
JJ
10
Vl
4)
JJ
c
••H
c
§
CN CN
O VO
rH CN
rH rH
*4* CM
rH rH
CM ro
at vo
•"» m
rH rH
rH 00
r- o
CM m
U 0
§!§!
u o
o o
in m
4J
jC
Ol
•H
4)
1
•H
J
•O JJ
4) £ --H
jj o1 ro
(0 -H U
VJ 41 -H
4) JJ JJ
JJ 43 O
C O> 0)
••H -rt rH
C J W
§
0
Ol
VO
^
•
VO
o>
rH
ro
00
vo
i-H
O
9!
o
in
CM
•O
VJ
4)
JJ
rH CO
•H VJ
&4 4)
i a
•0 (0
4) 04
JJ
(0 C
VJ 4)
Ol >
4) O
JJ *
C C
•H 0
c z
0
^
o
r**
a>
•
VO
—
rH
^*
ro
—
VD
rH
VO
rH
_^
CJ
8!
u
—
CD
tn
,___
•c
VJ
<0
5
u
4)
&
04
1
TJ
41
JJ
ro
4)
jj
c
-•H
C
0
z
§4)
CO JJ
CO VJ 0) C
•tH | * C5
U -O 3
O Vj «a O
(0 O, 4) JJ 4)
^ 10 JJ O Q
ft ro c
e 4) n E-.
3 JJ £ 0) 04
VJ CO 3 IH DQ
Q ro co «j
|J ^^ ^^
SrH M flh
4» O r-l
•H VJ fa (71
g-l vw 01 >i
•-I rj> jJ in
D ai c ro s
CO 3 -H O
to IH Jj 0)
4> CO O 3 X!
•O -H Q 10 JJ
ro EH PS
vj vj C
Oi 4> "O 41 -H
M * c a,
• CD jj ro ro T3 ro
01 Oj &4 4) 00
a* ro w u 4) jJ vo
••H 04 O 4> -M <0 CM
vj VM a, 01 jj
o T3 ro (0 01 n
01 c * 04 3:
4) (0 O CO X
JJ rH - E JJ 41
E ro ^ «-< w o « • T>
41 H ^ MMOEC
01 3 (0 04 'O CO
>i C W S ffl rH -O H ft,
CO O -"H vj O Oj Z
-H (OJJ C3 (OVjEM
4) jj *o 'iH o ro o ^ 3
O> (0 Q04 JjCrH»»
•aeu «co •a'ovjo co
3tHjJ ^4)C4)O4)Vj
rHjJu-iw'oowroDi c ro
COCO-iHOCrHIQ 10 rH O "— 1
^i vj O 10 CQ Q * 04 ro rH
• •acoio >-* co ccoo
TD a> I-HIOJJ to JJ 4) i-i ro -o
\ JJ4)O 4)*W 4)-iHO*C4)
o> ro o> x ro jj 3Jjjj-H
C OWE COT) 3 C004VMB U
-H < ^H ro 0) to EH l-i
to >ovj A gioco04>iro
JJ C4)04JJ U 4) Ol4IJJpaoi4)
ja o -u cai
O -H ro 13 O 4> <0 CO '-H O4)4>
JJ > 01 O rH U in O CJ 1-1 C C
OQiHj-i n o> o) £ O,W-H
JJ N JJ 01 r-i VJ T >, «
r- rH < 0) JJ C 0iC4l U HI C 4)
O -H U>rl-iHIOVOi4l£irojJ
• « to n jj cu w 354101
C3 4^ C i^t O 0? Q^ tO ^ ^ ^® ^ 4)
tO O ^H J-I ^3 Or* ^^ *T3 *O ^5 Q) «W
>, -HrHHHJJJJM01C3 1-1 ro
.Q jj jj ro o jj ro ro I-H -a (Dj E
o c o AX: » U4) -H
•oroa)-H«>-<-|jJrH s c jj a> -*-1
*X 4Jt^6CN O O (0 ^-lO O (04)
5Q £ VJ 4) CO ft
OU (0 CO CO Q>Oi4>4>4> 01<
rH 4) 4) 4) JJ (0 JJ ^ Vj JJ 04
ftiinii'a'a'OxOjflflJ cow
•H 3334>4>VjEj2O
JJ UrHrHrH JJ(0'HOO
£ C-) *^ U rH H W tH S CO 4) % •• O
4^ Vj
-— • , -, .— . ,-^ ^^ ^^ jj 3
rHCN roTinvo t— *^9
5-12
-------
i-H
O
4J
s
Q
4J
C
4J
3
rH
rH
rH
10
C
0
iH
4J *—»
c n
c o
83
CO tS*
CM
CO rH
Z <0
U
M *H
o c
<4H £
U
01 0)
0) EH
4J «•»
•H
4J
01
H
Jj
01
5
•
00
in
0)
rH
JO
«—*
CO
«*^
f-M
(0
4-
C
£H
•^
•N
0
0 >j
0 O
rH >-
— C
H
4J
a
8 —
s
o
—M «• ^_
^^
O
O H
o n
H 4J
4ft -H
— D
1C
4J U
01
8
— . _> •"•"
4J —
C cs
I'e
-P 0)
<0 4J
Q) tfl
u >
EH CO
0)
M *-.
fH rH
CO ^
i-H !o
rH X
•* -P
— ~ __ —
1
u
0)
M
1
ao
o
rH
1-
m
f«4
CO
^*
rH
r-
•"•
^tf1
rH
ao
o
cs
8
0
r**
4J
MH
(0
M
V*
•s
s
(0
rH 0)
4J
10
• 3
CO 01
0)
•H 4J
ocs^< Hr-cs t-vo M c
^ on o mr^vo f»r« Oo>
rHCSPOOnrHHCS O»E
CS vV vT
jj V
(0 CO
J3 co
3 M
CO «
^•cscs ^«csoo m«* --.-H
csrooo csr-in cso Afa
r-Hvoin^ocsoo w
H H CS rH CS (0 >•!
(0
e -a
— 3 C
1-4 O
Q 0
— Q)
CO
cocOi-HonrH^'anvo a>
r^ on ^* cs r^ ^* oo ^* 4J w
rHinan csvoon r~an -HO
aoroaOrHooo^1 MH
rH CS •* rH rH rH 4J •
3 C ro
co a> ao
€ vo
01 (j> cs
-a at
— (0 01 II
u
IT -a x
MO) vV
• a) 4J *a
• CO CH <0 C
cococo co co w coca s O> -H eu o>
4J M CD OH
02 0*04^ Z
>i D> C C H
CO « 10 M
4J
0) • at •—. &\ 01
— O> 4J n x: C u
•O CO JB 01 -H (0
3 O 3 <0 C rH
rH O CO S -H rH
• CO 10 01 0
TJ "O « 4J 6 0) T3
o o o o o o oo X "O 0) "O -ri a) -H
o o o o in o o cd en fl) X O f*i M w co
inoin m r- m inn j^ 4J -H to O ^
i-HrHrH J^QVIH $(UCTOn
> -O O JS 0) rH
C -H n C rH -P -P
•H 4-1 10 10 CQ 10 M
« g -* o u io
— 4J « 4J 4J 4JJ30)
Jd 00 VH Q) 3 ^i
O C O f3 4J 0) 03
O O M -H rH C
O -n « MH jo 4J -n
4J 4J rH rH 10 C
Q Q iQ 3 U N 4J atco-Hg a*
O -rt tH J3 rH O> 4J
09 • *ri io IQ *n QJ QQ Q) (o
>—u ojauvvoio oiQ)
mCV <0 rH M T3 4) 4J
~- Dl >i4->>W«CT)4Ja)>-lcO
^0 V 10 Jj O3 O Jj O 4^ Oi €
4J PU 01 0) C 10 -5
4J 4J -rl •O4J((PCO.I-IMtn
(0 flS^OrHC M 4J(OCSfaPM-iHQJ(04>
IH rHUUS-HnO) JJ 4J
US rrj (0 bd -H CQ fa MOl >lCO}COO}CC01<
IH U 3 1 0) 10 rHO(l)H(l)O'H-PI:i<
*O 'O **H *O Q) VV *O P) 0^ pi| {j (Q tQ r0 >p^ C 01 M
OIQ E 01 J= T3 0 <0 -n 3334JOO
ii 0) 43 O (0 O ft 01 4JMrHHHQ.ZU
O IJ £UllH> 3 rH OUOO ••
100) U(0-nO»'O 0)01 3CQCCC >i Q)
0)CO< 1 0) 6 M C4CC01 SUHMMOlC-U
i-H-HMfHrHCUOISC-iH-H -HIOOIU
J3JD3eJ3"JQ4O-HfaE-i ^^-.^.^N^£ 4J 3
C o>C (Quo) iHcNm^tinE-ivjOO
JP CO D P^ O Q ^^ "-^ ^^ ^^ ^-^ ^ O Z CO
5-13
-------
Table 5-9. Definition of NSPS Economic Options
A. NSPS Technical Option 1;*
o best performing mill costs for conventional pollutants (Table
5-7); plus
o zinc control costs (Table 5-6); plus
o monitoring costs (Table 5-3).
B. NSPS Technical Option 2;
o proposed NSPS costs for conventional pollutants (Table 5-8),
where this option defined, otherwise best performing mill costs
(Table 5-7); plus
o zinc control costs (Table 5-6); plus
o monitoring costs (Table 5-3).
Economic Option
(Cell Entry Shows Relevant NSPS Technical Option)
Subcategory
Group 1 2
Integrated except
Dissolving Kraft;
Deink A B
Dissolving Kraft;
Secondary Fibers
except Deink;
Nonintegrated A A
*The Final EPA Document gives technical treatment costs in going from
raw waste loadings to final effluent. Because the regulatory increment is
from BPT controls promulgated in 1977, these costs were modified to
account for BPT control in place. See Section 6, Limits of the Analysis.
5-14
-------
!-l
IU X
Q. •>
S~Z
0 C
O .« r< lf> K
o- KI T^ 1/1 «>
co
W
u
i
O.
o
a K 2
>- o
r-c r-i rj r-< MJ r-i
IU
o
£
g
in is
i I
! .
" SI
* »
» *
u
10
iu
in
IU
a
§
u
fe
in
8
u
O
iH
I
< o
t- I- O
>-i in o
a o <-<
o .-
o r -
IU -I N
fsl IU
l-< O
•O 0
ooooooooooooo
inooooomooo
rvuioi/)inir)i^i/imin
inoin
oooooooin
ooo*Mooi/ir^
in IA 1-1 IH tn
o o o o in e o
in KI in in eg 1/1 ui
CM
>-
u.
a
*
^~
u. o
« IU
a x
1C U
«
C9 IU
2 _l
5"
-j »-
O IU
in ***
in u
S2
o.
S
IU
iz
— IU O •
O X 11 o
(£ U Z lu
«« < ' < O
80 M x -j in
p i - «t
H< < o EL 6 iu C.
H -i m r Cm
»- u. — — « iu ui a a uj
u. < t- >- iu < Z
axu.il. U.U.U.PUU.
^ « < < _i _j
o a DC -> a 3 3 i i i
oiuxx<^inini i i
IU X U
XOODh*tOt9lUOOO
O^iuiuZuJZDOOO
«iuxxiux>-ttt322
<^IO<ffiC0inb.ooo
U>iZZiuZi-i-
5
I
u
a.
