&EPA
united States
Environmental Protection
Agency
Office of Toxic Substances
Washington, DC 20460
EPA-560/4-81-003
May 1981
Toxic Substances
Economic Impact Assessment
of A Chlorofluorocarbon
Production Cap
Support Document
Proposed Rule, Section 6
Toxic Substances Control Act
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EPA-560!4-81-003
March, 1981
ECONOMIC IMPACT ASSESSMENT
OF A CHLOROFLUOROCARBON
PRODUCTION CAP
Support Document, Section 6
Proposed Rule,
Toxic Substances Control Act
BY
Adele R. Palmer
Timothy H. Quinn
Contract No. 68-01-6236
Project Officer:
Ellen B. Warhit
REGULATORY IMPACTS BRANCH
ECONOMICS & TECHNOLOGY DIVISION
OFFICE OF TOXIC SUBSTANCES
WASHINGTON, D.C. 20460
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF PESTICIDES AND TOXIC SUBSTANCES
WASHINGTON, D.C. 20460
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Disclaimer
This document is a contractor's study done with the
supervision and review of the Office of Pesticides and Toxic
Substances of the u.S. Environmental Protection Agency. The
purpose of the study was to evaluate the economic implications of
a chlorofluorocarbon (CFC) production cap at 1980 levels in the
United States.
The report was submitted in fulfillment of Contract No. 68-
01-6236 by the contractor, The Rand Corporation. Work was
completed in February, 1981.
The study is not an official EPA publication. The document
cannot be cited, referenced or represented in any court
proceedings as a statement of EPA's view regarding the
chlorofluorocarbon industry or the impact of the regulations
implementing the Toxic Substances Control Act.
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PREFACE
This Note projects the economic costs of a regulatory "cap" that
would restrict total U.S. annual chlorofluorocarbon (CFC) production to
the 1980 level.
Alternative cost estimates reflect alternative
hypotheses about U.S. industries' responses to higher CFC prices.
The
U.S. Environmental Protection Agency plans to use this analysis for CFC
rulemaking during 1981.
EPA Contract 68-01-6236 supported this research.
The analysis
extends a major study of CFC regulation that Rand performed under ear-
lier EPA Contracts 68-01-3882 and 68-01-6111.
The earlier study com-
pared alternative regulatory methods, and found that they vary not only
in their economic implications but also in their potential effectiveness
in preventing cumulative CFC use and emissions during the 1980s.
In
contrast, the present study examines a single policy--the production
cap--which would prevent nearly 25 percent of cumulative CFC use over
the decade.
Quantitative outcomes--costs to the U.8. economy as a whole and to
the CFC-using industries--receive emphasis in this document.
Underlying
data sources and methodology receive a more cursory treatment in the
introduction and an appendix.
For a more detailed explanation, the
reader may wish to consult three publications from the earlier CFC
research project:
o
A. R. Palmer et al., Economic Implications of Regulating
Chlorofluorocarbon Emissions from Nonaerosol Applications,
R-2425-EPA, June 1980.
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o
W. E. Mooz and T. H. Quinn, Flexible Urethane Foams and Ch1oro-
fluorocarbon Emissions, N-1472-EPA, June 1980.
o
K. A. Wolf, Regulating Chlorofluorocarbon Emissions:
Effects
on Chemical Production, N-1483-EPA, August 1980.
For a summary of findings from the earlier research, see:
o
A. R. Palmer et a1., Economic Implications of Regulating
Nonaeroso1 Chlorofluorocarbon Emissions:
An Executive Brief-
ing," R-2575-EPA, July 1980.
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SUHHARY
Regulation that would limit annual chlorofluorocarbon (CrC) produc-
tiol1 to the 1980 level could cost the U.S. economy as much as $342 mil-
lion (in discounted 1976 dollars) between now and the end of 1990.
Costs will reach this level if firms and consumers adapt rather slowly
to the higher prices caused by restricted crc supplies.
In that case,
only well-known CrC-saving technologies would be implemented early in
the decade.
rirms would begin to exploit less common technologies only
by mid-decade, and consumers would begin to avoid CrC-made products only
by the end of the decade.
It is more likely, however, that both firms and consumers will
exploit CrC-saving opportunities earlier in the decade.
If so, costs
due to regulation would accumulate to only $275 million.
In addition to the costs imposed on the economy as a whole, a crc
production "cap" could transfer considerable wealth from CrC-using
industries and their customers to other parts of the economy.
The
wealth transfers could run as high as twelve times the costs estimated
above.
Most CrC-using firms in business today should be able to cope suc-
cessfully with the higher costs imposed by regulation.
The principal
exception could be firms making CrG-blown thermo formed polystyrene foams
for packaging.
If their customers switch to cardboard and paper when
foam prices rise, several foam making firms would go out of business,
laying off perhaps as many as two thousand workers, nationwide.
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CONTENTS
PREFACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S U'MMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
/
Section
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Policy........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CFC-Using Industries....................................
Measuring Prices and Costs..............................
II..
A HIGH-COST SCENARIO......................................
Price Outcomes..........................................
Adjustments in CFC Use..................................
Resource Cos ts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Payments.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III.
AN EXPANDED RESPONSE SCENARIO.............................
CFC Price Outcomes......................................
Adjustments in CFC Use..................................
Resource Costs and Transfer Payments....................
IV.
MARKET-CLEARING SCENARIOS............................ . . . . .
Likely Sources of Added Response........................
Consumer Response Effects on Resource Costs
and Transfer Payments.......................... . . . . .
Some Alternative Market-Clearing Scenarios.........;....
Scenario III: A Pessimistic View of
Consumer Response...................................
Scenario IV: An Optimistic View of
Consumer Response...................................
Scenario V and VI: Two Transition Scenarios..........
Detailed Outcomes Under Scenario V. ............ .........
Detailed Outcomes Under Scenario VI.....,...... ...... '"
V.
OTHER MEASURES OF POLICY EFFECTS. ........,. .......... .....
Consumer Price Effects..................................
Effects on Small Businesses... .... ............. .... .....
Plant Closures and Worker Layoffs....... """""'" ...
Energy Implications................................ . . . . .
APPENDIX: METHODOLOGY FOR ESTIMATING THE CFC DEMAND SCHEDULE...
Cautious CFC Demand Schedules...................... . . . . .
Weighting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate CFC Demand Under Alternative Scenarios........
CFC Prices, Resource Costs, and Transfer Payments. .., '"
BIBLIOGRAPHY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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1.
INTRODUCTION
How much would it cost the U.S. economy to preclude increased
chlorofluorocarbon (CFC) production beyond the 1980 level?
The answer
depends on how firms and consumers respond to the higher prices caused
by restricted CFC supplies:
o
At a minimum, we expect firms to implement several well-known
CFC-saving technologies, such as CFe recycling and substitution
of alternative chemicals. [1]
By 1985, CFC prices would be high
enough to make all these technologies economically attractive,
and the annual cost of using them would reach $59.5 million (in
1976 dollars).
After 1985, staying below the CFC production
cap would require additional CFC-saving technologies or an end
to market growth for consumer products made with CFCs.
o
Some lesser-known CFC-saving technologies also exist, but their
costs or effectiveness are uncertain.
If these technologies
prove to be relatively inexpensive, the cost of meeting the CFC
cap would be lower in each year.
For example, the 1985 cost
might be only $25.4 million (in 1976 dollars).
Using an
expanded set of existing technologies would enable industries
both to satisfy growing consumer demand for final products and
[1] We do not include CFC-22 substitution in refrigeration devices
among the "well-known technologies" referenced here. Though CFC-22 sub-
stitution could, in principle, help meet the production cap, it would
happen only at extraordinarily high CFC prices. Long before such prices
were reached, we would expect some use of less well-known (and less
costly) technologies and some consumer responses to higher final product
prices.
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to comply with the production restriction through 1989.
o
Costs would be lower still if consumers could find good substi-
tutes for CFC-made products as the cost of making them rises.
With only modest consumer response, the 1985 cost might be as
low as $21.6 million.
In combination with existing technolo-
gies, consumer response would help to hold CFC use below the
cap through 1990.
o
If industry develops new technologies for conserving CFCs, the
yearly costs could be lower still.
Plausible scenarios are ones in which existing technology plus con-
sumer response satisfy the CFC production constraint in all years
through 1990.
Our most costly plausible scenario predicts the decade's
cumulative costs (discounted to 1980 and measured in 1976 dollars)
should not exceed $341.6 million.
A reasonable estimate places these
costs closer to $270 million.
But the CFC production cap could cost CFC-using firms and their
customers much more than it costs the economy as a whole.
When a firm
buys additional resources for controlling CFC use--recycling equipment,
for example--the whole economy loses the opportunity to use those
resources for other purposes.
The preceding cost estimates measure only
these real resource costr.
However, when the firm pays higher prices
for the CFCs it still uses, the added expenditure by the firm ends up in
someone else's pocket.
There is no loss to the economy as a whole, but
there is a transfer of wealth away from CFC-using firms and their custo-
mers.[2]
[2] Who receives the wealth transfer depends on how the regulation
is implemented. See Palmer et al. (1980), Sec. V.
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Unless CFC regulation provides mechanisms for ameliorating wealth
transfers, they will be very high.
Like resource costs, the magnitude
of transfer payments depends on how user industries and their customers
respond to higher CFC prices.
If responsiveness is minimal, transfers
would amount to twelve times the policy's real resource costs.
If
industry and consumers are more responsive, estimated transfer payments
will be lower--but still substantially greater than resource costs.
This Note performs three functions:
First, it assesses the
economic implications of a CFC production cap to help the U.S. Environ-
mental Protection Agency plan and prepare its rulemaking actions.
Second, it identifies the sources of uncertainty about future behavior
by industries and consumers.
Third, it demonstrates how those uncer-
tainties influence estimates of CFC regulations' economic implications--
and in so doing, illustrates how actions in one CFC-using industry can
influence outcomes in other economic sectors.
To perform these functions, the Note examines alternative scenarios
describing industry and consumer response under a CFC production cap.
Section II shows outcomes if only well-known technologies are imple-
mentedj this is the highest-cost and most pessimistic scenario.
Section
III identifies the lower costs potentially achievable from also imple-
menting some less well-known technologies.
Together, the scenarios of
Sees. II and III show how specific changes in assumptions alter outcome
estimates.
But since neither of the first two scenarios explains how
the CFC market would equilibrate at the end of the decade, neither
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scenario is complete.
Section IV combines and extends results from the
preceding sections to generate several plausible overall scenarios.
Of
these, we examine Scenario V in detail because it is the highest-cost
plausible scenario, and Scenario VI because it portrays reasonable
expectations for actual market outcomes.
Finally, Section V discusses
policy effects on consumer prices, energy use, plant closures and worker
unemployment, and competitive standing of small businesses.
Regulatory outcomes are estimated using the data and methodology
developed in Palmer et al. (1980).
The appendix of this Note summarizes
the method and describes some computational improvements developed for
the analysis reported here.
THE POLICY
In all
scenarios,
the regulation puts a cap on aggregate CFC supply
at the 1980 level.
Market forces allocate the available CFC supply
among competing firms and industries.
For all scenarios, the cap is set at 341.0 million "weighted"
pounds.