«
a.
IU
•H
U.
X
•-I
luliu
into
•~
Z »
I-* *^
or iu
CL 3
V) in
2 in
Z K
X^
l-l «~l
IU Ul
a o
a
IU
a.
n.
IU
1^
in
2
T".
O
a:
u.
IU
in
M
»-
.
Or
U •
fQ;
O
U
1 1
1 1
• •
IU IU
»- >-
in en
^ «t
3 2
B§
a a:
to. u.
O O
O: Or
O O
ffi 0
or or
c. a
« «<
a. a
*
»-
—i
IU
tn u.
»-
5 £
O M
O k.
a o
a. o
o
o
_) tt
EIU
c.
<
or &
a. in
< OL
a. u
iu a
in w
2 ffi
g
t
0 Z
u o
1 f-
z »-
o o
z u
I 1
1 1
in en
Or a
IU IU
< «
a Q.
O'
IU IU IU
K
tt
u,
IU
5
§
Z Z
u. u.
^
Z Z
Si
*
«n
a
IU t-
Q- X
< U
a. M
IU
^2
in x
in is
»- -t
o o
W IU
»- »-
or or
(9 ID
IU IU
££
i
_i
<
z u
IU »H
to:
t-
u
^. UJ
2 UJ Q
a
•• i <
1 O
a m
IU f- D.
t- I LU
-j u a.
u. iu a.
3
O >- O
iu X iu
t- 19 t-
a _< a
o is
IU • IU
£££
S § z
in
o
u
a
u
a
IU
L.
in
Ul
X
1
or
O
en
O
5-15
-------
g :
Bit1
O. V.
8 Z
0 B
rH IT) m rH rH rH
rH rH m CO rH
O -C rf tit N
o» to K if, co
«0 O O Cr «M in WJ
o m o eg rH r>- O-
ri «• ni Ki «• m 1-1
[a
EH
W
w
S5
w
IK
u
D.
O
>- o
O
O
to rH rH rH
rH K> CM
>o<-ior-Kinco
C- a
« O r-
. , in 30
Z r- tt Z IU
O O UJ H- 5 —I
Z U CL X Z UJ O
< o a
I I CL rH •* I <
II IU I O
IU 2 tt CO
«f> OT 3 r- UJ r- tt
tt tt C/> Z »— X IU
uj iu in o ^j o CL
« < r- -I U. IU CL
CL CL 3
O O O r- O
I IU IAJ IU UJ X I
: z »- •- »- io i
: a
I 19
I tt
19
> O O D O
: 2 r r 2
a
o
in
o
u
*
5-16
-------
NSPS Option 1. Table 5-10 shows costs of compliance for model mills
for Option 1. Unit total annual costs range from $2.9 per ton for Paper-
board for Waste-Corrugating Furnish to $32.1 per ton for Tissue from
Wastepaper.
NSPS Option 2. Table 5-11 shows cost of compliance for model mills
for Option 2. Unit total annual costs range from $2.9 per ton for Paper-
board from Waste-Corrugating Furnish to $32.1 per ton for Tissue from
Wastepaper.
Demand/Supply Analysis, Total Costs of Compliance
This section presents the results of the demand/supply analysis
together with total costs of compliance for each of the NSPS options
described in Table 5-9. The results for each option are presented in two
tables, one for product sectors and one for subcategories. The product
sector tables show capital and total annual costs per ton of capacity, the
resulting price from the Base Case and percent change, the resulting
change in output in 1990 and percent change, the cumulative amount of new
source capacity in 1985-90 and percent change, and the total capital and
total annual costs of compliance associated with that amount of capacity.
The average compliance costs per ton of capacity in each product sector is
based on the mix of subcategories contributing to new source capacity
shown in Table 2-1 and the unit costs in Tables 5-10 and 5-11. The sub-
category tables show the 1985 increment to new source capacity based on
product sector shares and the unit and total capital and total annual
costs of compliance. The unit costs of compliance are taken from Tables
5-10 and 5-11.
Total NSPS capacity expansion for 1985-90 is 9.66 million tons under
NSPS Option 1 and 9.68 million tons under NSPS Option 2. The bulk of the
expansion occurs in four product sectors: Newsprint (2.23 million tons/
year), Uncoated Freesheet (1.03 million tons/year), Unbleached Kraft Liner-
board (3.54 million tons/year), and Semi-Chemical Corrugating Medium (1.01
million tons/year). Fourteen product sectors are predicted to have no new
source capacity.
NSPS Option 1. Tables 5-12 and 5-13 show the results for product
sectors and subcategories, respectively, for NSPS Option 1. Overall
production-weighted average unit capital costs are $13.4 per ton and total
annual costs are $4.7 per ton. The post-compliance average price is
$398.2 per ton, or 1.20 percent higher than the Base Case price. The
total reduction in output in 1990 is 597,400 tons, or .65 percent. Total
undiscounted capital costs for 1985-90 are $121.6 million and total annual
costs are $43.0 million.
5-17
-------
* s
? £
• O
. &
*> 4i
S I
? £
m E
• o •*
** e ^
3=w'
«S « C lA O
Ck « B O
» • a » o
S? ff* O
O v> o
• «r§
iS
* y
l\
~:ss
** o •
•« S ^
*iO
O> £ fc* »».•**
CCflb*O^h*
(-. *- **«flD
fc* ^J *• ** O, C
*Q,««« *O O
&
.S- ',
'.-salts;1
If
cuS£
-51 • "
£la£
5-18
-------
Table 5-13.
NSPS Total Costs of Compliance by Subcategory
NSPS Option 1
Subcategory
Integrated
Dissolving Kraft
Market Bleached Kraft
Bot Bleached Kraft
Fine Bleached Kraft & Soda
Unbleached Kraft (Linerboard)
Unbleached Kraft (Bag)
Semi-Chemical
Unbleached Kraft and Semi-Chem.
Dissolving Sulfite Pulp
Papergrade Sulfite
Groundwood — Thermo-Mechanical
Groundwood — Coarse, Molded, Newps.
Groundwood — Fine Papers
Misc. Integrated Mills
Secondary Fiber
Deink (Fine Papers)
Deink (Newsprint)
Deink (Tissue)
Tissue From .Wastepaper
Paper board From Waste. — Non-Corr.
Paper board From Waste. — Corr.
Wastepaper Molded Products
Builders Paper & Roofing Felt
Misc. Secondary Fiber Mills
Nonintegrated
Nonint. Fine Papers — Non-Cotton
Nonint. Fine Papers — Cotton
Nonintegrated Tissue Papers
Nonintegrated Lightweight
Nonintegrated Filter & Non woven
Nonint. Lightweight— Electrical
Nonintegrated Paper board
Misc. Non-Integrated Mills
Total
Cumulative
New Source
Capacity
(1985-90)
(1000 T/YR)
0.0
0.0
0.0
1072.6
2515.4
0.0
636.1
1998.6
0.0
370.4
0.0
1812.4
557.8
0.0
0.0
453.1
43.9
0.0
0.0
0.0
0.0
60.3
0.0
0.0
0.0
137.2
0.0
0.0
0.0
0.0
0.0
9657.8
Unit Costs
($/T)
Total
Capital Annual
20.1
17.6
21.4
16.4
10.5
8.5
11.1
9.0
52.1
33.7
12.5
11.5
13.8
0.0
14.0
13.5
31.5
83.9
15.4
8.2
27.5
21.4
0.0
10.8
43.0
20.0
32.9
41.2
37.4
19.6
0.0
15.5
7.6
6.0
7.3
5.8
3.4
2.8
3.7
3.0
18.3
11.2
4.4
4.4
5.1
0.0
6.2
5.8
12.9
32.1
5.4
2.9
9.3
7.6
0.0
3.7
15.4
9.0
13.6
17.1
15.5
8.7
0.0
5.5
Total Costs
of Compliance
(Mill. $/Yr.)
Total
Capital Annual
0.00
0.00
0.00
17.59
26.41
0.00
7.06
17.99
0.00
12.48
0.00
20.84
7.70
0.00
0.00
6.12
1.38
0.00
0.00
0.00
0.00
1.29
0.00
0.00
0.00
2.74
0.00
0.00
0.00
0.00
0.00
121.61
0.00
0.00
0.00
6.22
8.55
0.00
2.35
6.00
0.00
4.15
0.00
7.97
2.84
0.00
0.00
2.63
0.57
0.00
0.00
0.00
0.00
0.46
0.00
0.00
0.00
1.24
0.00
0.00
0.00
0.00
0.00
43.0
5-19
-------
The highest percentage price increases are 3.2 percent for
Construction Paper and Board and 1.6 percent for Semi-Chemical Corrugating
Medium. The largest percentage decreases in output are 2.98 percent for
Uncoated Free- sheet and 2.28 percent for Semi-Chemical Corrugating
Medium. Recycled Corrugating Medium actually shows a 5.33 percent
increase in output because of substitution away from Semi-Chemical
Corrugating Medium.
Total annual costs of compliance are concentrated in four subcategories:
Fine Bleached Kraft and Soda, $6.22 million; Unbleached Kraft (Linerboard),
$8.55 million; Unbleached Kraft and Semi-Chemical, $6.00 million; and
Groundwood—Coarse, Molded, Newsprint, $7.97 million, for a total of $28.74
million out of $43.0 million.
NSPS Option 2. Tables 5-14 and 5-15 show the results for product
sectors and subcategories, respectively, for NSPS Option 2. Overall
average unit capital costs are $13.0 per ton and total annual costs are
$4.6 per ton. The post-compliance average price is $398.1 per ton, or
1.18 percent higher than the Base Case price. The total reduction in
output is 582,200 tons per year, or .63 percent. Total capital costs are
$117.7 million and total annual costs are $42.1 million.
The highest percentage price increases are 3.2 percent for Construction
Paper and Board and 1.55 percent for Semi-Chemical Corrugating Medium. The
largest percentage decreases in output are 2.90 percent for Uncoated Ground-
wood and 2.22 percent for Semi-Chemical Corrugating Medium.
Total annual costs of compliance are concentrated among the same four
subcategories as Option 1: Fine Bleached Kraft and Soda, $6.02 million;
Unbleached Kraft (Linerboard), $8.31 million; Unbleached Kraft and Semi-
Chemical, $5.81 million; and Groundwood—Coarse, Molded, Newsprint, $7.97
million.
Capital Availability Analysis
This subsection presents the results of the capital availability
analysis for each product sector and the industry as a whole for each NSPS
option and BAT and PSES costs. The table for each option shows Base Case
industry cash flow, the change in cash flow due to compliance costs in
1985,* total Base Case capacity.expansion in 1985 (including both NSPS and
non-NSPS capacity), unit capital costs of capacity, and total capital costs
of expansion. The costs are put on the basis of 1985 to be comparable with
1985 cash flow.
Thus, the table presents the cash flow estimate together with the two
major demands on cash flow: funds for capacity expansion and for compliance
*This includes both capital costs and variable costs of compliance and
the capital costs of new capacity in 1985. See the discussion in Section 2.
5-20
-------
a
i .
i £
i S
z .
e i
m
• **
«r U
£ I
o • ^ »
• I~ « 3
*> C *4 D C
8J .*<
o •* »
• C «A
a « •
m o. *
S P
fc* «
£S
e «
S?