To compute the cap, we estimated 1980 domestic sales (in
pounds) of CFC-11, CFC-12, CFC-113, and CFC-S02,[3] multiplied each
estimate by its respective weighting factor in Table 1.1,[4] and set the
[3] The cap also applies to the CFC-12 contained in R-SOO, a refri-
gerant used in chillers. Amounts of CFC-114 and CFC-11S used in the ap-
plications considered here are too small to have noticeable effects on
our estimates.
[4] These weights differ from the ones used in Palmer et al.
(1980). The earlier weights gave larger measures of weighted pounds for
the same level of CFC production--and thus gave lower dollar figures for
price increases per weighted pound. Consequently, although resource
cost and transfer payment estimates can be compared between the two stu-
dies, weighted-pound measures of CFC use or emissions and "permit
prices" are not comparable. For further explanation, see the appendix.
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Table 1.1
CFC WEIGHTING FACTORS
Type of CFC
Weighting Factor
(Weighted Pounds
Per Pound of CFC)
CFC-11
CFC-12
CFC-113
1.00
0.79
0.77
a
CFC-502
0.19
SOURCE: Factors for CFC-11, CFC-12,
CFC-113, and CFC-22 were reported in EPA
(1980). Remaining factor computed by Rand.
a
CFC-502 is 51.2 percent CFC-115 and 48.8
percent CFC-22, by weight. The EPA weight-
ing factors are 0.20 for CFC-115 and 0.18 for
for CFC-22. Although CFC-22 is otherwise
ignored in this study, its contribution to
ozone-depletion potential is reflected in
the CFC-502 weighting factor. This allows
regulation of CFC-22 to be treated as an
extension of our analysis without revising
the CFC-502 data.
restriction equal to the weighted sum.
In 1981 and beyond, the weighted
sum of CFC sales cannot exceed the cap, but different mixes of CFCs can
be sold in different years.
Because the weights reflect differences
among CFCs in ozone-depletion potential, the weighted restriction holds
constant the annual U.S.
contribution to ozone depletion. [5]
[5] The earth's atmospheric ozone layer shields plant and animal
life from harmful ultraviolet radiation. Current atmospheric chemistry
models suggest that CFC emissions deplete ozone. EPA hopes to protect
the ozone layer by preventing U.S. CFC use that leads to emissions.
However, the U.S. currently contributes only about one-third of world-
wide annual emissions and other countries must also control emissions to
assure protection of the worldwide ozone layer. For further explana-
tion, see Palmer et a1. (1980) and NAS (1979).
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Insofar as possible, the restriction modeled here matches the
"economic incentive approach" described by the Environmental Protection
Agency in its October notice of proposed rulemaking [EPA (1980)].
The
EPA notice proposes to cap weight~d production of all crcs at the 1979
level.
Because our data refer to sales rather than production, our
analysis effectively ignores amounts produced for the crc manufacturers'
internal consumption.
Moreover, our restriction based on estimated 1980
sales might exceed somewhat a restriction based on actual 1979 data.
The principal difference between the regulation modeled here and
EPA's proposal results from our omission of CFC-22.
If that is also
restricted, users of CFC-22 would compete with other users for res-
tricted CFC supplies--but, of course, the cap would be greater by the
weighted amount of current CFC-22 production.
If CFC-22 demand response
resembles that for other CFCs, our estimates of regulation's cost will
be accurate for users of the CFCs we examine; if CFC-22 demand is less
or more responsive, our cost estimates will be too low ~r too high,
respectively.
CFC-USING INDUSTRIES
We estimate regulatory outcomes for several user categories and
subcategories: [6]
o
Flexible Foams:
Mak~£s of foams for cushioning using CFC-11
blowing agents, as in furniture, bedding, and carpet underlay.
[6] For more details, see Palmer et a1. (1980).
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o
Solvents:
Industrial users of CFC-ll3.
The largest sub-
category is use for cleaning and drying, principally in the
electronics industry.
"Other" uses include dry cleaning,
refrigeration, and several other specialized applications.
o
Rigid Foams:
Makers of CFC-ll and CFC-l2 insulation; makers of
CFC-12 thermo formed polystyrene (TPS) packaging materials; and
makers of other CFC-11 and CFC-l2 noninsulating rigid foams.
o
Mobile Air Conditioning (MAC):
Makers and servicers of automo-
bile air conditioning systems using CFC-l2 refrigerant.
o
Retail Food Refrigeration:
Makers and servicers of food store
refrigeration devices using CFC-12 and CFC-502 refrigerants.
o
Chillers:
Makers and servicers of industrial and commercial
air conditioning systems using various CFC refrigerants, prin-
cipally CFC-12.
o
Home Refrigeration:
Makers and servicers of refrigerators and
freezars using CFC-12 refrigerant.
o
Miscellaneous:
Users of liquid fast freezing systems for food
freezing; makers of sterilants for medical supplies; many other
very small users of CFCs.
As background, Table 1.2 reports estimated CFC use, in CFC pounds
and weighted pounds, by user category.
The 1980 data entered the calcu-
lation of the regulatory restriction.
The 1990 data provide a baseline
against which to measure regulation's limitation on use.
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Table 1. 2
PROJECTED PURCHASES OF CFC-11, CFC-12, CFC-113, AND CFC-502 IN THE
ABSENCE OF REGULATION, BY USER CATEGORY: 1980 AND 1990
Purchases
1980 1990 1980 1990
User (millions of (millions of
Category eFe pounds) weighted pounds)
Flexible foams 46.8 71.5 46.8 71.5
Solventsa
Cleaning and drying 54.1 94.5 41.7 72.8
Other 24.2 40.6 18.6 31.3
Rigid foams b 73.8 164.3 72.3 161. 0
Insulation
TPS packaging c 14.5 22.6 11.5 17.9
Other noninsulation 19.2 38.2 17.1 34.0
Mobile air conditioning
~1anufacturing 38.0 42.5 30.0 33.6
Servicing 60.3 82.3 47.6 65.0
Home refrigeration 7.1 9.4 5.6 7.4
Retail food
refrigeration
CFC-12 10.8 10.1 8.5 8.0
CFC-502 d 11.9 15.3 2.3 2.9
Chillers e 14.9 21.4 13.7 21.6
Miscellaneous 31.6 69.6 25.3 55..7
TOTAL f 407.2 682.3 341. 0 582.7
SOURCE: Palmer et a1. (1980).
a
Estimated 1990 solvents use differs from the source document.
See appendix.
b
Includes CFC-ll in rigid urethane and CFC-12 in extruded
polystyrene board. On average, CFC-l1 accounts for 88 percent
of the weighted totals.
c
CFC-l1 is 54 percent of the weighted totals. The remainder
is CFC-12.
d
CFC-11 is 67 percent of the weighted totals. The remainder
is CFC-12.
e
CFC-12 is 94 percent of the weighted totals. The remainder
is CFC-ll.
f
CFC use reported here exceeds the source document's data by
inclusion of CFC-502.
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MEASURING PRICES AND COSTS
In the absence of regulation, we expect most CFC prices to remain
roughly constant in real terms. [7]
Table 1.3 reports our estimated
1980 prices (in 1976 dollars).
These form a baseline against which
to compare CFC prices under regulation.
Although the production cap policy will raise different CFC prices
by different amounts, the annual price increment per weighted pound will
be the same for all the regulated CFCs.
We call this price increment
a "permit price."
It is the price users would pay to buy a permit
allowing them to purchase one weighted pound of any CFC, provided the CFC
Table 1. 3
ESTIMATED BULK PRICES FOR VIRGIN CFCs, 1980
CFC
Bulk Rate
per CFC Pound
(in 1976 dollars)
CFC-ll
CFC-12
CFC-113
CFC-502
$0 . 34
0.41
0.60
1.11
SOURCES: These estimates derive from
the 1976 price estimates reported in
Palmer et a1. (1980), Table 3.5. The same
source document explains the 1980 price
estimate for CFC-113 and notes that this
price is expected to vary with C-113 pro-
duction levels. All other prices would be
expected to remain constant in real terms
through 1990 in the absence of regulation.
See the appendix.
[7] That is, we would expect CFC prices to maintain approximately
the same levels relative to one another, to substitute chemicals, and
to chemical-using or recovery equipment. Though relative price changes
might occur, they cannot be predicted reliably. An exception is CFC-
113. Its price is expected to vary inversely with changes in CFC-113
production due to economies of scale. See the appendix.
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manufacturers continue to charge the baseline prices.
However, if per-
mits are not issued, we would expect the CFC manufacturers' prices to
rise by the permit price amount.
In short, the permit price is a useful
summary statistic for measuring CFC price adjustments under regulation.
The permit price as an economic concept receives attention in the
appendix, but computations involving permit prices deserve a brief prel-
iminary explanation.
To convert the permit price to the price increment
per CFC pound, multiply by the appropriate weighting factor in Table
1.1.
To obtain the total price a user pays per CFC pound in any year,
add the baseline price to the converted permit price.
Throughout this report, prices and costs are stated in 1976 dol-
1ars.
This emphasizes the fact that the 1980 data shown herein corne
from prior projections rather than direct observation.
Measuring costs
in 1976 dollars also facilitates comparison between this document's
results and those for other policy options analyzed in Palmer et al.
(1980) .
Finally, using 1976 dollars avoids the ticklish problem of
selecting an appropriate inflation factor.
The proper factor would
reflect price changes for chemical substitutes for CFCs, CFC-saving
machinery and equipment, and other producer commodities purchased by
CFC-using industries.
According to the Survey of Current Business
(1977, 1980), prices for all producer commodities rose about 45 percent
from 1976 to mid-1980.
Prices rose by somewhat more--about 50 percent--
for all industrial chemicals and by somewhat less--about 40 percent--for
all machinery and equipment.
These figures provide a rough guide for
updating the 1976 data reported below.
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II.
A HIGH-COST SCENARIO
Scenario I: CFC-using industries respond to rising CFC prices
only by exploiting more fully the CFC-saving technologies al-
ready in limited use. Firms recover and recycle CFCs, improve
their production equipment, make revisions in product design,
and turn to alternative chemicals where feasible. Higher pro-
duction costs translate into higher final product prices, but
final product sales nevertheless grow approximately at the
rates anticipated before the CFC price increases. Consequent-
ly, firms now using CFCs remain in business and new firms
enter final product markets.
The scenario is not farfetched--provided CFC prices do not rise too
high or for too long.
If CFC prices rise high enough, they or the costs
of CFC-saving technologies will translate into substantially increased
production costs and output prices.
Customers then face strong incen-
tives to select alternative final products.
Meanwhile, CFC-using firms
have reason to search for new low-cost technologies.
If the search is
unsuccessful and consumer demand weakens, fewer new firms will enter the
final product markets and some existing CFC users might even go out of
business.
And even if CFC prices rise slowly--but for long enough--
industry eventually might discover new ways to avoid heavy CFC use.
Thus, if the scenario differs from reality, it most likely will do so at
high CFC prices, in more distant years.
To describe behavior under a CFC production restriction, the
scenario cannot be used beyond 1985.
By that year, expanded rivalry for
limited CFC supplies would raise the permit price to $1.70.
Beyond
1985, the scenario is incomplete because it provides no mechanisms to
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clear the CFC market--to bring quantities demanded into line with res-
tricted supplies--at any price.
For this reason, the scenario is
implausible beyond 1985.
For the years through 1985, the scenario's regulatory outcomes
probably represent a "worst case" prediction.