•S3
*> C
2
U
O O
OO
£l'a 2 £
5-21
-------
Table 5-15.
NSPS Total Costs of Compliance by Subcategory
NSPS Option 2
Subcategory
Integrated
Dissolving Kraft
Market Bleached Kraft
EOT Bleached Kraft
Fine Bleached Kraft & Soda
Unbleached Kraft (Linerboard)
Unbleached Kraft (Bag)
Semi -Chemical
Unbleached Kraft & Semi-Chem.
Dissolving Sulfite Pulp
Papergrade Sulfite
Groundwood — Therrao-Mechanical
Ground wood — Coarse, Molded, Newsp.
Groundwood — Fine Papers
Misc. Integrated Mills
Secondary Fiber
Deink (Fine Papers)
Deink (Newsprint)
Deink (Tissue)
Tissue From Wastepaper
Paperboard From Waste. — Non-Corr.
Paperboard From Waste. — Corr.
Wastepaper Molded Products
Builders Paper & Hoofing Felt
Misc. Secodary Fiber Mills
Nonintegrated
Nonint. Fine Papers — Non-Cotton
Nonint. Fine Papers — Cotton
Nonintegrated Tissue Paper
Nonintegrated Lightweight
Nonintegrated Filter & Nonwoven
Nonint. Lightweight — Electrical
Nonintegrated Paperboard
Misc. Nonintegrated Mills
Total
Cumulative
New Source
Capacity
(1985-90)
(1000 T/Yr.
0.00
0.00
0.00
1074.50
2518.70
0.00
638.70
2004.90
0.00
370.80
0.00
1812.30
560.50
0.00
0.00
453.10
43.90
0.00
0.00
0.00
0.00
60.31
0.00
0.00
0.00
137.30
0.00
0.00
0.00
0.00
0.00
9675.00
Unit Costs
($/T)
Total
) Capital Annual
20.1
16.8
20.7
15.5
9.9
8.2
10.8
8.6
52.1
32.9
12.5
11.5
13.3
0.0
13.1
13.5
30.0
83.9
15.4
8.2
27.5
21.4
0.0
10.8
43.0
-20.0
32.9
41.2
37.4
19.6
0.0
15.1
7.6
5.8
7.1
5.6
3.3
2.7
3.6
2.9
18.3
11.0
4.4
4.4
4.9
0.0
6.0
5.8
12.5
32.1
5.4
2.9
9.3
7.6
0.0
3.7
15.4
9.0
13.6
17.1
15.5
8.7
0.0
5.4
Total Costs
of Compliance
(Mill. $/Yr.)
Total
Capital Annual
0.00
0.00
0.00
16.65
24.93
0.00
6.90
17.24
0.00
12.20
0.00
20.84
7.45
0.00
0.00
6.12
1.32
0.00
0.00
0.00
0.00
1.29
0.00
0.00
0.00
2.75
0.00
0.00
0.00
0.00
0.00
117.70
0.00
0.00
0.00
6.02
8.31
0.00
2.30
5.81
0.00
4.08
0.00
7.97
2.75
0.00
0.00
2.63
0.55
0.00
0.00
0.00
0.00
0.46
0.00
0.00
0.00
1.24
0.00
0.00
0.00
0.00
0.00
42.11
5-22
-------
costs. In a worst case capital squeeze situation, the industry would have
to meet both needs out of its own cash flow.
NSPS Option 1. Table 5-16 shows the results of the capital
availability analysis for NSPS Option 1 in 1985. For the industry as a
whole, total cash flow is $6.11 billion, capital costs of expansion $1.69
billion, and one-year compliance costs $28.28 million. Cash flow appears
to be adequate to cover Base Case capacity expansion costs. One-year com-
pliance costs are a a small fraction of capital requirements for capacity
expansion and of total cash flow. Therefore costs of compliance do not
appear to be a major problem for the industry even under pessimistic
assumptions about cash flow and compliance costs.
Seven product sectors, Bleached Kraft Paper, Special Industrial,
Newsprint, Unbleached Kraft Linerboard, Bleached Kraft Linerboard,
Bleached Kraft Foldingboard, and Semi-Chemical Corrugating Medium, have
Base Case capacity expansion costs greater than one-third of cash flow.
Therefore, even in the Base Case these sectors may face some difficulties
in raising capital. On the other hand, most of these product sectors
represent large commodity products with reasonable growth prospects, so
capital availability should not be a problem. The incremental capital
costs are small in comparison to the total expansion costs, and should not
affect these sectors' ability to raise capital.
Unbleached Kraft Linerboard has the largest single amount of compliance
costs, $5.99 million, one-fourth of total compliance costs. Fourteen
product sectors have no compliance costs due to NSPS capacity.
NSPS Option 2. Table 5-17 shows the one-year compliance costs for
NSPS Option 2, $27.69 million. Like NSPS Option 1, it is not likely to
have a significant impact on the industry's ability to finance capacity
expansion.
Employment and Indirect Impacts
Table 5-18 shows the results of the direct employment, indirect earnings,
and indirect employment impact analyses for NSPS Options 1 and 2. (No output
effects are expected from BAT and PSES regulations.) These impacts are de-
rived from the sales value of lost output, which is approximated by the pro-
duct of 1990 total lost output and the average industry Base Case price, $394
per ton. The general methodology was discussed in Section 2. An overall
industry average sales per employee of $103,000 was used to calculate direct
employment impacts. The indirect earnings to sales ratio is .40 and the
average value of indirect earnings per employee is $20,900.
5-23
-------
s s*
• *M C
QUO
O * —
G. •
J*^ — V.
— • *J
u c
« « o
k a a c
* ° -2
8 a 7 »i
« >. o ^
a«J — *J
— •
u c o
«• m IN ,-H IN ,-4 IN i
vmo*0**>fi4aDr4
•o
t§ I
» £ -o •"
«• C
•£ • *» A'VO «- fc
u • c M M • m u
VK 3 -^fc*Oki ID
£ «D «l c C Cu *O V 5. •-« U.
V££~-Z*£S£m c »
0 * • *5 S3 =22 S
£.£.:
?.
o 8 » 2 £
— 5 o a i
• •> o •" * •
•2-S
i«J>«uO--c»'«l
^^aoocc^oo-^
«uuxOa5£dSOH
!"•••___ -
_* IM IM V 59 V V
K«fl£*«ft •
i C * r< - -
«* U * •* ~ * V t!
S V U V +1 t TlO
~t «•?•>•>«•«««
•o • ••ootic — -<-<
sxxxasa
ii
O 9>
r* *n
o o
o o
a
a
12
£52 21 S
5-24
-------
Table 5-17. Capital Availability Analysis: NSPS Option 2, 1985
Product Sector
Paper
Unbleached Kraft
Bleached Kraft
Glass ine
Spec. Industrial
Newsprint
Coated Printing
Uncoated Free sheet
Uncoated Groundwood
Thin Papers
Solid Bl. Bristols
Cotton Fibre
Tissue
Board
Unbl. Kraft Liner
Bl. Kraft Liner
Bl. Kraft Folding
Semi Chero. Corr.
Recycled Liner
Recycled Corr.
Recycled Folding
Constr. Paper & Board
Molded Pulp
Solid Bl. Board
All Other Board
Pulp
Dissolving Pulp
Market Pulp
New Source
Capacity
Expansion
(lOOOt/y)
83.13
0.00
0.00
3.72
333.34
84.30
160.61
43.29
0.00
0.00
0.00
44.62
540.17
0.00
0.00
157.10
0.00
0.00
0.00
9.83
0.00
9.42
21.69
0.00
0.00
Total Costs
of Capacity
Expansion*
56.5
13.3
2.0
38.7
239.3
174.3
264.5
64.9
0.0
13.2
0.0
77.0
440.2
4.9
50.9
126.9
3.7
16.4
22.6
19.9
0.0
25.4
31.2
0.0
0.0
-nij.i.ions 01 j.:»/o »-
One Year
Compliance Costs
BAT&PSES NSPS
0.797
0.000
0.000
0.066
4.647
1.400
3.658
0.662
0.000
0.000
0.000
1.360
5.717
0.000
0.000
1.752
0.000
0.000
0.000
0.239
0.000
0.000
0.208
0.000
0.000
Base Case
Total Cash
Flow
229.0
12.3
9.9
107.4
224.0
569.4
1356.6
196.0
61.5
100.9
23.1
1197.7
542.7
-15.1
105.8
174.5
12.1
57.1
134.7
392.0
0.0
158.9
449.1
39.7
0.0
Total
1491.22
1686.0
7.18
20.51
6114.7
*See Table 5-16
5-25
-------
Table 5-18. Employment and Indirect Impacts, 1990
I Reductions in:
NSPS
Option
1
2
1
I Output
1 (1000 t/y)
597.4
582.2
1
1 Sales
1 Value
1 (Mill $)
235.4
229.4
1
1 Industry
1 Employment
1 (no. jobs)
2285
2227
1
I Indirect
1 Earnings
1 (Mill $)
94.2
91.8
1
1 Indirect
1 Employment
1 (no. jobs)
4708
4588
1
Source: EPA estimates.
5-26
-------
The impacts for both options are similar. Reductions of industry
employment range from 2227 to 2285 jobs; indirect earnings range from
$91.8 to $94.2 million; and indirect employment ranges from 4588 to 4708
jobs.
Small Business Analysis
Compliance costs were examined to determine if small mills bear
disproportionate impacts. Small businesses are defined for this analysis
as mills which have annual sales less than $10 million. Most existing
mills are not expected to bear monitoring costs under BAT and PSES
limitations. Only one mill has other costs of compliance under BAT and
PSES. Although this mill's revenues place it on the borderline between
large and small mills/ its costs are not expected to exceed 0.3 percent of
its sales. This impact is not expected to be significant.
5-27
-------
Section 6
Limits of the Analysis
This section discusses the major limitations of the assumptions,
methodology and results of the analysis. It also presents the results of
a number of sensitivity analyses which test the robustness of the results
of Section 5. It is organized into parts which parallel those of the
methodology and results sections (2 and 5, respectively), i.e., Base Case
projections including demand equations and construction of supply curves;
costs of compliance; demand/supply analysis; total costs of compliance;
mill-level impacts and closure; capital availability; and employment and
indirect impacts.
Base Case Projections
Demand Forecast
The demand forecast has two major components, growth of end-use demand
and price elasticity of demand. The DRI macroeconomic forecast drives the
end-use demand sector growth which determines the product sector growth
rates used in the analysis. The growth rate does not affect the Base Case
price level, since the analysis assumes that demand and supply grow at the
same rate regardless of what the rate is. The growth rate does affect the
speed at which new source capacity grows, and hence also the rate of
growth of costs of compliance.
The estimate of price elasticity does not affect the constant long-run
price or the rate of growth of output as long as the market remains in
equilibrium. It does affect the response of demand to a cost change, and
hence the extent of the effect of NSPS costs on the loss of output in a
given sector. The elasticity estimates are subject to both random and
model specification errors. The effects of the price elasticity on the
analysis here are not large because they do not affect the assumed rate of
capacity expansion.
Supply Curves
The supply curves used in the analysis are quite simple, reflecting
assumed constant long-run unit costs of capacity expansion equal to the
1985 Base Case price for each product sector. The assumption about the
level of costs is not crucial since we are concerned mainly with the
incremental cost of the Regulation. Use of the long-run supply curve does
ignore short-run adjustments, but these are less important given the focus
on new source costs. The assumption of constant real costs over the
forecast period is more reasonable than it seemed a few years ago, due to
the leveling off of fuel prices.
-------
Costs of Compliance
Pollution control costs were developed by EPA. Costs were developed
from "model" mills and hence will only approximate actual costs borne by
individual mills. However, they should provide reasonable estimates of
overall compliance costs in a given subcategory or product sector.
In calculating total annual costs/ a single cost of capital was used
for all mills. However, total annual costs are not overly sensitive to
variations in the cost of capital. For example, capital costs for most
subcategories tend to be about nine times operating and maintenance plus
energy costs. Using a CRF of .22 implies capital costs are about three
times total annual cost. Therefore, using a value for the CRF 10 percent
higher or lower causes total annual costs to be seven percent higher or
lower.
Like variable production costs, variable pollution control costs are
not escalated from real 1978 levels. Therefore total annual pollution
costs are underestimated, affecting price impacts similarly. Also, real
cost increases may be much less than previously predicted, due to the
leveling off of fuel prices.
NSPS costs of compliance were estimated from baseline BPT and BAT.
The engineering costs were estimated in going from raw waste load to final
NSPS effluent limitations. To adjust for the fact that new sources would
have to comply with BPT and BAT effluent limitations in the absence of
NSPS, EPA assumed that only 20 percent of the total cost of the treatment
system applies to the incremental treatment. While this adjustment is
rough, it does provide a much better estimate of the actual incremental
costs than if the total costs were used. (The total costs were
erroneously used in the analysis of the January 1981 proposal of NSPS
effluent limitations.)
The assessment of monitoring costs in this analysis is significantly
overstated and should be disregarded. The analysis and pertinent tables
estimate costs if all plants monitor for trichlorophenol and pentachloro-
phenol to check compliance with BAT, NSPS, PSES and PSNS. However, the
regulation provides that monitoring is not required if mills do not use
chlorophenolic-containing slimicides and biocides. Since most, if not all,
mills are expected to comply with the regulation by using other substitute
biocides, little or no monitoring costs are expected to be incurred.
Demand/Supply Analysis
The demand/supply model can be characterized as one of competitive
long-run equilibrium. In a long-run equilibrium growth path, price is
determined by long-run average total cost. This adjustment is assumed to
take place instantly on the supply side, although demand takes a few years
to adjust completely. One issue is whether the industry behaves in a
long-run competitive manner by fully passing through the treatment cost
increase. The problem of how to describe imperfectly competitive markets
6-2
-------
has vexed economic theory for a long time. It is not possible to predict
the outcome of price and output in an oligopolistic market. No single
qnoncompetitive" model could be used to forecast impacts of treatment
requirements on price and output. Assuming long-run full cost pass-
through is probably a reasonable approximation.
In this analysis a capital recovery factor of 0.22 was used to
estimate total annualized costs of NSPS. In order to examine the
sensitivity of the analysis to this assumption, two sets of alternate
costs were generated for NSPS Option 1, using values of 0.27 and 0.17 for
the CRF. These costs were then used as inputs to the demand/supply model
to solve for price and output changes for each of the product sectors.
These different scenarios were each compared to the 1985 Base Case. Table
6-1 summarizes the results of this sensitivity analysis.
Using a CRF of 0.22, total industry output will decline by 0.56 percent
over the period 1985 to 1990 and average price will rise by 4.33 dollars
per ton product, or 1.09 percent. With a CRF of 0.27, total output will
decline by 0.64% as price rises 5.00 dollars per ton, or 1.27 percent. If
a CRF of 0.17 is applied, total output will decline by 0.48 percent as
price rises an average of 3.67 dollars per ton, or 0.93 percent.
The largest single sector production drop is borne by Uncoated
Groundwood with declines of 2.3 percent to 3.0 percent. The largest price
increase occurs in the Construction Paper and Board Sector, with increases
of 2.8 to 3.7 percent. Overall, varying the CRF from 0.17 to 0.27 effects
a production decline of about 0.16 percent and a rise in average price of
1.30 dollars per ton. These figures suggest that the analysis is not par-
ticularly sensitive to estimate of the capital recovery factor.
Total Costs of Compliance
Estimates of total costs of compliance due to NSPS depend on the
estimates of capacity expansion, the share of new capacity classified as
direct discharging, the share of new capacity classified as "new source,
and the mix of subcategories assumed. Eventually most new capacity will
be subject to NSPS. Therefore use of a constant share of NSPS capacity
over time is probably inadequate.
Table 6-2 shows the effect of two other assumptions about the amount
of new source capacity in each product sector. In the first case, it is
assumed that there is no decline in new source capacity due to NSPS
costs. In the second case, it is assumed that the share of new source
capacity among all capacity is one-half the value assumed in the
analysis. Assuming that no new source capacity expansion is affected by
NSPS costs yields a total 1985-90 NSPS capacity expansion of 10.35 million
tons per year, 49 percent higher than the estimate used in the analysis.
Costs of compliance rise by the same proportion. Assuming a value of NSPS
capacity expansion of one-half that used in this analysis reduces NSPS
capacity expansion to 4.86 million tons per year, with an equal percentage
6-3
-------
Table 6-1. Price and Output Changes from the Base Case
With Different Values for the Capital Recovery Factor: NSPS Option 1
Capital Recovery Factor
0.22 I 0.27 I 0.17
Average Price Change
$/ton
percent
Change in Total Industry
1000 ton/yr percent
output
4.33
1.09
0.56
5.00
1.27
0.64
3.67
0.93
0.48
6-4
-------
£ *
I 2
8 S
a 35-
sr.
ss >. = -_
- C u o o x
«J 9 -« ** ffi \
• O O « I **
*4 0) • C *A O
9 Ui Ml (D o
i > • ao> o
.31
i* V*
SJ* 3
M *M vl —<
0 5 S1
~ fl
SO • I 4>
£i£S
> « a o» o
r* e
r* r* o f- P- o
, - «1 5
i • Q> £ 9 IS
! w "5 ^ 31 J!
E • ** WHO ^
5£52-.
3 e S 5 • u:
13 ^j
fc* 6
5,8 e • -I
-• — el » « «|
£ S 3 a S 2 ^1
6-5
-------
reduction in compliance costs. Therefore, the assumption about the share
of new source capacity expansion does have a significant effect on the
estimate of total costs of compliance. However, the relative impact of
the costs would not substantially change under either alternative
assumption.
Mill-Level Impacts and Closure Analysis
Mills with significant impacts were identified using the criterion of
a cost-to-sales ratio of greater than four percent. This criterion does
take mill-specific conditions into account, nor is it based on more
general average levels of profitability in the industry. However, even if
a lower criterion of two percent were used, no mills would have
significant impacts.
Capital Availability
The comparison of cash flow and capital requirements depends on the
sector-specific estimates of cash flow, the forecast of capacity expansion
in each subcategory, including the mix of existing and new sources, costs
of compliance, and the capital costs of new capacity. The cash flow
estimates are based on revenues and costs taken from the demand/supply
analysis. Revenues are the product of total output and price. Variable
costs are the integral under the supply curve. However, in sectors with a
variety of different grades, the price used may not have been the sector-
wide average price, so revenues may be under- or over-estimated.
Unfortunately, other information on cash flow broken down by product sector
is not available. Revenue estimates would also be affected by using a
different macroeconomic forecast for the Base Case. However, it is unlikely
that these changes would significantly affect the overall financial evalua-
tion of the industry, although the evaluations for individual sectors might
change, since compliance costs are such a small fraction of total cash flow.
There is considerable uncertainty about the base costs of new capacity.
Since costs of capacity expansion in a single year are larger than total
costs of compliance in any of the treatment options, these estimates have
an important effect on the overall financial picture of the industry,
although they do not affect the estimate of the incremental effect of NSPS
regulations.
6-6
-------
Employment and Indirect Impacts
Employment
The employment-to-sales ratios derived are quite crude. They probably
overestimate employment impacts because they are based on existing rather
than new mills.
Indirect Earnings and Employment Effects
The estimates of indirect earnings and employment impacts rest on a very
simple input/output framework. The approach tends to overestimate impacts
because it does not take into account that the reduction in earnings and jobs
in particular product sectors will be at least partially offset by increased
growth due to higher investment elsewhere.
6-7
-------
Appendix A
Capital Recovery Factor
The capital recovery factor (CRF) measures the rate of return that an
investment must achieve each year in order to cover the cost of the
investment and maintain net earnings, including depreciation and taxes.
Stated another way, the capital recovery factor is the excess of revenues
over variable costs, per dollar of invested capital, needed to cover the
cost of borrowing, depreciation and net profit-related taxes, while
preserving the market value of the firm's stock.
The formula for CRF used in previous analyses was:
A(N,K ) - td
CRF = (A-l)
1 - t
where:
N « lifetime of investment
Kf = average after-tax cost of capital
A(N,Kf) = annuity whose present value is 1,
given N and Kf [Kf/(l-(l+Kf )~N) ]
d = depreciation rate
t = corporate income taxes
Changes in the tax code dealing with rapid depreciation and investment tax
credits require alterations in the formula for calculating the capital
recovery factor. The revised formula is:
A(N,K )(.9-c)
CRF = - - - (A-2)
1 - t
n td
where :
where:
n = depreciation lifetime under tax code
d1 « new depreciation rate
Other variables as above.
The assumptions and data used to obtain values for the above variables are
described below.
Average Cost of 'Capital
The cost of capital, Kf, is the average percentage return that
suppliers of debt and equity demand. For firms which have more than one
type of capital, Kf is calculated as the average of the after-tax costs
of debt and the costs of equity, weighted by the share of market value of
-------
each relative to the total market value of the firm. In equation form:
K* = bi(l-t) + (l-b)r (A-3)
where:
*
Kf = average cost of capital after taxes
i * average cost of debt
r = average cost of equity
t = corporate income tax rate
b = share of debt financing
The costs of debt and equity are measured by the current market value
of outstanding debt and stock, rather than the original costs when the
debt and equity were issued. The argument that projects should be
evaluated using the weighted average cost of capital as the discount
factor has been made elsewhere* and rests on several assumptions. Firms
are assumed to have an optimal debt/equity ratio (or at least some
preferred debt/equity ratio), to have already obtained that ratio, and to
strive to maintain it over time. In addition, it is assumed that new
projects do not alter the overall risk position of the firm. (A change in
the risk level might result in a change in the debt/equity level.)
Therefore, new projects, on average, will be financed with these same
desired fractions of debt and equity.
Cost of Debt. Since firms often have more than one debt issue, it is
necessary to calculate an average cost within a company as well as across
companies. The following information on the debts of 27 pulp and paper
companies was obtained from Standard and Poor's Bond Guide (January
1980) .**
1) yield to maturity
2) debt outstanding
3) closing price
First, the total market value of each bond issue is calculated as the
bond price multiplied by the amount of debt outstanding. Second, the
average cost of debt is calculated as a weighted average of the various
values for yield to maturity, where the weights equal the ratio of the
market value of each bond issue to the total value of debt. The average
before-tax cost of debt for these companies is 11.03 percent.
*See, for example, J. Fred Weston and Eugene F. Brigham, Managerial
Finance (6th ed.), Dryden Press, 1978, Chapter 19.