The scenario predicts
robust growth in CFC-using applications.
If, contrary to the scenario,
consumers turn to alternative products or firms develop new techno1o-
gies, less CFC would be purchased at each price.
Consequently, CFC
prices would not have to rise as high or as fast to keep purchases in
line with the restricted supply.
And, if the scenario overestimates the
CFC price, it also overestimates resource costs and transfer payments.
Later sections of this report offer scenarios that do explain how
the CFC market could clear throughout the next decade.
Several market-
clearing mechanisms surely exist, but which will prove most important is
uncertain.
Scenario I provides a useful backdrop for exploring various
hypotheses about how the CFC market will clear.
Thus, Scenario I
represents a foundation upon which to build the market-clearing
scenarios.
PRICE OUTCOMES
Assuming the foregoing scenario applies, Table 2.1 estimates
equilibrium price outcomes (in real terms, 1976 dollars) for 1980
through 1985.
The CFC prices are the totals users would pay per CFC
pound, both to purchase CFCs and to buy permits if EPA issues them.
If
CFC manufacturers' prices (in real terms) remain at the levels in Table
1.3, users would pay the permit prices listed in Table 2.1.
Since CFC
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production is not restricted in 1980, the crc price is unaffected and
the permit price is zero.
Price increases reflect the crc weighting factors.
With its rela-
t~vely large weight, CFC-11 experiences the most dramatic price rise~--
43 percent per year, on average.
In contrast, the least weighted crc--
crC-S02--shows relatively modest price increases, averaging only five
percent per year.
As intended, a policy that weights crcs according to
their ozone depletion potential penalizes use of some CFCs more than
others.
Table 2.1
ANNUAL EQUILIBRIUM PERMIT PRICES UNDER
THE HIGH-COST SCENARIO
(In $ 1976)
a
Total User Price Per CFC-Pound
b
Year CFC -11 CFC-12 CFC -113 CFC-502 Permit Price
1980 $0.34 $0.41 $0.60 $1.11 $0.00
1981 0.44 0.49 0.68 1. 13 0.10
1982 0.65 0.65 0.86 1.17 0.31
1983 0.98 0.92 1.15 1. 23 0.64
1984 1.49 1. 32 1. 57 1. 33 1.15
1985 2.04 1. 75 2.00 1.43 1. 70
a
Includes user payments for permits, if issued. Otherwise, the
total user price is assumed paid to the crc manufacturers.
b
Assumes manufacturers' crc prices are as indicated by Table 1.3
for all years. A permit entitles the holder to use one weighted
pound of any CFC.
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ADJUST~ffiNTS IN CFC USE
A production quota prevents emissions by preventing growth in
aggregate annual CFC use.
Absent regulation, weighted CFC use would
accumulate to 2.3 billion pounds between 1980 and the end of 1985.
Thus,
between 1980 and the end of 1985, the policy would prevent about 13 per-
cent of cumulative use that would otherwise have occurred.
The production quota holds annual use constant only in the aggre-
gate.
Some individual uses grow, while others decline commensurately.
The annual mix of CFC use changes because final product demands grow at
different rates and because options for conserving CFCs differ among
users.
Table 2.2 shows patterns of expected use adjustments by year and
user category.
Annual use actually declines in flexible foams, sol-
vents, rigid packaging foams (TPS) , and CFC-12 retail food refrigera-
tion.
In mobile air conditioner servicing, CFC-12 annual use. grows, but
a little more slowly than it would in the absence of regulation.
~d
CFC-502 use for retail food refrigeration grows noticeably as that CFC
becomes a more heavily used substitute for CFC-12.
Under this section's
scenario, CFC purchases for the remaining categories--insulation and
other nonpackaging rigid foams, mobile air conditioner manufacturing,
chillers, home refrigeration, and miscellaneous uses--a1l grow at the
same rates they would have in regulation's absence.
The last two
columns in Table 2.2 summarize policy's effects on use.
Whereas the
penultimate column shows cumulative use under the production cap, the
final column shows what cumulative use would have been without regula-
tion.
-------
-15-
Table 2.2
PROJECTED CFC USE BY USER CATEGORY,
SCENARIO I: 1980-1985
(In millions of weighted pounds)
Unregu-
User Use Under Regulation lated
Category/ Cumu- Cumula-
CFC 1980 1981 1982 1983 1984 1985 lative tive Use
Flexible foam 46.8 35.7 31.6 27.1 17.1 11. 0 169.3 312.8
Solvents 60.3 61.0 56.2 49.7 47.5 45.4 320.1 416.5
Rigid foam
TPS 11.5 11.5 10.8 8.9 7.3 0.8 50.8 77.2
Insulation 72.3 78.3 84.9 91.9 99.6 107.9 534.9 534.9
Other 17.1 18.3 19.6 21.1 22.5 24.1 122.7 122.7
Mobil air
conditioning
Manufacturing 30.0 30.3 30.7 31.0 31.4 31.7 185.1 185.1
Servicing 47.6 49.0 50.3 51.5 52.4 53.3 304.1 309.2
Retail food
refrigeration
CFC-12 8.5 6.5 2.9 2.5 2.1 1.8 24.3 50.1
CFC-502 2.3 2.8 3.4 3.5 3.6 3.7 19.3 14.7
Chillers 13.7 14.3 15.0 15.7 16.4 17.2 92.3 92.3
Home refrig-
eration 5.6 5.8 5.9 6.1 6.3 6.4 36.1 36.1
Miscellaneous 25.3 27.4 29.6 32.1 34.7 37.5 186.6 186.5
a
TOTAL 341.0 341.0 341.0 341.0 341.0 341.0 2,046.0 2,338.6
a
Detail might not sum to totals due to rounding.
-------
-16-
RESOURCE COSTS
As CFC prices rise after 1980, resource costs rise also.
The price
increases encourage firms to adopt CFC-saving technologies.
Firms'
expenditures for this purpose measure the value of resources diverted
from other uses.
Under this section's scenario, annual resource costs
would approach sixty million dollars by the end of 1985.[1]
As Table 2.3 shows, not all users pay resource costs.
Some firms
do not have readily available alternative technologies--at least under
the assumptions of this scenario.
Included in this group are makers of
rigid foam insulation, mobile air conditioners, chillers, home refri-
geration devices, and miscellaneous CFC-using products.
In addition,
some firms do not implement technological alternatives in the policy's
early years.
These firms wait until CFC prices rise substantially
before making an adjustment.
Thus, for example, initial years' resource
costs are especially low for mobile air conditioner servicers'.
In the aggregate, discounted resource costs under this section's
scenario accumulate to 71 million dollars by the end of 1985.
Most of
the costs arise in the flexible foam, solvents, and TPS (packaging foam)
categories.
TRANSFER PAYMENTS
Whereas resource costs arise from firms' efforts to avoid CFCs,
transfer payments arise because firms pay more for CFCs they continue to
use.
Suppose, for example, a firm begins recycling CFC-11 when its
price rises by one dollar, thus reducing CFC use from 100 to just 80
[1] For further explanation of resource costs, see the appendix.
-------
-17-
Table 2.3
PROJECTED RESOURCE COSTS BY USER CATEGORY,
SCENARIO I: 1980-1985
(In $ million 1976)
. --_._~--- ______0
Resource Costs
User Category
1981
1982
1983
1984
1985
Cumu1ativea
Flexible foam
0.7
2.1
4.7
15.2
23.8
29.9
Solvents
0.1
2.0
6.4
11. 4
19.0
25.2
Rigid foam
TPS
Insulation
Othe r
O.Ob
0.3
1.5
3.2
13 .9
11. 7
Mobile air conditioning
Manufacturing
Servicing
~~;b
0.1
0.3
0.9
2.0
2.0
Retail food refrigeration 0.1
0.7
0.8
0.8
0.9
2.4
Chillers
Home refrigeration
Miscellaneous
Total
0.9
5.1
13.5
31.4
59.5
"11.0
aSum of annual resource costs, discounted to 1980 at 11 percent.
b
Positive, but less than 0.1 after rounding.
-------
-18-
pounds.
The recycling expense shows up as a resource cost in Table 2.3.
The additional 80 dollars paid for CFCs still in use represents a
transfer payment.
If the government sells permits at one dollar apiece,
the 80 dollars ends up in the U.S. Treasury.
If, instead, the CFC pro-
ducers raise their CFC-11 price by one dollar, the 80 dollars is added
to producer revenue.
But either way, user industries pay the added
expense. [2]
Estimated transfer payments are especially high under the assump-
tions of Scenario I.
According to the scenario, only CFC-conserving
technologies with well-known costs and effectiveness are ever employed
by CFC-using firms.
Many firms continue to use CFCs in large quantities
despite the production quota.
Consequently, CFC prices m~st rise sub-
stantially to clear the market, and many firms make large transfer pay-
ments.
Most user categories would face rapidly increasing transfer pay-
ments throughout the period, as Table 2.4 indicates.
The exceptions are
flexible foams, where methylene chloride substitution and CFC recovery
and recycle would be pervasive by 1985, and rigid packaging foams, where
pentane substitution also becomes pervasive.
In all categories, cumulative transfer payments exceed cumulative
resource costs.
For some users--those who make TPS rigid packaging
foams--transfer payments are just 22 percent larger than resource costs.
But for other categories--those with zero resource costs--transfers are
[2] For further explanation of transfer payments, see the appendix.
Ways to mitigate transfer payments under a production quota are the sub-
ject of a research task currently underway at the Rand Corporation under
EPA contract No. 68-01-6236.
-------
-19-
Table 2.4
PROJECTED TRANSFER PAYMENTS BY USER CATEGORY,
SCENARIO I: 1980-1985
(In $ million 1976)
User Category
1981
Flexible foam
3.7
Solvents
6.3
Rigid foam
TPS
Insulation
Other
1.2
8.1
1.9
Mobile air
conditioning
Manufacturing
Servicing
3.1
5.1
Retail food
refrigeration
1.0
Chillers
1.5
Home refrigeration
0.6
Miscellaneous
b
TOTAL
2.8
35.1
1982
TRANSFER PAYMENTS
1984
9.8
17.6
3.4
26.5
6.1
9.6
15.7
2.0
4.7
1.9
9.3
106.5
1983
17.3
31.9
5.7
58.9
19.6
19.9
33.0
3.8
10.1
3.9
20.5
218.4
19.7
54.5
8.4
114.3
25.8
36.0
60.2
6.5
18.9
7.2
39.8
1985
18.7
77 .2
1.4
183.1
40.9
53.9
90.5
9.3
29.2
10.9
391.3 578.8
63.7
a
Cumulative
48.1
125.0
14.3
255.8
57.8
80.8
134.7
15.1
42.2
16.1
89.1
879.1
NOTE: Transfer payment estimates are calculated prior to rounding
the permit price data to the nearest cent.
a
Sum of annual expenses, discounted to 1980 at 11 percent.
b
Detail might not sum to totals due to rounding.
-------
-20-
the only expense imposed by regulation.
In the aggregate, cumulative
transfer payments are twelve times as high as cumulative resource costs.
For each dollar spent to avoid CFC use, user industries together would
spend twelv~ dollars to buy CFC permits or otherwise pay higher CFC
prices due to regulation.
-------
-21-
III .