**It is assumed that the cost of capital to pharmaceutical companies is
very close to that for chemical companies in general.
A-2
-------
Cost of Equity. A firm's cost of equity can be expressed in equation
form as:
r = - + g (A-4)
P
where e is the annual dividend, P is the stock price, and g the expected
growth rate of dividends.* To estimate the firms' cost of equity, the
following data were obtained from Standard and Poor's Stock Guide (August
1979):
1) dividend yield;
2) closing price;
3) number of shares outstanding.
This information was collected for both preferred and common stocks.
An estimate of the expected growth rate was obtained using data on
production levels for the years 1979-1980 from the DRI model. The annual
compound rate of growth for total paper and paperboard production was
calculated to be 3.5 percent. Since this is an estimate of production,
not sales or income, an inflation factor must be added in. Based on the
ORI inflation projections for 1980-1990, an annual compound rate of
inflation of 7.5 percent was calculated. Thus, the expected growth rate
of dividends (g in the above formula) is 3.5 + 7.5 = 11.0 percent. (This
assumes that real prices remain unchanged.)
Separate costs of capital were calculated for common stock and
preferred stock. The yield to maturity on the common stock of 53 forest
product companies is 5.2 percent, which yields a cost of equity of:
5.2 + 11.0 = 16.3
This is more accurately described as the cost of retained earnings. The
cost of new issues of common stock is higher than the cost of retained
earnings because of the flotation costs involved in selling new common
stock. Since new issues are a very small proportion of a firm's capital,
they are not included in our calculation of the overall weighted cost of
capital.
Preferred stock is a hybrid between debt and common stock. Like debt,
it carries a commitment on the part of the corporation to make periodic
fixed payments. Thus, the cost of capital is equal to:
r = f (A-5)
without an estimate of the expected growth rate of dividends.
*See, for example, J. Weston and E. Brigham, op.cit.
A-3
-------
Depreciation
Depreciation is normally defined as the fraction of revenues set aside
each year to cover the loss in value of the capital stock. Due to recent
changes in the federal tax code, the economic life of a capital item is
now considerably longer than the depreciation life for tax purposes.
Based on earlier work the lifetime of capital stock for this industry is
assumed to be about 10 years.* The depreciation rate for most personal
property now is straight-line over five years (20 percent). These values
are used in the revised calculation of the capital recovery factor.
Tax Rate
The current federal corporate income tax rate is 20 percent on the
first $25,000 of profits, 22 percent on the next $25,000, and 46 percent
on all profits over $50,000. For this analysis, plants are assumed to be
paying an even 46 percent federal tax on all profits. A study by Lin and
Leone** indicates that state and local income taxes also are a significant
factor in pollution control investments. State corporate income tax rates
may be as high as 9.5 percent. In their study, a weighted average of 7
steel-producing states yielded an average state corporate income tax rate
of 7.55 percent. State income taxes, of course, are deductible expenses
in computing corporate income tax. A state corporate income tax rate of 8
percent is assumed here. Deducting this figure before computing the
federal income tax rate reduces the net effect of the 8 percent rate to
about 4 percent. Thus, the overall effective income tax rate is
approximately 50 percent.
Sensitivity Analysis
Table A-l presents various values for the capital recovery factor,
assuming various weighted costs of capital (Kf) and different
formulations allowing for changes in the federal tax code. Both the rapid
depreciation and the investment tax credit serve to lower the capital
recovery factor, thus reducing the return necessary to justify a given
investment.
*Draft Industry Description; Organic Chemical Industry, Vol. I, Meta
Systems, December 1979.
** An Loh-Lin and Robert A. Leone, "The Iron and Steel Industry," in
Environmental Controls, (Robert A. Leone, ed.), Lexington, MA: Lexington
Books (1976), p. 70.
A-4
-------
Table A-l
Alternative Derivations of the Capital Recovery Factor
Variable Values
Weighted cost of .10 .15 .20 .10 .13 .15 .20
capital (K )
Life of asset (N) 10 10 10 10 10 10 10
A(N, Kf) .163 .199 .239 .163 .185 .199 .239
Depreciation life (n) 10 10 10 5 5 5 5
Depreciation rate (d) .10 .10 .10 .20 .20 .20 .20
Tax rate (t) .50 .50 .50 .50 .50 .50 .50
c .379 .352 .335 .299
CRF(l) .226 .298 .378
CRF(2) .201 .240 .265 .335
CRF(3) .169 .202 .225 .288
where: CRF(l) is original formula (A-l in text)
CKF(2) allows for rapid depreciation but not investment tax credit
CRF(3) allows for both rapid depreciation and investment tax credit
(A-2 in text)
The weighted cost of capital is estimated based on the current costs
as reflected in the current prices and yields of a sample of corporate
stocks and bonds for that industry. In January of 1980, the weighted cost
of capital for the pulp and paper industry was estimated to be about 12
percent. There are two major assumptions in using this method. First
that current prices and yields accurately reflect future costs of
capital. However, interest rates have increased significantly since the
summer of 1979. Second, that the current portfolio mix will remain
constant over the next several years. Given changes in tax codes, and
changes in the availability of certain sources of capital such as
industrial revenue bonds, this is unlikely. Therefore the cost of capital
is expected to be higher than 12 percent. Given the mix of financing
sources available, the weighted cost of capital for the period covered by
this study is assumed to be close to 15 percent.
A-5
-------
A single, industry-wide CRF equal to 22 percent has been used in our
analysis. For a given investment, a firm's CRF will vary with their cost
of capital and mix of financing. However, it was not possible to estimate
a separate CRF for each establishment or firm.
A-6
-------
Appendix B
The 308 Survey
The economic analysis of various pollution control options is based
in large part on information collected through a questionnaire issued by
EPA under authority of section 308 of the Clean Water Act (the 308
Survey). This questionnaire was sent to approximately 700 mills in the
pulp, paper and paperboard industry. A total of 633 responses to the
308 questionnaire, representing 648 mills, were included in the analysis.
A follow-up on the non-responding mills showed that in most cases these
mills were closed at the time of the survey, or were not producers of
pulp, paper or paperboard.
Purpose of the Survey
The survey was designed to provide information on mill character-
istics, production costs, investment in new capital, and market struc-
ture. Of primary concern was information on production costs. At the
time of the survey there was only one public source which contained con-
sistent and detailed manufacturing cost information organized in a way
directly useful to an impact study.* These costs were for representa-
tive new facilities typical of good technical practice in 1974, however,
and a host of assumptions would have to be made to translate them into
a form which would allow us to construct marginal cost curves for in-
dustry product sectors. To develop new manufacturing cost functions
and to verify or modify the assumptions made to translate the cost
functions into cost curves for the sectors, information for individual
mills was needed on the relationship between costs and capacity,
capacity utilization, production processes and products, and age of
capital.
To determine impacts it is essential to consider questions of
demand. The DRI Forest Products model provided the capability to esti-
mate demand on a product-by-product basis. However, we wanted to be
able to test the assumptions of this model against information obtained
from individual firms concerning the markets for their products. In
addition, the demand analysis projects capacity expansion on the basis
of announced plans for expansion and specified investment behavior. To
assess the forecasts we needed information on individual mills' plans
for expansion.
*Economic Impacts of Pulp and Paper Industry Compliance with
Environmental Regulations, Report for Office of Planning and Evaluation,
U.S. Environmental Protection Agency, Arthur D. Little, Inc., May 1977.
-------
Questionnaire
The questionnaire contained 24 questions, and was organized into
five parts:
• Identification: Name and address of mill and (if different) name
and address of parent company; name, address and telephone of
individual responsible for completing the questionnaire.
• Capacity; Mill capacity in various grades of pulp, paper, and/or
paperboard.
• Economic Information: Assets and capital investment, revenue,
expenses, quantities sold and transferred, and annual production
and inventory change information for two fiscal years.
• Annual Operating Costs and Capital and Operating Costs arising
from Federal Regulations; Fiber, chemicals, labor and energy
costs in the most recent fiscal year; and estimates of capital
and operating costs for air and water pollution control and OSHA
compliance.
• Future Plans; Planned capital expenditures on air and water
pollution control and capacity expansion by product or process;
plans to curtail operations; and if applicable, user charges of
POTW's.
Confidentiality
Two procedures were employed to protect the confidentiality of the
data. Those mills which sent their responses directly to EPA were pro-
tected by the procedures specified in Article XXI, Parts A to F of
contract No. 68-01-4675. These included EPA removing the Identification
Section from each questionnaire and assigning a code number with region
and subcategory identifiers to each questionnaire before they were for-
warded to Meta Systems for processing.
Those mills which did not respond directly to EPA sent their com-
pleted questionnaire to a third party (Arthur Andersen & Co.) whom they
had hired to hold the data and protect its confidentiality. Both sets
of data (mills responding directly to EPA and mills responding to
Arthur Andersen & Co.) were stored on Arthur Andersen's computer, and
Arthur Andersen personnel monitored the use of the data to prevent the
exposure of 308 Survey data on an individual mill.
B-J
-------
Limitations of Survey
As noted above, the response rate to this 308 Survey was excellent,
and for the most part the quality of the data appears quite good. How-
ever, there are a few problems with the questionnaire and/or the
responses. In the case of the question dealing with annual operating
costs, it is unclear what the mills included in "other costs."" It was
assumed that these costs included the operating costs necessitated by
current pollution control regulations, although this may not always be
the case.
A couple of problems arose with responses by indirect dischargers.
Due to the wording of the question, the flow level and user charge in-
formation is ambiguous. Also, final determination of whether a mill
was an indirect or direct discharger was left to the technical con-
tractor.
In some cases, a mill's reported production and capacity levels
were inconsistent. Various stages of the analysis required one or the
other level. Since it was not possible to determine which was correct,
the production and capacity data were used as they appeared on the
mill's response.
B-3
-------
Appendix C
Demand/Supply Methodology
Overview
The core of the approach to estimating the impact of BCPCT and
BATEA regulations on the industry is a microeconomic demand/supply
analysis for each market (product) sector of the industry. The analysis
produces a base case forecast of price, output, "contribution to
capital" (revenues less variable costs) and capacity utilization for
each product sector in the absence of new regulations. It also fore-
casts the effects of the costs of various treatment requirements on
those variables. The approach assumes that individual product markets
are competitive and that prices depend on the variable costs of the
marginal (high cost) mills in the various sectors. Market or product
sectors rather than subcategories are utilized because the relevant
set of competing products depends on product type, not manufacturing
process. The organization of the industry into product sectors corres-
ponds closely to product groups used by API.
For each sector, supply curves are constructed from manufacturing
cost and production data collected in the 308 Survey and pollution con-
trol cost estimates provided by the technical contractor. The supply
curves explicitly relate mill subcategories, the basis for defining
treatment costs, with product sectors, where the interaction of demand
and supply takes place. Supply curves are generated for a base case
with no additional pollution control requirements and for each of sev-
eral control options. The supply curves for different years are adjusted
to account for forecasts of capacity expansion through 1985.
The demand for each product sector is modeled using demand equa-
tions estimated by Data Resources, Inc. and linked with DRI's macroeco-
nomic forecasts over the period of the analysis, 1979-85. This provides
a demand forecast to match the capacity expansion forecasts on the
supply side.
The interaction between supply and demand is modeled by solving
the system of supply and demand equations for each product sector for
equilibrium values of price, output, "contribution to capital" and
capacity utilization for each year of the forecast period.
-------
Figure C-l shows the information flows and stages of analysis which
form the demand/supply analysis.
Figure C-2 presents a more analytical picture of the relation-
ship of the various elements of the analysis, and suggests some impor-
tant implications of the methodology adopted. Quantity produced is
measured along the horizontal axis and price and unit cost along the
vertical axis. The base case assumes no new treatment requirements.
Given demand curve DD and supply curve SS, market equilibrium implies
price = P and output = Q. The excess of revenues over variable costs
("contribution to capital") is given by area CEP.
Let S'S' represent the industry supply curve with treatment
costs. This yields a new equilibrium with price = P'-, quantity = Q1
and contribution to capital = C'E'P'. A number of elementary but im-
portant observations flow from this analysis. First, as long as demand
and supply are somewhat elastic, price will rise and output will fall.
If supply is not perfectly elastic (i.e., if SS and S'S1 are not hori-
zontal) the price increase will be less than the cost increase for the
original marginal producer (i.e., PP'
-------
FIGURE C-l> Demand/Supply Analysis
SUPPLY
DEMAND
TECHNICAL
CONTRACTOR
INFORMATION
DRI MACRO-
ECONOMIC
MODEL
1
OTHER
DRI
INFORMATION
1
DEMAND INDICATORS,
EXPORTS, IMPORTS, NON-
PAPER SUBSTITUTE PRICES.
OTHER EXOGENEOUS
VARIABLES
MAP FROM MILL SUBCATEGORIES
DRI, API
CAPACITY
FORECASTS
i
^^^ _j
1
/'RANK CAPACITIES BY umt>
( COSTS TO OBTAIN SUPPLY
V. CURVES ^/
CAPACITY
EXPANSION
FORECAST
1979-90
1
J
C GENERATE FITTED
UPPLY CURVE (1978 BASEI
SUPPLY CURVE FORECASTS
1979-90
C
JL
: SOLVE DEMAND/SUPPLY A
EQUILIRIUM MODEL y
FORECASTS OF PRICE,
OUTPUT, CAPACITY
UTILIZATION, CONTRIBUTION
NOTE: RECTANGULAR BOXES DENOTE INFORMATION FLOWS.
OVAL BOXES DENOTE UNITS OF ANALYSIS.
C-3
-------
FIGURE C-2. Shift in Supply Curve Due to Treatment Costs
PRICE,
COST
P1
P
C'
c
0' Q
S'
OUTPUT
C-4
-------
FIGURE C-3. Example of Marginal Cost and Average Cost Curves
UNIT
COST
OUTPUT
FIGURE C-4. Example Where Marginal Cost Equals Average Cost
UNIT
COST
AC=MC
OUTPUT
C-5
-------
An estimate of the supply curve for the entire sector can be
obtained by ranking all mills manufacturing a given product in terms
of unit cost, and then pairing the unit cost of a given mill with the
cumulative production of all mills with unit costs less than or equal
to that mill's. This is the procedure followed in this study. Although
the curve so obtained strictly equals the industry supply curve only
under the assumptions of perfect competition and constant marginal cost
for each mill, we believe that it represents a good approximation even
if these assumptions are relaxed somewhat. The following example
illustrates the curve construction procedure.
Example. Suppose the individual mill data for a given product
sector are as follows:
Mill Production cost, $/ton Output, 1000s tons/year
1 210 800
2 180 3000
3 260 900
4 175 3400
5 205 900
6 200 1000
(total = 10,000)
Mill #4, being the lowest-cost producer, forms the first step on
the curve with unit cost = 175, production = 3400. Mill #2 is the next
lowest cost producer; its incremental output adds 3000 to the ac-
cumulated production, with a unit cost of 180. The rest of the curve
is constructed similarly, until all production is accounted for, with
the highest cost producer being the point (260;10,000). This process
results in a step function like that shown in Figure C-5. The length
of each step is the production of that one mill, and the height of the
step is that mill's unit cost.
In practice, the approach proceeds roughly as outlined above;
with a supply curve constructed for each product sector. First, all
of the mills that produce a given product, say Newsprint, are selected
from the 308 Survey data base. Next, unit variable manufacturing cost
is determined by summing the questionnaire responses for the individual
cost components for that product: wood and pulp, chemicals, labor,
energy, and other, and then dividing by the mill's output of that pro-
duct. This is the basic step of the transformation of costs from sub-
category to product sector.
C-C
-------
FIGURE C-5. An Example of a Constructed Supply Curve
UNIT COST
$/TON
3400
6400 Q T400 8300 9100 10,000
OUTPUT 103 TONS/YEAR
C-7
-------
The structure of the supply curve has some implausible implications.
Suppose the intersection of the demand curve (DD) and the supply curve
yields price P and quantity Q as in Figure C-5. The figure implies that
all mills with unit costs below that of mill 6 operate at full capacity,
while mill 6 absorbs all the slack, and mills with higher costs do not
operate at all, which is not realistic.* Nevertheless, the use of aver-
age costs gives a picture of the cost structure within a given product
sector. Since high cost mills have the greatest variability of output,
this should give a reasonable approximation of the shape of the supply
curve.
Another limitation of the procedure is that it assumes that demand
and supply in the entire product sector is cleared by a single price.
In many markets, especially papers, there is a significant variation in
quality and characteristics among subgrades, and prices will vary corres-
pondingly. Therefore, producers that appear to have high costs may pro-
duce higher quality products with higher prices. Using a single price
could distort the relative profitability of different mills. There is
less harm on the demand side because prices of similar grades can be
expected to move together.
Standardizing Costs. All costs are adjusted to first quarter 1978
dollars to agree with the pollution control costs provided by the techni-
cal contractor. To do this, all cost data from 308 responses must be
inflated/deflated to correspond to this fixed base. The ends of the
accounting base years in the 308 responses vary from January 1976 to
December 1978. To adjust these costs, approximate deflators of two sorts
were developed. The first type are deflators directly applicable to
specific products, as obtained from DRI time series for average operating
costs for these products. For products where no such direct deflators
were available, estimates of cost changes for each input were developed,
covering wood, pulp, and secondary fiber, labor, chemicals, and energy.
Separate regional cost factors were also developed for each input. In
both cases, the time period selected for adjustment was based on the mid-
point of the year-long accounting period as reported by the mill.
No further adjustments were made to Survey costs to account for
real (constant price) input cost increases between 1978 and 1983-85, the
period of the analysis. Although forecasts of costs of the various input
categories are available, it was felt that using these forecasts directly
would overstate the cost increases because of process changes mills would
make in response to higher costs. Nevertheless, it is expected that real
production costs will increase 5 to 15 percent over this period.**
*In the analysis, reported production was used as a proxy for capacity
to construct the supply curves, since production costs were only available
for that amount. This tends to understate capacity somewhat. However,
this is compensated for in the calibration of the supply curves described
below.
**DRI Pulp and Paper Review, June, 1980, passim.
C-8
-------
Functional Form of the Supply Curve. Both for reasons of confi-
dentiality and because of the cumbersome form of the step functions
derived by the above procedure, the calculated values of unit costs
and cumulative production are used to estimate econometrically a smooth
supply function which approximates the step function. The fitted
curve is the one used in the demand/supply analysis. It has the
general form:
c = f (q)
where
c = unit cost
q = cumulative production
A variety of functional forms were investigated for each product
sector and the choice of which to use in the demand/supply analysis
depended on such criteria as reduction in sum of squares, significance
of coefficients, and standard errors of estimate.
Calibration of Supply Curve to Base Case. Because the survey data
on production are taken from several different years and coverage was
not complete, the supply curve generated by the above procedure does not
correspond to actual supply conditions in any particular year.
Specifically, the cumulative production obtained from the curve corres-
ponding to the price of a product in 1978 is not necessarily equal to
reported output of that product in 1978. (In most cases, cumulative
production at the 1978 price is within ten percent of actual 1978 pro-
duction, but usually lower. In a few cases it is higher.)
In order to calibrate the demand/supply model for each sector, the
estimated supply curve is shifted right or left so that it is consistent
with the 1979 price (in 1978 dollars) and level of output.* Strictly
speaking, this procedure assumes that the "unobserved" capacity has vari-
able costs equal to the y-intercept of the fitted supply curve. In
practice, as long as the unobserved capacity has variable costs less
than those of the marginal high-cost mill, the calibration will not
affect the shape of the supply curve in the region of its intersection
with the demand curve. Therefore, it will not affect the forecast of
price and output in the demand/supply analysis.
*1979 is the most recent year for which annual information is avail-
able. Therefore, there is no need to start with 1978 levels and "fore-
cast" 1979 levels. This approach is identical to that used to model
capacity expansion in subsequent years.
C-9
-------
Inclusion of Pollution Control Costs. Pollution costs for
several levels of control were determined by the technical contractor
for individual mills and for the basic divisions of subcategory.
Generally, one level of production process controls and two levels
incorporating end-of-pipe treatment were considered. Costs were cal-
culated for capital, operation and maintenance (O&M) and energy on an
annual basis. Where appropriate, regional factors modifying these
costs were developed.
The treatment costs added to the supply curve are total annual-
ized unit costs which include capital charges (investment costs multi-
plied by the CRF), as well as variable costs. This is because the
decision to install pollution control equipment and remain operating
is a long-run decision. We assume that firms can correctly predict
future trends so that only those which expect to recover at least the
total costs of their pollution control system will stay open. This
approach ensures that the marginal producer remaining open will recover
total treatment costs.
The procedure for estimating the supply function including pollu-
tion control costs is to divide the costs of a specified level of
pollution control for each mill, by the mill's capacity to obtain a
treatment cost per ton. This unit cost is then added to the unit vari-
able manufacturing cost of that mill. This implies that a mill's
treatment costs are allocated across its various products on an equal
per ton basis. The mills are reranked by unit cost and the supply
curve is reestimated using these new cost figures. The new curve will
shift upwards, reflecting the increased costs of additional pollution
control. Note that if a mill had inframarginal unit costs before treat-
ment, but has unit costs greater than the marginal mill after treatment,
its position in the supply curve will shift to the right of the marginal
mill. For example, Figure C-6 shows the supply curve from Figure C-5
after pollution costs have been added. In this case, the cost rankings
of mills #1, #5, and #6 have switched.
The Adjustment of the Supply Functions to Account for Capacity
Expansion. The supply functions were generated using the data on pro-
duction, capacity, and costs available at the time of the 308 Survey.
However, because we forecast supply through 1985, and because the supply
curve will change shape with additions of new capacity and retirement of
old capacity, these supply curves must be adjusted to account for capa-
city expansion.
C-10
-------
FIGURE C-6.
Supply Curve Resulting from the Rcranking of
Mills with Treatment Costs
UNIT COST
$/TON
OUTPUT 103 TONS/YEAR
NOTE: HORIZONTAL DASHED LINE (---) SHOWS PRE-CONTROL
UNIT VARIABLE COST
HORIZONTAL SOLID LINE (—) SHOWS UNIT VARIABLE
COST PLUS TOTAL ANNUAL POLLUTION CONTROL COST
c-n
-------
There are several sources of information on current and future
capacity. The capacity figures published by the American Paper Insti-
tute (API) are generally considered to be the most reliable of those
publicly available. The responses to the 308 Survey also provide in-
formation on current capacity and expansion to which the mills are
committed. Most of this expansion is to be on stream by 1981. Current
API figures include probable expansion through 1982. The 308 Survey
and API are in reasonably close agreement on capacity, both current and
planned, to 1981.