AN EXPANDED RESPONSE SCENARIO
Scenario II: In response to rising CFC prices, CFC-using in-
dustries not only exploit technologies already in limited use,
but also search out and implement existing technologies having
uncertain costs or effectiveness. On average, the added tech~
nologies prove to be as effective--and no more costly--than .
the better known ones. The technologies make products more
costly. but final product sales nevertheless grow at about the
rates expected prior to regulation. CFC-using firms remain in
business and new ones enter the growing final product markets.
In contrast with Scenario I, Scenario II recognizes that several
CFC-saving technologies of uncertain cost or effectiveness could be
drawn into use by rising CFC prices.[l]
Foods currently frozen by the
liquid fast freezing process could be frozen using non-CFC refrigerants.
Hospital supplies might be sterilized with recycled CFC-12--or without
the CFC.
Mobile air condition systems might be redesigned to require
smaller initial refrigerant charges.
Rigid foams for such products as
marine flotation devices might be "blown" with other chemicals,
And
some solvent applications other than cleaning and drying might prove
amenable to recycling or chemical substitution.
Many of these options
are known to be technologically feasible; indeed, some have been used
historically.
Unlike Scenario I, Scenario II assumes these options
would come into playas readily and effectively under CFC regulation as
the options we know more about.
More precisely, Scenario II analyzes behavior by three user groups.
By reference to the categories and subcategories identified in Table
1.2, the three groups are:
[1] For a detailed description of such technologies, see Palmer et
a!. (1980).
-------
-22-
Group A:
Flexible foams; solvent cleaning and drying; TPS rigid
foams; mobile air conditioner servicing; retail food
refrigeration.
Group B:
Rigid foam insulation; chillers; home refrigeration.
Group C:
"Other" solvents; "other noninsulation" rigid foams;
mobile air conditioner manufacturing; miscellaneous.
Group A's user categories have predictable technical responses to
rising CFC prices.
For this group, CFC use should exhibit a marked
degree of price response.
For example, in both Scenarios I and II, we
expect Group A's use to decline by about 55 percent if the permit price
reaches $2.81.[2]
In contrast, Group B is technologically unresponsive to higher CFC
prices in both Scenarios I and II.
CFC-conserving technical options for
Group B do not now exist or are 80 costly and time-consuming to imple-
ment they would not become important before the end of the decade.
Unless consumers refuse to pay higher prices for Group B's proclucts--a
possibility excluded by Scenario II--CFC use will be unaffected by regu-
lation.
Finally, all other user categories belong to Group C.
For this
group, technical options exist but are too rarely used for us to know
precisely how costly or effective they are.
Scenario I assumes Group C
firms are like those in Group B--unresponsive.
Scenario II assumes
[2] The most costly of the well-known technological options we ex-
amined in Scenario I would be induced at an estimated permit price of
$2.81.
-------
-23-
Group C firms are proportionately just as responsive to permit prices as
Group A.[3]
How plausible is Scenario II?
What we know about CFC-saving tech-
nologies in Group C tells us a 55 percent use reduction is credible if
CFC prices rise by as much as $2.81 per weighted pound.
But because we
know little about the costs of Group C's technologies, we cannot be sure
how extensively they will be used at lower CFC prices.
Scenario II
could be overly optimistic about Group C's response to small price
increases, and thus might underestimate resource costs in the policy's
early years.
While Scenario II might prove optimistic about the early years of
regulation, the scenario is surely too pessimistic about later years.
Even including Group C's technologies does not allow technology alone to
achieve the 1990 use restriction.
Like Scenario I, Scenario II ignores
consumer responses and new technologies that would help achieve the 1990
policy target.
Despite its possible shortcomings, Scenario II demonstrates a not-
able characteristic of production quota policy:
The availability of
low-cost technologies in a few user categories makes the policy less
costly to everyone.
CFC-saving technologies remove some of the demand
pressure on prices.
Consequently, prices rise more slowly in Scenario
II than in Scenario I.
High-cost technologies do not have to be
[3] Greater Group C responsiveness would lower costs below Scenario
II's outcomes. Suppose, for example, Group C stops using CFCs as soon
as the permit price reaches $0.01. Under this purely exploratory as-
sumption, total cumulative resource costs reach only $19.2 million, and
total cumulative transfer payments reach just $236.4 million. The per-
mit price would rise slowly to $0.84 in 1990.
-------
-24-
introduced as soon.
And in each year, both resource costs and annual
~ransfer payments are lower.
CFC PRICE OUTCOHES
Comparing Tables 2.1 and 3.1 reveals the price implications of
Scenario II's expanded response assumption.
Prices rise much more
slowly in the early part of the decade.
By 1985, Scenario II's permit
price reaches only 67 cents, compared with $1.70 for Scenario I.
Extremely high permit prices arise in Scenario II, but only near the end
of the decade--beyond the limit of Scenario I.
Table 3.1
ANNUAL EQUILIBRIUM PERMIT PRICES UNDER
THE EXPANDED RESPONSE SCENARIO II
(In $ 1976)
a
Total User Price Per CFC Pound
b
Year CFC -11 CFC-12 CFC-113 CFC"502 Permit Price
1980 $0.34 $0.41 $0.60 $1.11 $0.00
1981 0.40 0.46 0.64 1.12 0.06
1982 0.51 0.54 0.73 1.14 0.17
1983 0.64 0.65 0.85 1.17 0.30
1984 0.79 0.77 0.99 1.20 0.45
1985 1. 01 0.94 1.19 1.24 0.67
1986 1. 30 1.17 1.43 1. 29 0.96
1987 1.51 1. 33 1.60 1. 33 1.17
1988 1. 91 1. 65 1.94 1.41 1.57
1989 2.69 2.27 2.59 1.56 2.35
a
Includes user payments for permits, if issued. Otherwise, the
total user price is assumed paid to the CFC manufacturers.
b
Assumes CFC sales prices are as indicated in Table 1.3. A
permit entitles the holder to use one weighted pound of any regulated
CFC.
-------
-25-
ADJUSTMENTS IN CFC USE
Because Scenario II extends further into the future than Scenario
I, Table 3.2 shows a larger cumulative effect on aggregate CFC use than
does Table 2.2.
Relative to unregulated outcomes, the pulicy prevents
23 percent of cumulative use by the end of 1989.
Of course, between
1981 and 1985, Scenarios I and II show the same cumulative prevention.
But in Scenario II, we can observe annual prevention for later years as
well, reaching 40 percent in 1989.
The regulatory policy is the same
for either scenario, but Scenario II's outcomes are observable for a
longer period.
For years when both scenarios yield estimates, Scenario II differs
from Scenario I in user category outcomes.
Compare 1985 use in Table
3.2 with the end-year of Table 2.2.
Flexible foams, cleaning and drying
solvents, rigid foam packaging (TPS), and mobile air conditioner servic-
ing all use more CFCs under Scenario II.
The reason:
Under Scenario
II's expanded response assumption, "other" solvents, "other" rigid foam,
mobile air conditioner manufacturing, and miscellaneous user categories
all use less CFCs.
Implementation of CFC-saving technologies across
more user categories spreads the burden of meeting the overall use res-
triction.
Between 1981 and 1989, five of Table 3.2's user categories show
marked growth.
Three are members of Group B--user categories that will
grow despite higher CFC prices.
In addition, mobile air conditioner
servicing--a price-responsive member of Group A--grows because increased
CFC recycling does not offset growth in final product demand.
Finally,
CFC-502 use in retail food refrigeration grows because it is a less
-------
Table 3.2
PROJECTED CFC USE BY USER CATEGORY, SCENARIO II: 1980-1989
(In millions of weighted pounds)
Use Under Regulation
Cumulative
User CateRory 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Regulated Unregulated
Flexible foam 46.8 40.4 36.3 34.1 30.6 29.1 23.8 16.0 12.6 13.1 282.8 570.4
Solvents 60.3 60.6 59.6 56.3 52.7 47.6 45.1 44.0 40.5 35.5 502.2 780.5
Rigid foam
TPS 11.5 11. 7 11.6 11.4 10.8 9.4 8.6 8.2 5.6 0.0 88.8 141. 4 I
Insulation 72.3 78.3 84.9 91.9 99.6 107.9 116.9 126.6 137.2 148.6 1064.2 1064.2 N
Other 17.1 17.1 17.0 16.8 16.7 16.3 15.9 15.3 14.7 13.9 160.8 237.4 0'
I
Mobile air conditioning
Manufacturing 30.0 28.3 26.5 24.9 23.2 21.5 19.7 18.0 16.3 14.6 223.0 315.7
Servicing 47.6 49.0 50.5 51.9 53.3 54.7 56.0 57.4 58.5 59.5 538.4 549.9
Retail food refrigeration
CFC-12 8.5 7.3 4.9 2.5 2.1 1.8 1.5 1.3 1.1 0.9 31.9 82.5
CFC-502 2.3 2.6 3.3 3.5 3.7 3.8 3.9 4.0 4.1 4.2 35.4 25.6
Chillers 13.7 14.3 15.0 15.7 16.4 17.2 18.0 18.8 19.7 20.6 169.4 169.4
Home refrigeration 5.6 5.8 5.9 6.1 6.3 6.4 6.6 6.8 7.0 7.2 63.7 63.7
Miscellaneous 25.3 25.5 25.6 25.7 25.7 25.4 25.0 24.4 23.6 22.7 248.9 370.3
TOTALa 341. 0 341. 0 341. 0 341. 0 341. 0 341.0 341. 0 341. 0 341. 0 341. 0 3,410.0 4,371.6
aDetai1 may not sum to totals due to rounding.
-------
-27-
heavily weighted CFC that can economically be substituted for CFC-12
when CFC prices rise.[4]
Two user categories virtually eliminate CFC use by the end of 1989
in this scenario.
Makers of thermo formed polystyrene sheet (TPS rigld
foam) switch to pentane at high CFC prices.
Similarly. much of the
CFC-12 use in retail food refrigeration is replaced by CFC-502.
In both
cases, Scenario II assumes products are made by the same firms before
and after regulation, but regulation induces chemical substitution.
RESOURCE COSTS AND TRANSFER PAYMENTS
According to Table 3.3, Scenario II substantially modifies Scenario
I's estimated resource costs.
When both scenarios yield annual esti-
mates, total annual resource costs are lower in Scenario II.
In 1985,
for example, Scenario II's total is less than half as high as Scenario
I's total.
Scenario II also distributes resource costs among more user
categories.
Flexible foams, solvents, TPS rigid foams, and MAC servic-
ing all generate much lower annual resource costs under Scenario II;
Group C categories generate higher annual resource costs than in
Scenario I.
Scenario II also shows rising annual resource costs beyond 1985.
Because a longer time period is observable under Scenario II, all the
cumulative resource cost data in Table 3.3 exceed their counterparts
from Table 2.3.
[4] Price-induced CFC-502 substitution for CFC-12 in retail food
refrigeration results because the policy's CFC weighting creates incen-
tives to substitute less ozone-depleting CFCs for others.
-------
o
Table 3.3
PROJECTED RESOURCE COSTS BY USER CATEGORY, SCENARIO II: 1980-1989
(In $ million 1976)
Resource Costs
1981 1982 1983 1984 1985 1986 1987 1988 1989 Cumulative a
User Category
Flexible foam $0.3 $0.8 $1. 8 $3.6 $5.4 $11.1 $21. 3 $27.0 $28.2 $46.7
Solvents 0.1 0.6 2.2 4.8 9.6 14.6 19.6 29.1 44.8 58.5
Rigid foam O.Ob
TPS 0.1 0.3 0.7 1.8 2.9 3.7 8.2 18.2 15.8 I
Insulation O.Ob N
Other 0.2 0.5 1.0 2.0 3.4 5.4 8.0 11.8 14.9 00
I
Mobile air conditioning
Manufacturing O.lb 0.3b 0.8 1.4 2.6 4.2 6.4 8.9 12.3 17.3
Servicing 0'<1 0.0 0.1 0.1 0.3 0.7 1.1 2.0 3.5 3.4
Retail food refrigeration 0.0 0.3 0.8 0.8 0.9 0.9 0.9 0.9 0.9 3.6
Chillers
Home refrigeration
Miscellaneous 0.1 0.3 0.8 1.6 3.1 5.4 8.6 12.9 19.1 23.8
TOTAL 0.6 2.5 7.1 14.0 25.4 43.0 66.9 97.1 138.7 184.0 \
aSum of annual resource costs, discounted to 1980 at 11 percent.
b but less than 0.1 after rounding.
Resource costs positive,
-------
Table 3.4
PROJECTED TRANSFER PAYMENTS BY USER CATEGORY. SCENARIO II: 1980-1989
(In $ million 1976)
Transfer Payments
User Category 1981 1982 1983 1984 1985 1986 1987 1988 1989 Cumulative a
Flexible foam 2.6 6.3 10.2 13.7 19.5 23.0 18.7 19.8 30.9 77.4
Solvents 3.9 10.3 16.8 23.5 31.9 43.4 51.4 63.8 83.5 166.9
Rigid foam
TPS 0.7 2.0 3.4 4.8 6.3 8.3 9.6 8.8 0.0 24.6
Insulation 5.0 14.7 27.4 44.5 72.3 112.5 148.0 215.9 349.7 470.6 I
Other 1.1 3.0 5.0 7.4 10.9 15.3 18.0 23.2 32.9 58.2 IV
Mobile air conditioning '"
I
Manufacturing 1.8 4.6 7.4 10.4 14.4 19.0 21.1 25.7 34.4 71.1
Servicing 3.1 8.8 15.5 23.8 36.7 53.9 67.1 92.1 140.0 214.5
Retail food refrigeration 0.6 1.4 1.8 2.6 3.7 5.2 6.2 8.2 12.2 21.0
Chillers 0.9 2.6 4.7 7.3 11.5 17.3 22.0 31.0 48.6 70.4
Home refrigeration 0.4 1.0 1.8 2.8 4.3 6.4 8.0 11.0 16.9 25.5
Miscellaneous 1.6 4.4 7.7 11.5 17.0 24.0 28.5 37.2 53.3 91. 9
TOTALb 21.8 59.2 101.8 152.3 228.5 328.2 398.6 536.7 802.3 1,292.0
NOTE: Transfer payments are estimated prior to rounding permit price data to the nearest cent.
aSum of annual transfer payments, discounted to 1980 at 11 percent.
b .
Detail may not sum as totals due to rounding.
-------
-30-
Table 3.4 shows that Scenario II's transfer payment estimates also
differ from those of Scenario I.
Total annual transfer payments are
lower in Scenario II because CFC prices are lower in each year.
In
addition, Group C users have lower annual transfer payments because
their use of CFC-saving technologies in Scenario II allows them to avoid
some CFC expenditures.
Scenario II's cumulative transfer payments are higher than in
Scenario I.
This merely reflects the longer period observable under
Scenario II.
-------
-31-
IV.
~!ARKET-CLEARING SCENARIOS
Neither of the preceding sections' scenarios is complete.
Scenario
I seems sensible for the first few years, but cannot be extended beyond
1985.
Scenario II reasonably predicts expanded user response in the
mid-decade, but cannot be extended beyond 1989.
Neither scenario pro-
vides sufficient mechanisms to clear the CFC market in all years of the
policy.
To be plausible, a scenario should allow the CFC market to clear
every year.
Historically, economic markets have adjusted even to dwin-
dling supplies of precious nonrenewable resources.
The CFC regulation
studied here does not eliminate CFCs--it merely eliminates their growth.
Therefore, it is implausible to suppose the CFC market will not clear--
that demand will not equilibrate with supply at any price.
LIKELY SOURCES OF ADDED RESPONSE
Scenario II almost clears the 1990 market.
At a permit price of
$2.81--where the most costly analyzed technology would come into use--
Scenario II predicts 1990 aggregate CFC demand for 356.7 million
weighted pounds.
This figure exceeds the production cap by merely 15.7
million--Iess than five percent.
A modest degree of consumer response
or a few added technological responses would extend Scenario II through
1990.
Consumer response to higher final product prices will surely help
reduce CFC demand.
Contrary to the assumptions in Scenarios I and II,
consumers purchase fewer products at high prices than at low ones.
-------
-32-
Because regulation makes CFC-made products more expensive, fewer will be
sold than Scenarios I and II assume.
And lower final product sales
implies less CFC use.
Consumer response will affect some user industries more than oth-
ers.
Home refrigerator and freezer sales, for example, should hardly be
affected.
CFCs contribute so little to total production costs that even
high CFC prices will not cause much change in refrigerator or freezer
prices; and consumers cannot easily store perishables without refrigera-
tion.
Also, industries that substitute other chemicals for CFCs (or
otherwise avoid much CFC use) become less subject to consumer response.
For example, once a type of flexible foam is blown with methylene
chloride it becomes immune to further CFC price increases--and its purj
chasers will not face any further foam price increases due to CFC regu-
lation.
But there are some CFC-using industries susceptible to consumer
responses.
They will be greatest for products that:
(a) require a
fixed amount of CFC per unit; (b) use enough CFC per unit for CFC price
changes to affect production costs noticeably; and (c) have good substi-
tute products available to consumers.
According to this reasoning, the flexible foams still made with
CFCs at the 1990 permit price of $2.81 should experience some consumer
response.
Under Scenario II, these foams use 13.7 million weighted
pounds of CFC-11 in 1990, mostly in molded and slabstock applications
that do not appear amenable to methylene chloride conversion.
Because
CFC-11 currently accounts for at least five percent of total production
costs, a $2.81 permit price could substantially raise current production
costs and foam prices--at least 41 percent.
To avoid these high foam
-------
-33-
prices, customers could instead buy innerspring mattresses and rubber or
felt carpet underlay; furniture and auto seat makers could instead use
nonfoam cushioning materials.
Because Scenario II (as well as Scenario
I) ignores these consumer incentives and opportunities, it surely over-
states flexible foam CFC use.
Similarly, there should be some consumer response in the residen-
tial market for foam insulation.
Given current technology, this insula-
tion cannot be made without CFCs. [1]
CFCs' current share of total pro-
duction costs is about seven percent.
Thus, a permit price of $2.81
would raise production costs substantially--by at least 58 percent for
rigid urethane insulation and at least 38 percent for extruded polys-
tyrene board.
In residential structures, fiberboard sheathing makes a
reasonably good substitute for the rigid foams; in housing, rigid
urethane foam saves only about 15 percent on heating costs--and polys-
tyrene board saves even less--relative to fiberboard. [2]
Because home
builders would face incentives as well as opportunities to avoid foam
insulation at a 1990 permit price of $2.81, Scenario II's estimate of
37.3 million weighted pounds in residential use of rigid foam insulation
is surely too high.
A modest degree of consumer response in just the preceding two foam
applications would be sufficient to help clear the 1990 CFC market at
the $2.81 permit price.
Suppose, for example, a one percent increase in
[1] CFC recycling might be technologically feasible, but would be
prohibitively expensive even at a permit price near $3.00.
[2] Foam is a supplementary insulation material in residential
structures, and thus contributes less to energy savings than in other
insulation applications. See Palmer et al. (1980), Table 3.C.lO, p.
114.
-------
-34-
final product prices reduces flexible foams sales by one percent and
residential insulation sales by just one-half per~ent.[3]
Then the
1990 flexible foams use would reach only 8 million weighted pounds, and
the 1990 residential insulation use would reach only 27.4 million
weighted pounds. [4]
Together, these revised use figures would eliminate
the 15.7 million pounds by which Scenario II exceeds the production cap
in 1990 at $2.81.
Although anticipated consumer response in the foams categories
alone is sufficient to meet the 1990 constraint, other product areas
will probably also experience consumer response at high eFe prices.
For
example, customers could buy nonfoam packaging materials, cork buoys,
and inflatable flotation devices instead of using rigid foams.
Then
Scenario II's estimate of 13.9 million weighted pounds of "other" rigid
foam eFe use at the 1990 $2.81 permit price would be too high.
High eFe prices might also encourage technological responses not
anticipated by Scenario II.
In the miscellaneous products category,
Scenario II assumes technological responses would occur primarily in the
two largest subcategories--1iquid fast freezing and sterilants.
The
remaining miscellaneous products--warning devices, heat detectors, and
[3] Our literature review uncovered no previous studies estimating
elasticities of demand for either cushioning materials or insulation.
An elasticity of about minus one is not uncommon for consumer durables
having close substitutes, as is the case for cushioning foams. The
demand for insulation should be at least as elastic as we assume here.
Energy studies suggest the long-run energy demand elasticity lies
between -0.5 and -1.5. [See, for example, Nordhaus (1979) and Taylor
(1977).] Because insulation and energy are substitutes in producing home
"comfort," and because insulation is currently a small share of the to-
tal cost of producing comfort, a simple production model suggests insu-
lation demand should be at least as elastic as energy demand.
[4] Estimates assume fixed proportions in production and constant
arc elasticities throughout the consumer demand schedule.
-------
-35-
blowers and drain cleaners--use CFCs as propellants.
Such applications
expanded rapidly at a time when CFCs were receiving a clean toxicologic
bill of health relative to alternative chemicals.
Alternative ways to
make these products might be stimulated by high CFC prices.
If so, eVbn
the 22.7 million weighted pounds of miscellaneous use estimated for
Scenario II would be too high.
In summary, there are 87.6 million weighted pounds of CFC use pos-
tulated by Scenario II (at the $2.81 permit price in 1990) that might
show additional CFC demand adjustments.
Very modest consumer response
in the flexible foams and rigid insulating foams categories would reduce
use enough to meet the 1990 production constraint.
But additional
demand adjustment might also be observed for certain "other" rigid foams
and for the miscellaneous products.
Overall, an 18 percent use reduc-
tion (from 87.6 to 71.9 million weighted pounds) in the four categories
where some added adjustment could be expected would be just sufficient
to meet the 1990 production cap.
If the permit price reaches $2.81--
raising the CFC-ll price over 800 percent and the CFC-12 price over 500
percent--an 18 percent use reduction among the four categories is
likely.
CONSUMER RESPONSE EFFECTS ON RESOURCE COSTS AND TRANSFER PAYMENTS
Other things equal[5] , consumer response reduces aggregate resource
[5] Throughout this discussion and the remainder of this document,
we assume the production cap policy does not include any provision to
ameliorate transfer payments. When we relax the previous section's as-
sumption of zero consumer response, it becomes possible for transfer
payment compensation policies to affect market outcomes (permit prices
and final product prices in particular). By assuming from here on that
there is no compensation policy, we are holding "other things equal.".
-------
-36-
costs and aggregate transfer payments.
When consumers buy fewer CFC-
made products, less CFC is demanded by industry, and permit prices are
lower than otherwise.