DRI forecasts future capacity through 1985. They base their
current capacity on API data, and use API estimates for expansion
through 1982. After 1982 their forecast of capacity is based primarily
on creating the capacity needed to meet the demand forecast by the DRI
model. An additional source of information on future expansion is the
historical trend for each product sector. The projection must take into
account the cycles in investment which appear to be common for several
product sectors. Through 1982 we use the API estimates of capacity.
Estimating expansion beyond 1982 is more difficult because firms do not
have definite plans that far in advance. The construction of a complete
investment model is particularly difficult in an industry like pulp and
paper, where expansions involve large sums of money and occur infrequently.
Rather than treating investment as an endogenous variable, we have chosen
to estimate future capacity based on API and DRI forecasts.
Two checks are imposed on these estimates of capacity expansion
to ensure that they are reasonable. The first is capacity utilization.
To a certain extent, output can be increased by making greater use of
current capacity. According to API estimates, in 1977 there were
27,381,000 tons of paper produced, with a capacity of 29,859,000 tons.
Thus, the overall capacity utilization rate was approximately 91.7 per-
cent. Included in the measure of capacity is an allowance for normal
maintenance, grade changes, and other downtime. Therefore, it is pos-
sible to have a capacity utilization rate of more than 100 percent, but
only for a short period. On the other hand, if the capacity utilization
factor declines sharply, there is reason to conclude that the capacity
estimate is too high. This criterion was used to evaluate the results
of the demand/supply analyses using initial capacity expansion estimates.
In some cases, the capacity forecasts were revised if the changes in
capacity utilization implied by the demand/supply forecasts varied sig-
nificantly and/or were inconsistent with other information about the
likely prospects for that product factor.
C-12
-------
A second check is the profitability of investments in new
capacity. The present discounted value of the excess of price over
variable cost per ton after tax can be taken as the value of the
investment. If this value exceeds the unit costs of new capacity
from the 308 Survey, then the capacity expansion forecast is profit-
able. The methodology is discussed more fully in the section on
capital availability analysis.
To actually model the effect of capacity expansion on the
fitted supply curves, it is assumed that new capacity has unit
variable costs equal to the minimum of that for existing capacity.
Therefore, the addition of new capacity can be represented simply
as a rightward shift of the existing cost curve, with unit costs of
new capacity equal to the y-intercept of the original cost curve.
This adjustment is exactly analogous to that used to calibrate the
supply curve to the 1979 base period.
Consider.the example in Figure C-7. Figure C-7a represents a
product sector supply function as it might appear in 1979. If five
units of additional capacity were projected for 1980, the supply
curve would be shifted as shown in Figure C-7b; i.e., the new capa-
city would come in as low variable cost production onthe left end
of the supply function. If additional capacity was expected to
come on-stream in the following year, it would be introduced in
exactly the same fashion.
It should be noted that this assumption about variable costs of
new capacity could be relaxed without affecting the results of the
demand/supply analysis. As long as variable costs are less than the
variable costs of the marginal existing mill, the intersection of the
demand and supply curves is unaffected. Therefore, price and output
changes due to treatment costs will not be affected either. However,
relaxing this assumption does affect the amount of "contribution to
capital" available for capacity expansion. Therefore, the capital
availability analysis must be examined for sensitivity to this factor.
Supply functions are prepared in this manner for individual pro-
duct sectors with and without pollution controls for each year from
1978 to 1985.
Total Cost of Compliance. The capacity expansion forecasts are
also used to predict total costs of compliance to the Proposed Regula-
tion for capacity in place by 1983. Costs of compliance for mills in
place in 1978 are taken directly from the sums of treatment costs esti-
mated for mills in the 308 Survey. The expansion forecasts can be used
directly to calculate costs of compliance by product sector for mills
in place by 1978. To compute costs by subcategory, expansion forecasts
C-13
-------
FIGURE C-7. Modeling Capacity Expansion Using the
Product Sector Supply Curves
FIGURE C-7a. Supply Curve in 1979
600
UNIT COST
(dollors/ 400
ton)
200
I
20 40 60 80 100
PRODUCTION (tons/year)
FIGURE C-7b.
Supply Curve in 1980
with Five Units of
New Capacity
UNIT COST
(dollars/
600
400
5 tons of new capacity
_L
I
20 40 60 80
PRODUCTION (tons/year)
100
C-14
-------
for each subcategory must be developed based on the product sector
forecasts. First, an expected mix of subcategories corresponding to
expansion in each sector was estimated. It was assumed that expansion
after 1978 in each sector would contain the same fractions of inte-
grated subcategories as found in the 308 Survey. Only a small increase
in nonintegrated capacity is predicted.*
Starting in 1982, capacity increases due to "greenfield" mills or
major alterations of existing plants are assumed, subject to NSPS stan-
dards. Thus it is necessary to predict what fraction of new capacity
would be classified as a new source. This was done using information
on installation of new machines in API's capacity forecasts and planned
capacity increases in existing plants from the 308 Purvey.
Demand Side Analysis
This section outlines the methodology used to model demand for
pulp and paper products. It includes a discussion of general factors
affecting demand in the industry, the structure of the equations making
up the model, the results of the ecb'nometric estimation, and the macro-
economic forecast which drives the demand side of the demand/supply
model.
Factors Affecting Demand. Demand for specific products within
the industry exhibits considerable variety, since each product has its
own unique characteristics. The economic and technological trends
affecting demand for the twenty-seven product sectors that have been
defined for the industry are summarized in the product profiles in Draft
Volume II. Some product sectors have been severely affected by the
penetration of substitute materials into their traditional markets.
Examples of this trend are the substitution of polyethylene bags for
Bleached Kraft bags, of plastic film for Glassine and Greaseproof paper,
of plastic containers for Molded Pulp products, and of plastic bottles
for Solid Bleached Milk cartons. Other product sectors have not suc-
cumbed to penetration. For example, most Unbleached Kraft papers have
superior packaging properties and consequently have maintained market
shares.
Technological change in end use markets has affected some pro-
ducts. Demand for Solid Bleached Bristols is down since there is
increased use of computer magnetic tape rather than cards. Uncoated
Freesheet use, on the other hand, has grown due to the burgeoning
need for business forms and paper for computers and copying machines.
*This is because most new expansion does occur in integrated mills
and because doing so automatically accounts for the increase in market
pulp capacity that must, for consistency, accompany increase in non-
integrated capacity .
C-15
-------
Technological changes in product production have improved demand in
some sectors such as Newsprint, Uncoated Groundwood Paper, and very
recently, Tissue, by improving product characteristics and therefore
consumer acceptance.
The demand for each product is linked to the level of activity
of particular sectors of the economy. For example, Special Industrial
Papers demand follows overall industrial production, and Coated Print-
ing Papers demand is related to the level of advertising in the U.S.
Some products are also affected by national policy. The future use of
the various recycled paperboards, for instance, will be influenced by
national recycling policies.
Demand Model. Because most pulp and paper products are inter-
nationally traded, an analysis of demand must take into account both
domestic and foreign demand and supply for a given product. The basic
identity is:
Apparent Consumption = Shipments + Imports - Exports (C-l)
Shipments, i.e., domestic production, are the supply side of our model.
Forecasting equations for imports and exports have been developed by
DRI. In most cases, DRI's forecasts of exports and imports are taken
as exogenous to the demand/supply models used in the present analysis,
since their magnitudes are relatively small. (Dissolving Pulp is the
exception.)
In the next step of the analysis, apparent consumption is analyzed
into two components, actual consumption and inventory changes. In equa-
tion form:
Apparent Consumption = Consumption + Inventory Change (C-2)
This reflects the fact that consumers of paper and board products buy
them to add to their inventories, as well as consuming them immediately
for their given "end-use". Because inventory demand tends to be very
volatile, it is preferable to separate it out and focus on the under-
lying end-use demand, i.e., actual consumption. Actual consumption is
more stable and reflective of long-term effects of demand such as sub-
stitution and technological change. Not doing so would tend to over-
estimate the price elasticity of demand.
Lastly, in DRI's estimation approach, actual consumption is
analyzed as the product of an "end-use factor" (EUF) and a "demand
indicator" (IND). In equation form:
C-16
-------
Consumption = EUF x IND (C-3)
One can think of the demand indicator as an index which measures the
effect on demand (consumption) of the size of the end-use consumption
market while holding price and other factors constant. In the case
of consumer Tissue, for example, an obvious candidate for a demand
indicator would be the number of households in the U.S. Everything
else equal, one would expect a doubling in the number of households
to double the demand for consumer Tissues. In economic terms, the
demand indicator represents shifts in the demand curve. In other-
cases, the demand indicator might be the index of production of the
end-use industry. The choice of a demand indicator for a particular
product sector depends on which macroeconomic variable best correlates
with the size of the end-use sector.
Several product sectors are represented by more than one demand
indicator because components of their demand are experiencing different
market trends. Each demand indicator is weighted by the share of that
component of total demand. For instance, demand for Coated Printing
Paper has three major components. Demand for the smallest — coated
one-side paper — is declining because of substitution by plastics.
However, demand for the two types of coated two-side paper is growing,
resulting in an overall increase in demand for the sector.
Conversely, the end-use factor can be thought of as the demand of
an average unit of the end-use sector. In the case of tissues this
would be a single average household. In some other sector it would be
a unit of production of the end-use industry. Therefore, the end-use
factor captures all other- factors affecting demand (price, substitute
price, technological change) except the size of the end-use sector.
It is the demand curve "normalized" to a unit of the end-use sector.
Multiplying the end-use factor (demand per end-use unit) by the demand
indicator (number of end-use units) gives us back the total demand of
the end-use sector, which, in equilibrium, equals actual consumption.
End-Use Factor Equations. DRI's approach is to estimate econo-
metrically the end-use factor equation. Given time series for Consump-
tion and the chosen demand indicator, equation C-3 yields a time series
of the end-use factor. This end-use factor is then regressed against
the appropriate own and substitute price series and other independent
variables to obtain the coefficient sstimates for the equation.
C-17
-------
A typical end-use factor equation has the following form:
EUFfc = C + L(PQ /PD ) + L(PQfc/PS ) + L(Xfc) (C-4)
where
EUF = end-use factor
C = constant term
PQ = price of paper grade
PD = GNP deflator or other price index
PS = price of substitute good
X = other independent variables, e.g., time or
proxy for technological change
n
L = lag operator (e.g.,
i=o
t = time subscript
The constant term captures the "exogenous" component of demand. The
second term in equation C-4 measures the effects of changes in the real
price of the paper grade, the third term measures the effect of relative
changes in own and substitute prices, and the fourth term captures the
effects of othe exogenous variables on demand. Lags on most price terms
range from four to eight quarters.
In most cases , the end-use factor equations are estimated with
quarterly data. In these cases quality is always a function of lagged
relative price (not current price) . This form makes them awkward to
use in the demand/supply analysis bacause the elasticity of demand in the
current quarter is zero. However, because the supply curves are based on
annual data, it was necessary to convert the demand curves to an annual
basis to make them compatible. As a result of the annualization proce-
dure, demand becomes a function of current as well as lagged price. This
is because the lagged price terms for the most recent quarters are allo-
cated to the current year when the aggregation from the quarterly to
yearly basis is made.