Lower permit prices mean firms do not employ as
many high-cost technologies and so resource co~ts are lower.
Lower per-
mit prices also translate directly into lower transfer payments.
In meeting the regulatory limitation on CFC use, lower-cost actions
by consumers substitute for higher-cost actions by firms.
The actions
by consumers do impose some costs on them.
For example, the consumer
who chooses fiberboard sheathing instead of CFC foam insulation must pay
higher fuel costs.
We include these costs to consumers in our resource
cost measures. [6]
Nevertheless, consumer response lowers our measures
of aggregate resource costs because consumer actions are less costly
than the actions firms would otherwise have to undertake to meet the
production cap.
The consumers who respond to higher final product prices do so in
order to improve their own welfare.
The consumer who chooses fiberboard
sheathing (and pays higher heating costs), for example, does so in order
to avoid high prices for foam insulation.
Though final product substi-
tution imposes some costs on consumers, they make the choice voluntarily
because it is less costly than the alternative--higher costs for the
CFC-made products.
[6] Our methodology automatically includes the net resource costs
due to consumer response. See the appendix.
-------
-37-
Table 4.1
EQUILIBRIUM PERMIT PRICES UNDER ALTERNATIVE SCENARIOS
(1976 dollars per weighted pound)
Year Scenario III Scenario IV Scenario V Scenario VI
1980 $0.00 $0.00 $0.00 $0.00
1981 0.06 0.06 0.10 0.09
1982 0.17 0.13 0.31 0.28
1983 0.30 0.27 0.64 0.45
1984 0.45 0.35 1.15 0.68
1985 0.67 0.55 1. 70 0.94
1986 0.96 0.81 2.81 1.16
1987 1.17 1. 06 2.81 1. 35
1988 1. 57 1.18 2.81 1. 62
1989 2.35 1.64 2.81 1. 93
1990 2.81 2.81 2.81 2.80a
a
Differs from $2.81 due to computations based on a piecewise-
linear approximation to the 1990 CFC demand curve.
SOME ALTERNATIVE MARKET-CLEARING SCENARIOS
Figure 4.1 compares four market-clearing scenarios with Scenarios I
and I!.
(For convenience, Table 4.1 numerically reports the figure's
annual permit prices for the four new scenarios.)
Each market-clearing
scenario makes different assumptions about how and when available
market-clearing responses come into play:
Scenario III:
Uses Scenario II's expanded technological responses,
but adds some consumer response only in 1990 to help
clear that year's market.
Scenario IV:
Uses Scenario II's technological responses, but adds
some consumer response in all years, 1981 through
1990.
Scenario V:
Uses Scenario I through 1985, adding just enough
technological and consumer response to clear the
-------
3.00
:c
c:
::J
8.
]
....
~ 2.00
'Q)
~
...
CI)
C.
II>
...
~
"0
"0
CD
....
en
.-
-
.~ 1.00
...
c.
....
'E
...
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Q.
-38-
o
1985
Year
1990
Fig. 4.1-Equilibrium permit prices under alternative scenarios
-------
-39-
market each year after 1985 at the highest estimated
permit price.
Scenario VI:
Assumes a gradual transition from Scenario I's rela-
tively unresponsive 1980 CFC demand patterns to the
1990 demand patterns of Scenarios III through V.
The more extensive are responses in a given year, the lower is a
scenario's permit price for that year in Figure 4.1 (and Table 4.1).
A scenario with higher permit prices also has higher total cumula-
tive resource costs and transfer payments.
All the market-clearing
scenarios prevent 24 percent of unregulated cumulative CFC use and emis-
sions.
But Table 4.2 shows high total cumulative costs for Scenario V
and much lower costs for Scenario IV, with Scenarios III and VI in the
middle of the cost range.
Scenario III:
A Pessimistic View of Consumer Response
Scenario III illustrates how a modest degree of consumer response
can extend Scenario II through 1990.
The annual outcomes for Scenarios
II and III are identical through 1989.
Through added consumer response,
Scenario III goes on to clear the 1990 market, generating $170 million
in 1990 resource costs and nearly $1 billion in 1990 transfer payments.
Because Scenario III outcomes can be estimated for an additional year,
the cumulatives are higher than for Scenario II.
Although Scenario III reasonably assumes consumers will respond to
higher final product prices in 1990, the scenario arbitrarily assumes
consumers will respond only in 1990--not in earlier years.
The scenario
is optimistic about Group C industries' technological responses early in
the decade, but exceedingly pessimistic about consumer demand response
until the end of the decade.
-------
-40-
Tab 1e 4. 2
AGGREGATE RESOURCE COSTS AND TRANSFER PAYMENTS,
SCENARIOS III, IV, V, VI: 1981 TO 1990
(In $ million 1976)
Scenario
Year III IV V VI
ResoUX'ae Costs
1981 0.6 0.5 0.9 0.8
1982 2.5 2.1 5.1 4.1
1983 7.1 6.0 13.5 10.2
1984 14.0 12.1 31. 4 20.2
1985 25.4 21.6 59.5 34.7
1986 43.0 36.1 85.4 53.7
1987 66.9 57.2 104.1 76.4
1988 97.1 84.2 124.3 104.6
1989 138.7 119.6 146.3 138.0
1990 170.1 170.1 180.8 182.7
Cumulative a 243.5 217.4 341.6 274.7
Trona fer Payments
1981 21. 8 19.5 35.1 32.3
1982 59.2 45.8 106.5 97.1
1983 101. 8 93.2 218.4 152.0
1984 152.3 120.2 391. 2 231.4
1985 228.5 186.9 578.8 321. 3
1986 328.3 275.2 958.2 395.9
1987 398.6 360.5 958.2 460.4
1988 536.7 401. 8 958.2 552.4
1989 802.3 557.8 958.2 659.6
1990 958.2 958.2 958.2 956.4
Cumulative a 1629.4 1363.5 2979. 3 1829.8
NOTE: Transfer payments are estimated prior
to rounding permit prices to the nearest cent.
a
Sum of annual resource costs and transfer
payments, discounted to 1980 at 11 percent.
-------
-41-
Scenario IV:
An Optimistic View of Consumer Response
Scenario IV is optimistic about both technological and consumer
responses.
Scenario IV makes the same technological-response assump-
ti0ns as Scenario II, and the same 1990 consumer-response assumptions as
Scenario II I .
But Scenario IV a1so assumes consumers will be just as
responsive to high final product prices in all prior years as they are
in 1990.
In short, Scenario IV optimistically assumes both firms and
consumers can adjust quickly to the changing market conditions caused by
CFC regulation.
Scenarios V and VI:
Two Transition Scenarios
In contrast with Scenario IV, Scenario V is very pessimistic about
both technological and consumer response.
Through 1985, Scenario V uses
Scenario I's "high cost" CFC demand assumptions.
After 1985, Scenario V
assumes that technological responsiveness increases just enough to clear
each year's market at the highest estimated permit price through 1989
and that no consumer responsiveness occurs until 1990.
Thus, Scenario V
allows for a transition from the very cautious 1980 demand patterns of
Scenario I to the more responsive 1990 demand patterns of Scenarios III
and IV.
But Scenario V assumes the transition is slow to develop and
minimal in every year.
Scenario VI also assumes a transition from the 1980 Scenario I
demand patterns to the 1990 ones of Scenarios III through V.
But rela-
tive to Scenario V, Scenario VI's transition starts earlier, and
-------
-42-
proceeds at a more uniform rate.
Scenario VI recognizes that firms and
consumers take time to adjust fully to the new market environment
presented by CFC regulation.
But the scenario presumes the adjustment
process starts right away, as soon as CFC prices begin to rise.
Of the four market-clearing scenarios, the last two appear espe-
cially pertinent to decisionmaking.
Scenario V generates the highest
plausible estimate of regulation's costs, given the available data.
If
CFC regulation is justified even at Scenario V's high costs, the regula-
tion would be justified under the lower costs of any of the other
scenarios.
However, Scenario V is exceedingly pessimistic.
It should
be interpreted as a "worst case" unlikely to be faced in reality.
Even
without assuming that totally new technologies will be developed or that
consumers and firms will rapidly respond to higher prices, Scenario VI
demonstrates that regulation's resource costs could be 20 percent
lower--and transfer payments could be 39 percent lower--than Scenario V
predicts.
For planning purposes, Scenario VI poses reasonable expecta-
tions for the future, while Scenario V places an upper bound on how
costly regulation might be.
DETAILED OUTCOMES UNDER SCENARIO V
As Table 4.3 shows, CFC prices tend to stabilize after 1985 in
Scenario V. [7]
Prior to 1985, Scenario V matches Scenario I; both
scenarios include only Group A's technological responses until they are
exhausted.
After 1985, Scenario V combines two price assumptions, a
[7] Slight adjustments in the CFC-113 price after 1985
assumption of economies of scale in this CFC's production.
pendix.
reflect our
See the ap-
-------
-43-
Table 4.3
ANNUAL EQUILIBRIUM CFC AND PERMIT PRICES,
SCENARIO V: 1980 TO 1990
(In $ 1976)
Total a
User Price per CFC Pound
Permit
Year CFC-11 CFC-12 CFC-113 CFC-502 Priceb
1980 $0.34 $0.41 $0.60 $1. 11 $0.00
1981 0.44 0.49 0.67 1.13 0.10
1982 0.65 0.65 0.86 1.17 0.31
1983 0.98 0.92 1.15 1. 23 0.64
1984 1.49 1. 32 1.56 1. 33 1.15
1985 2.04 1. 75 2.00 1. 43 1. 70
1986 3.15 2.63 2.90 1.64 2.81
1987 3.15 2.63 2.92 1.64 2.81
1988 3.15 2.63 2.94 1.64 2.81
1989 3.15 2.63 2.97 1.64 2.81
1990 3.15 2.63 2.96 1.64 2.81
a
Includes user payments for permits, if issued.
Otherwise, the total user price is assumed paid to
the CFC manufacturers.
b
Assumes manufacturers' CFC prices are as indi-
cated by Table 1.3 for all years. A permit entitles
the user to use one weighted pound of any CFC.
-------
-44-
reasonable one and a pessimistic one.
The reasonable one is that the
market will clear at the $2.81 permit price in 1990.
The pessimistic
assumption is that the market will not clear at lower permit prices
between 1985 and 1990.
The detailed outcomes of Tables 4.4 through 4.6 result from
Scenario V's specific assumptions about how responses are distributed
among user categories.
Though Scenario V is more pessimistic about
technological response than Scenario II, both scenarios distribute
responses the same way.
For 1980 through 1985, Scenario V assumes no
Group C response.
For 1985 through 1989, Scenario V shows less Group C
response than Scenario II, but both scenarios distribute the response
among Group C users in proportion to their baseline (unregulated) use.
By 1990, Scenarios V and II share the same assumptions about Group C
response.
Scenario V assumes consumer responses occur only in 1990 and only
in flexible foams and residential foam insulation.
All of the resource
costs attributable to product-substitution by consumers shows up in the
estimates for the product areas where consumer response occurs.
As expected, total annual resource costs are higher under Scenario
V than under any other scenario, as illustrated by Table 4.5.
From 1986
to 1990, resource costs gradually increase for the Group C users as they
become more responsive to higher CFC prices.
Consistent with the
assumptions about consumer responses, Table 4.5 shows large increases in
resource costs in 1990 for flexible foams and insulation.
Because of Scenario V's high equilibrium permit prices, Table 4.6
shows higher transfer payments than under Scenario II for virtually
-------
Table 4. 4
PROJECTED CFC USE BY USER CATEGORY.
SCENARIO V: 1980. TO 1990
(In millions of weighted pounds)
Use Under Regulation
Cumulative
User Category 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Regulated Unregulated
Flexible foam 46.8 35.7 31.6 27.1 17.1 11.0 11.5 12.0 12.6 13.1 8.0 226.5 641. 9
Solvents 60.3 61.0 56.2 49.7 47.5 45.4 39.9 38.0 35.8 33.5 34.2 501.5 884.6
Rigid foam I
TPS 11.5 11.5 10.8 8.9 7.3 0.8 0.0 0.0 0.0 0.0 0.0 50.3 159.3 .I"
l/1
Insulation 72.3 78.3 84.9 91. 9 99.6 107.9 116.9 126.6 137.2 148.6 151.1 1215.3 1225.2 I
Other 17.1 18.3 19.6 21.1 22.5 24.1 22.7 19.9 16.8 13.6 14.4 210.1 271.4
Mobile air conditioning
Manufacturing 30.0 30.3 30.7 31.0 31.4 31.7 28.7 24.1 19.6 15.2 14.3 287.0 349.3
Servicing 47.6 49.0 50.3 51.5 52.4 53.3 54.5 56.1 57.8 59.5 61.3 593.3 614.9
Retail food refrigeration
CFC-12 8.5 6.5 2.9 2.5 2.1 1.8 1.5 1.3 1.1 0.9 0.8 29.9 90.5
CFC-502 2.3 2.8 3.4 3.5 3.6 3.7 3.8 4.0 4.1 4.2 4.4 39.8 28.5
Chillers 13.7 14.3 15.0 15.7 16.4 17.2 18.0 18.8 19.7 20.6 21.6 191. 0 191.0
Home refrigeration 5.6 5.8 5.9 6.1 6.3 6.11 6.6 6.8 7.0 7.2 7.4 71.1 71.1
Miscellaneous 25.3 27.4 29.6 32.1 34.7 37.5 36.3 32.7 28.4 23.5 23.7 331. 2 426.0
TOTALa 341.0 341. 0 341. 0 341. 0 341.0 341. 0 341. 0 341. 0 341. 0 341. 0 341. 0 3751. 0 4954.3
aDetai1may not sum to totals due to rounding.
-------
Table 4.5
PROJECTED RESOURCE COSTS. BY USER CATEGORY,
SCENARIO V: 1981 TO 1990
(In $ million 1976)
Resource Costs
User Category 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Cumu1ativea
Flexible foam 0.7 2.1 4.7 15.2 23.8 24.9 25.9 27.0 28.2 37.4 91.5
Solvents 0.1 2.0 6.4 11.4 19.0 33.8 39.2 45.1 51.5 56.1 121. 6
Rigid foam O.Ob
TPB 0.3 1.5 3.2 13.9 16.0 16.7 17.4 18.2 19.0 49.6
Insulation 13.9 4.9 I
Other 1.8 4.8 8.2 12.0 13.7 16.4 ~
Mobile air conditioning 0"-
I
Manufacturing O~Ob 2.3 5.7 9.1 12.6 13.6 17.6
Servicing 0.1 0.3 0.9 2.0 2.9 3.1 3.3 3.5 3.7 9.2
Retail food refrigeration 0.1 0.7 0.8 0.8 0.9 0.9 0.9 0.9 0.9 0.9 4.3
Chillers
Home refrigeration
?'Usce11aneous 2.9 7.7 13.2 19.5 22.5 26.5
TOTALc 0.9 5.1 13.5 31.4 59.5 85.4 104.1 124.3 146.3 180.8 341. 6
aSum of annual resource costs, discounted to 1980 at 11 percent.
b .
Resource costs positive, but less than 0~1 after rounding.
CDetail may not sum to totals due to rounding.
-------
Table 4.6
PROJECTED TRANSFER PAYMENTS 'BY USER CATEGORY.
SCENARIO V: 1981 TO 1990
(In $ million 1976)
Transfer Payments
User Category 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Cumulativea
Flexible foam 3.7 9.9 17.3 19.7 18.7 32.4 33.8 35.3 36.9 22.5 119.3
Solvents 6.3 17.6 31.9 54.5 77.1 112.2 106.7 100.6 94.1 96.1 350.6
Rigid foam
TPS 1.2 3.4 5.7 8.4 1.4 0.0 0.0 0.0 0.0 0.0 14.3 I
Insulation 8.1 26.5 58.9 114.3 183.1 328.1 355.6 385.2 417.4 424.6 1082.3 ~
Other 1.9 6.1 13.5 25.8 40.9 64.8 57.7 49.7 40.8 40.5 172.0 ......
I
Mobile air conditioning
Manufacturing 3.1 9.6 19.9 36.0 53.9 80.6 67.8 55.1 42.7 40.2 211. 3
Servicing 5.0 15.7 33.0 60.2 90.5 152.9 157.5 162.3 167.2 172.2 488.7
Retail food refrigeration 1.0 2.0 3.8 6.5 9.3 15.0 14.8 14.6 14.6 14.6 47.4
Chillers 1.5 4.7 10.1 18.9 29.2 50.5 52.9 55.4 58.0 60.7 162.8
Home refrigeration 0.6 1.8 3.9 7.2 10.9 18.6 19.1 19.7 20.2 20.8 59.0
Miscellaneous 2.8 9.3 20.5 39.8 63.7 102.0 91. 7 79.8 66.1 66.6 271. 7
TOTAL 35.1 106.5 218.4 391. 2 578.8 958.2 958.2 958.2 958.2 958.2 2979.3
NOTE: Transfer payments are estimated prior to rounding permit price data to the nearest cent.
aSum of annual transfer payments. discounted to 1980 at 11 percent.
b
Detail may not sum to totals due to rounding"
-------
-48-
every user category--even those which use considerably fewer CFCs. 'The
sole exception is thermoformed polystyrene sheet products.
Beginning in
1985, TPS foam makers avoid high transfer payments by using pentane
instead of CFC-12.
But for all other user categories, even low use lev.
els generate high transfer payments at Scenario V's high permit prices.
DETAILED OUTCOMES UNDER SCENARIO VI
Because Scenario VI is more optimistic about the economy's ability
to adjust to rising CFC prices, the estimated economic impacts of the
production cap are less than under Scenario V.
Estimated Scenario VI
outcomes appear in Tables 4.7 through 4.10.
While CFC p,rices under Scenario VI reach the same 1990 levels as
under Scenario V, they do so more gradually.
By 1985, for example,
Scenario VI's prices of CFC-ll, CFC-12, and CFC-113 are all at least 25
percent lower than in Scenario V.
Relative to Scenario V, the lower permit prices of Scenario VI
result from earlier technological responses by Group C firms and earlier
consumer responsiveness for flexible foams and residential foam insula-
tion.
Scenarios V and VI share the same assumptions for 1980 and 1990,
but Scenario VI assumes the transition to 1990's greater technological
and consumer responses occurs gradually over the entire decade.
Table 4.9 verifies that lower permit prices translate into lower
overall resource costs.
For example, Scenario VI's total resource costs
in 1985 are 37 percent below those for Scenario V.
But by 1990, both
scenarios show about the same total resource costs.
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-49-
Table 4.7
ANNUAL EQUILIBRIUM CFC AND PERMIT PRICES,
SCENARIO VI: 1980 TO 1990
Total User Price Per CFC Pounda
(In $ 1976)
Year
CFC-ll
CFC-12
CFC-1l3
CFC-502
Permitb
Price
1980 $0.34 $0.41 $0.60 $1.11 $0.00
1981 0.43 0.48 0.67 1.13 0.09
1982 0.62 0.63 0.83 1.16 0.28
1983 0.79 0.77 0.99 1.20 0.45
1984 1.02 0.95 1.19 1.24 0.68
1985 1.28 1.15 1.40 1.29 0.94
1986 1.50 1.33 1.58 1.33 1.16
1987 1. 69 1.48 1. 74 1.37 1.35
1988 1.96 1.69 1.97 1.42 1. 62
1989 2.27 1.93 2.23 1.48 1.93
1990 3.14 2.62 2.95 1.64 2.80
a
Includes user payments for permits, if issued. Otherwise,
the total user price is assumed paid to the CFC manufacturers.
b
Assumes CFC sales prices are as indicated in Table 1.3. A
permit entitles the holder to use one weighted pound of any CFC.
-------
Table 4.8
PROJECTED CFC USE BY USER CATEGORY,
SCENARIO VI: 1980 TO 1990)
(In millions of weighted pounds)
Use Under Regulation
User Cate or 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990a 1ated
Flexible foam 46.8 36.4 33.8 29.1 27.3 22.6 16.8 10.3 10.1 9.7 8.1 251. 0 641. 9
Solvents 60.3 61.1 57.1 53.1 48.8 46.8 45.7 44.6 41.9 39.2 34.1 532.7 884.6
Rigid foam
TPS 11.5 11.5 11.0 10.3 9.0 8.3 7.9 7.4 3.9 0.0 0.0 80.8 159.3
Insulation 72.3 78.3 84.7 91.7 99.0 106.8 115.1 124.0 133.2 142.9 151.1 1199.1 1225.2 I
VI
Other 17.1 18.1 18.9 19.3 19.2 18.9 18.3 17.7 16.5 15.4 14.4 193.8 271.4 0
Mobile air conditioning I
Manufacturing 30.0 30.0 29.5 28.5 26.8 24.8 22.7 20.8 18.4 16.1 14.2 261. 8 349.3
Servicing 47.6 49.0 50.3 51. 7 53.0 54.3 55.7 57.1 58.4 59.6 61.3 598.0 614.9
Retail food refrigeration
CFC-12 8.5 6.7 3.0 2.5 2.1 1.8 1.5 1.3 1.1 0.9 0.8 30.2 90.5
CFC-502 2.3 2.8 3.4 3.5 3.6 3.7 3.8 4.0 4.1 4.2 4.4 39.8 28.5
Chillers 13.7 14.3 15.0 15.7 16.4 17.2 18.0 18.8 19.7 20.6 21.6 191. 0 191.0
Home refrigeration 5.6 5.8 5.9 6.1 6.3 6.4 6.6 6.8 7.0 7.2 7.4 71.1 71.1
Miscellaneous 25.3 27.0 28.4 29.5 29.6 29.4 28.7 28.2 26.6 25.0 23.6 301.3 426.0
TOTAL b 341. 0 341.0 341.0 341.0 341. 0 341.0 341.0 341.0 341.0 341.0 341. 0 3751.0 4954.3
aOutcomes for 1990 differ slightly from Scenario V due to piecewise linear approximation of Group C demand schedules.
b sum to totals due to rounding.