Insufficient data were available to estimate end-use factor equa-
tions for three sectors: All Other Paper, Molded Pulp, and Market Pulp
(except Dissolving Pulp) . Problems include the multiplicity of differ-
ent products included in these sectors and the difficulty of identifying
demand indicators and obtaining price series. Analysis of the demand
for Market Pulp is further complicated by the wide substitutability among
different grades. As a result, demand/supply analyses could not be done
for these sectors.
C-18
-------
The actual demand equation used in the demand/supply model is
constructed by retracing the steps outlined in equations C-l and C-4.
Multiplying the end-use factor equation* A-4 by the DRI forecast of
the demand indicator, and adding the forecasted values of inventory
change and exports, less imports, yields an equation relating U.S.
production to the price and other variables in equation C-4.
Results of Estimation. The full results of the estimated end-
use factor equations are given in Appendix 2-B. A useful way to sum-
marize the results is to use the concept of elasticity of demand.
Price elasticity of demand is defined as the percent change in quantity
demanded resulting from a given percent change in price, all other
factors held constant. It gives a convenient summary of the relation-
ships specified by a given demand equation. The formula for elasticity
is:
e =
where Q is quantity demanded and P is price. A high value of e (greater
than one) means that demand is relatively price-sensitive, whereas a low
value of e implies the opposite. Products with low demand elasticities
are in a better position to pass through to the customer the added costs
of pollution control. The own price elasticity shows the effect of a
product's own price on its demand, and the cross-price elasticity shows
the effect of the price of substitute goods on its demand.
Table C-l lists the pulp and paper industry sectors, their own-
price elasticities, their substitutes, and their cross-price elasticities.
In most cases, confidence intervals for these estimates are small. The
table shows that the own-price elasticity estimates of most of the pro-
duct sectors are relatively inelastic. Exceptions are Bleached and Un-
bleached Kraft Papers, Glassine and Greaseproof Papers, Cotton Fibre Pa-
pers, Uncoate"d Groundwood Papers, Thin Papers, and Solid Bleached Board;
all with elasticities greater than one. Some product sectors are extreme-
ly inelastic. These include Tissue paper, Uncoated Freesheet, and Solid
Bleached Bristols.
Several product sectors have high cross-price elasticities, imply-
ing that price rises due to pollution costs could significantly affect
demand if they are not matched in the competing sectors. Glassine and
*A11 variables except the own price PQ and EUF in the end-use factor
equation are also assumed exogenous in the demand/supply model. As with
other variables, these are taken from DRI forecasts. These forecasts are
described below.
**
"Appendix 2-B" refers to Appendix 2-B in the Draft Report.
C-19
-------
TABLE C-l. SUMMARY OF DEMAND ELASTICITIES
Price
Unbleached Kraft
Bleached Kraft
Glassine
Spec. Industrial
Newsprint
Coated Printing
Uncoated Freesheet
Uncoated Groundwood
Thin Papers
Solid Bl. Bristols
Cotton Fiber
Tissue
Own Price
Elasticity*
1.49
3.86
2.14
.73
.63
.64
.38
2.65
1.07
.41
2.06
.06
Substitute
Plastic Film
Plastic Film
Plastic Film
n.a.
Uncoated Groundwood
Uncoated Groundwood
Uncoated Groundwood
Newsprint, Uncoated
Book Papers
Chemical Woodpulp
Papers
n.a.
Chemical Woodpulp
n.a.
Cross-Price
Elasticity
of Substitute
.17
.67
1.16
n.a.
.35
.23
.22
2.65
.82
n.a.
1.12
n.a.
Board
Unbl. Kraft Liner.
Bl. Kraft Liner.
Bl. Kraft Folding
Semi-Chem Corr.
Recycled Liner.
Recycled Corr.
Recycled Folding
Constr. Paper & Bd.
Molded Pulp
Solid Bl. Board
All Other Board
Pulp
Dissolving
Market
.61
.61
.73
.61
.61
.61
.73
.68
n.a.
1.15
.65
Plastic Films, Polystyrene,
Hard Plastic Packaging
.59
n.a.
**
Plastic Pouches, Film &
Hard Packaging
**
**
**
Plastic Pouches, Film &
Hard Packaging
Solid Wood Products
n.a.
Plastic Film
Plastic Pouches, Film &
Hard Packaging
n.a.
n.a.
.42
.42
.48
.42
.42
.42
.48
n.a.
n.a.
.39
.07
n.a.
n.a.
Total
Source: DRI demand equations
*Absolute Value
**Same as for unbl. kraft liner
n.a.: data not available for emprirical estimate of elasticity
C-20
-------
Greaseproof papers, Cotton Fibre papers, and Uncoated Groundwood papers
all have cross-price elasticities greater than unity. The cross-price
elasticity for Bleached Kraft Papers is also relatively high. Products
which have very low cross-price elasticities include Unbleached Kraft
Papers and Uncoated Freesheet. For some product sectors such as Tissue
and Solid Bleached Bristols, data are not available to estimate cross-
price elasticities.
The Macroeconomic Forecast. Values of the exogenous variables in
the demand models, such as demand indicators, are taken from the March
1980 "trend" forecast of the U.S. economy, made by DRI's macroeconomic
model for the period 1980-85. This forecast shows a recession with de-
clines in real GNP through the last three quarters of 1980 followed by
gradual recovery in 1981. Inflation is expected to abate gradually
after the credit squeeze in the first half of 1980, although the "core"
rate of inflation due to wage increases could remain at around ten per-
cent through the early 1980's. In the following years, 1982-85, a pre-
dicted move toward a balanced budget is expected to reduce the share of
consumer spending in GNP, while tax cuts and increased defense expendi-
tures are predicted to boost investment spending. This shift from con-
sumption to investment spending has implications for the relative
recovery rates of different paper and board grades. It is expected that
paper grades associated with advertising (Newsprint, Coated Printing
Papers) and fiber boxes and other packing materials used for consumer
goods will fare less well. Table C-2 shows the movements of some impor-
tant variables in the forecast.
Solution of the Model
The supply and demand curves for each sector are combined to form
a product sector model with can be solved to predict the equilibrium
path of the market over time.* As described earlier, the demand rela-
tionship described in equations C-l and C-4 relates price to U.S. produc-
tion. The supply curve developed relates U.S. production to the marginal
cost (dollar per ton) of that output. Adding the assumption of compet-
itive behavior,
Price = Marginal Cost (C-5)
closes the system. This is the basic structure of the demand/supply
models used to forecast price and output in each product sector.
*The procedure for the five linerboard and corrugating medium sectors
is somewhat more complex. The supply and demand of all five sectors is
modeled jointly to capture substitute and complementary relationships.
C-21
-------
TABLE O2. AVERAGE ANNUAL PERCENT CHANGE OF ECONOMIC VARIABLES IN DRI CONTROL FORECAST
1979 1980 1981 1982 1983 1984 1985
Real GNP 2.3 0.2 1.5 4.3 3.4 2.6 3.8
Consumer Price Index 11.4 12.9 10.2 9.6 8.8 8.0 8.1
Consumer Expenditures
except Services 1.3 0.1 0.6 3.4 3.4 2.7 3.5
Printing, Index 4.1 -1.6 0.3 6.2 3.9 3.0 4.5
Wholesale Prices (Costs)
Energy 26.6 48.7 27.5 19.1 12.2 10.5 12.4
Chemicals 11.8 19.0 12.2 9.6 7.6 6.0 6.7
Source: DRI Pulp and Paper Review (March 1980), p. 15.
C-22
-------
The demand side of the model is driven by values of the exogenous
variables from the DRI model and lagged prices. On the supply side,
total capacity is given exogenously. For each year, the model is solved
for the market-clearing price and quantity. A base case Is established
for 1979 to 1985. This not only creates a reference case, but also es-
tablishes a series of lagged prices to start the analysis of the effects
of treatment costs. Starting with 1983, supply curves embodying costs
from each treatment option are used to calculate an equilibrium price and
quantity for each year and option. Although mills are not required to
begin treatment until 1984, they are assumed to incur costs beginning in
1983. The model also calculates total industry contribution to capital
(revenues less variable costs). Projections for each treatment option
are made through 1985.
C-23
-------
Appendix D
Demand Curves
The parameters used to determine the demand for a product sector in a
given year t are presented in Table D-l. The coefficients dj are weights
on the prices lagged from year t. The parameter S is the annual growth
rate of demand in the sector. Under the assumption of long-run equilibrium
(see Appendix C), S was taken as identical to the growth rate of supply.
Note that the units of P and Q in the demand curves are different from
those in the supply curves, and must be adjusted accordingly to be
comparable with them.
The demand curves for Unbleached Kraft Linerboard, Semi-Chemical
Corrugating Medium and Recycled Corrugating Medium actually show the
demand for total fiber box shipments (in millions of square feet) as a
function of price (in dollars per million square feet). A series of
conversion equations is needed to determine price and output for each of
these papergrades.
Some product sectors are omitted because they were not available
(Molded Pulp) or no NSPS capacity was expected to be built.
-------
Table D-l. Parameters for Product Sector Demand Curves
Model Coefficients*
Product Sector
Unbleached Kraft
Bleached Kraft
Glassine
Spec. Industrial
Newsprint
Coated Printing
Uncoated Freesheet
Uncoated Groundwood
Thin Papers
Solid Bl. Bristols
Cotton Fibre
Tissue
Board
Unbl. Kraft Liner.
Bl. Kraft Liner.
Bl. Kraft Folding
Semi-Chemical Corr.
Recycled Liner
Recycled Corr.
Recycled Folding
Constr. Paper & Board
Molded Pulp
Solid Bl. Board
All Other Board
Pulp
Dissolving Pulp
c
9453
NA
NA
1065
7579
9147
12108
7216
NA
NA
NA
5140
469391
NA
4350
469391
NA
469391
NA
8983
NA
4563
7156
00
-105.7
NA
NA
-7
098.6
-29.4
-20.3
-69.9
NA
NA
NA
-4.42
-1944
NA
-21.7
-1944
NA
-1944
NA
-79.9
NA
-33.8
-124
dl
-194.7
NA
NA
-3.5
-19.7
069.8
-67.91
-124.1
NA
NA
NA
0
-3198
NA
-65.9
-3198
NA
-3198
NA
-119.8
NA
-42.5
89.8
*2
-39.7
NA
NA
0
0
-6.7
-20.52
-30
NA
NA
NA
0
-698
NA
-9.6
-698
NA
-698
NA
-10
NA
-27.9
-11.84
d3
0
NA
NA
0
0
0
0
0
NA
NA
NA
0
0
NA
0
0
NA
0
NA
0
NA
-4.2
0
<*4
0
NA
NA
0
0
0
0
0
NA
NA
NA
0
0
NA
0
0
NA
0
NA
0
NA
-.9
0
s
.02
NA
NA
.02
.06
.03
.03
.06
NA
NA
NA
.01
.04
NA
.02
.04
NA
.026
NA
.01
NA
.01
.008
NA
NA
NA
NA
NA
NA
NA
*The coefficients assume price is in 1978 cents per pound and output in
1000 tons per year.
Source: DRI, Meta Systems estimates.
D-2
------- |