Detail may not
-------
Table 4.9
PROJECTED RESOURCE COSTS BY USER CATEGORY,
SCENARIO VI: 1981 TO 1990
(In $ million 1976)
Resource Costs
User Category 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990a Cumulative b
Flexible foam 0.6 1.4 3.5 5.4 10.4 17.9 27.1 29.1 31,5 37.3 74.7
Solvents 0.1 1.6 4.1 8.3 12.3 16.6 21.6 29.6 39.0 56.7 84.4
Rigid foam
TPS O.Oc 0.2 0.7 1.7 2.7 3.5 4.8 10.9 18.2 19.0 26.2
Insulation 0.0 O.Oc 0.1 0.2 0.5 1.0 1.8 3.2 5.5 13.9 10.4 I
Other O.Oc 0.1 0.3 0.9 1.9 3.4 5.0 7.8 10.9 14.1 18.8 U1
~
Mobile air conditioning I
Manufacturing O.Oc 0.1 0.4 1.3 2.6 4.2 5.9 8.6 11.3 14.1 21.0
Servicing O.Oc 0.1 0.1 0.3 0.6 1.0 1.4 2.1 3.3 3.7 5.4
Retail food refrigeration 0.1 0.7 0.8 0.8 0.9 0.9 0.9 0.9 0.9 0.9 4.3
Chillers
Home refrigeration O~Ob
Miscellaneous 0.1 0.4 1.4 3.0 5.4 8.0 12.5 17.6 23.1 30.3
d
TOTAL 0.8 4.1 10.2 20.2 34.7 53.7 76.4 104.6 138.0 182.7 274.7
aOutcomes for 1990 differ slightly from Scenario V due to piecewise
schedules.
bSum of annual resource costs, discounted to 1980 at 11 percent.
cResource costs positive, but less than 0.1 after rounding.
d
Detail may not sun> to totals due to rounding.
linear approximation of Group C demand
):>
--. :::= ~~ ~ ;:~~
~2 ~-: ?: ~~> ~:~
~ GJ ~j
r...)
C\)
,'--
? -
c:.? CJ ""-
'leI (' -1 j"-
t ", (/~, r~,,~
2~ ;~ ; ':~
~:~.: \~c.-' ~4J
Q ., '..)
-------
Table 4.10
PROJECTED TRANSFER PAYMENTS BY USER CATEGORY,
SCENARIO VI: 1981 TO 1990
(In $ million 1976)
Transfer Payments
User Category 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990a Cumulative b
Flexible foam 3.4 9.6 13.0 18.6 21.3 19.5 13.9 16.4 18.8 22.7 84.9
Solvents 5.8 16.~ 23.6 33.1 44.1 53.0 60.1 67.8 75.9 95.7 233.8
Rigid foam
TPS 1.0 3.1 4.6 6.1 7.8 9.2 10.0 6.3 0.0 0.0 28.0 I
Insulation 7.4 24,,1 40.8 67.2 100.6 133.6 167.4 215.9 276.4 423.6 663.0 \.J1
Other 1.7 5.4 8.6 13.0 17.3 21.3 24.0 26.8 29.7 40.4 91. 7 N
I
Mobile air conditioning
Manufacturing 2.8 8.4 12.7 18.2 23.4 26.4 28.1 29.8 31.2 39.8 111.3
Servicing 4.6 14.3 23.0 36.0 51.2 64.7 77.1 94.6 115.4 171. 9 305.2
Retail food refrigeration 0.9 1.8 2.7 3.9 5.2 6.2 7.1 8.4 10.0 14.6 29.4
Chillers 1.-4 4.3 1.0 11.2 16.2 20.9 25.4 32.0 39.9 60.6 101.0
Home refrigeration 0.5 1.7 2.7 4.2 6.1 7.7 9.2 11.3 13.9 20.8 36.4
Miscellaneous 2.6 8.1 13.1 20.1 27.7 33.4 38.0 43.1 48.3 66.2 145.1
TOTAL c 32.3 97.1 152.0 231. 4 321. 3 395.9 460.4 552.4 659.6 956.4 1829.8
NOTE: Transfer payments are estimated prior to rounding permit prices to the nearest cent.
aTransfer payments for 1990 differ slightly from Scenario V, due to slightly lower equilibrium permit price.
b
Sum of annual transfer payments, discounted to 1980 at 11 percent.
CDetail may not sum to totals due to rounding.
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-53-
The distribution of resource costs differs between Scenario V and
Scenario VI.
For Group A firms, Scenario VI uniformly predicts lower
resource costs from 1981 through 1989.
These lower costs are partly
offset by higher resource costs among Group C firms and in flexible and
insulating foams.
Relative to Scenario V, Scenario VI assumes Group C
firms and purchasers of flexible and insulating foams can partly avoid
high transfer payments by incurring some added resource costs.
Table 4.10 shows that Scenario VI's transfer payments are dramati-
cally less than in Scenario V in nearly all user categories.
For 1985
through 1987, Scenario VI's lower permit prices make it advantageous for
TPS foamers to continue some CFC use despite high transfer payments.
Total cumulative transfer payments are nearly 40 percent less in
Scenario VI than in Scenario V.
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-54-
V.
OTHER MEASURES OF POLICY EFFECTS
This section translates the cost estimates of previous sections
into other measures of policy effects:
consumer prices, competitiveness
of small businesses, plant closures and worker unemployment, and energy
implications.
As indicated below, the effects examined here correspond
to the cost outcomes of Scenarios V or VI.
Effects for the other plau-
sible scenarios--III and IV--lie within the range of outcomes for
Scenarios V and VI.
CONSUMER PRICE EFFECTS
For most products consumers buy, the price effects of a CFC produc-
tion cap will be very small, even under Scenario V's high-cost assump-
tions and even for the last years of the decade.
The largest percentage increases in product prices can be expected
for certain of the CFC-blown plastic foams.
Section IV explained that a
permit price of $2.81 could increase some foam prices substantially--as
much as 41 percent for some flexible urethane foams and perhaps 38 to 58
percent for some foam insulation.
However, such large increases will
not be the norm.
For many foam products, producers can avoid much of
regulation's impact by reducing CFC use.
For example, small and
medium-sized flexible urethane foam plants would convert most of their
output to methylene chloride long before the permit price reaches $2.81.
Price increases will be far less for these foam products--perhaps 10 to
20 percent by the late 1980's.
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-55-
In many cases the effects of foam price increases on the prices of
goods consumers buy will be quite small.
Many foams are intermediate
products used in automotive seats or to insulate the walls of a home
refrigerator or freezer.
Because the foam accounts for only a small
fraction of the total costs of such consumer products, the consumer
price increases due to higher foam prices will typically be two percent
or less.
Even in such products as furniture, where foam cushions
comprise 10 to 15 percent of production costs, consumer product prices
will generally increase less than 5 percent.
For TPS foam products, price increases should be less--perhaps much
less--than 25 percent.
According to some industry estimates of the cost
of converting to pentane blowing agents, the prices of TPS meat trays,
egg cartons, and fast food containers could rise 20 to 25 percent.
But,
as noted in Palmer et al. (1980), pentane conversion could be less
costly than our scenarios assume--and so TPS foam product prices might
only rise 10 to 12 percent.
Because pentane conversion occurs by mid-
decade in our scenarios, these price increases would be observed by
then.
Below, in our discussion of plant closures and worker layoffs, we
explain that TPS foams compete with nonfoam packaging materials, such as
paper and cardboard.
It i~ possible that foam purchasers will select
alternative packaging materials long before TPS foam prices rise as much
as our scenarios predict.
If so, final product consumers will not
experience the full price increases estimated above.
In all the refrigeration products--chillers, mobile air condition-
ers, home appliances, and retail food refrigeration systems--higher CFC
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-56-
prices would cause only small percentage increases in consumer product
prices.
Refrigerant costs are currently under five percent of final
product costs.
Even a $2.81 permit price would raise refrigerant costs
to less than 6.5 times today's levels.
Consequently, higher refrigerant
prices would raise final product costs less--typica1ly much 1ess--than 3
percent.
Price effects for products made with CFC solvents would also be
very small.
Solvents currently account for less than one percent of the
production costs for electronics components.
A five-fold increase in
solvents costs (caused by a $2.81 permit price) would raise electronics
product prices less than five percent even if firms could not use a1ter-
native solvents.
Solvent substitution possibilities make the likely
final product price effect even smaller.
Information about the miscellaneous products category is too scant
for us to compute price effects for those products.
For a general dis-
cuss ion of the markets for these products and their likely responses to
higher CFC prices, see Palmer et al. (1980).
EFFECTS ON SMALL BUSINESSES
The production cap policy is not inherently biased against small--
or large--firms.
Under a production cap policy, businesses of all sizes
pay the same permit prices.
Historically. firms that made large CFC
purchases have sometimes received volume discounts.
Discounting might
well continue under regulation.
Nevertheless, the change in CFC user
prices because of regulation should be approximately the same for large
and small purchasers.
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-57-
With few exceptions, the ability to cope with higher prices is not
dependent on the size of a firm.
Especially successful firms will be
those that make timely management decisions and have good working rela-
tionships with employees, suppliers, and bUjers.
These characteristics
appear in small as well as large firms.
Even very small firms typically
belong to trade associations and distribution networks that convey
information for decisionmaking.[l]
And research shows that small firms
are at least as quick as larger ones to find and implement new cost-
saving technologies. [2]
Firms of different sizes typically have the
same opportunities to deal successfully with higher CFC prices.
One notable exception we have identified arises in the flexible
foam industry.
One way to respond to higher CFC prices is recovery and
recycling, which requires investment in capital equipment.
At present,
there seems to be little variation in the equipment available to plants
of different sizes.
Therefore, the cost of using recovery equipment per
unit of output (or per unit of CFC use avoided[3]) varies substantially
among plants.
A large foam plant can economically begin recovery and
recycle at a lower CFC price than its smaller competitor, and can charge
lower fClrn prices to its customers.
Recycling economics could prove important to the size structure of
the flexible foams industryppthough there are reasons to be sceptical.
A large firm typically has multiple plants, some of which can have quite
low output levels; a large firm faces the same economics in its small
[1] Two examples of organizations serving small (as
CFC-using firms are the Society of the Plastics Industry
Conditioning and Refrigeration Institute.
[2] For example, see Utterback (1974).
[3] See Palmer et al. (1980), Table 3.A.7, p. 61.
well as large)
and the Air
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-58-
plants as a small firm with a single small plant. [4]
The coexistence of
large and small firms in the industry today suggests many reasons for
differences in size; firms may offer different foam products or serve
different communities.
To the extent small and large firms are not
direct competitors, differences in their recycling costs will not seri-
ously affect firms' ability to survive higher eFe prices.
Finally, a
growing market for eFe recovery equipment should encourage development
of different systems with different capacities and costs.
Unless and
until that happens, there may be cases where high eFe prices disadvan-
tage the small foam producer, but only if he directly competes with a
firm having a larger production facility. [5]
A similar capital bias might also arise for the TPS rigid foams.
Recovery and recycle is also an option for that user category.
Another
option, pentane substitution, also appears to require substantial capi-
tal investment for fireproofing plants--an investment that does not vary
proportionately to the plant's output level or eFe use.
Because both of
the major eFe-saving technologies in TPS foams involve some capital bias
against small plants, higher eFe prices could affect the size structure
of that industry.
There are also good reasons to be sceptical of a large capital bias
effect on the TPS foam industry.
As for the flexible foams, it is
incorrect to equate small plants with small firms.
The TPS foam indus-
try is already highly concentrated, with over 80 percent of total output
[4] Although Palmer et al. (1980) provides data on the distribution
of plant sizes, we have almost no data on ownership distributions.
[5] As an alternative to a production cap policy, mandatory re-
quirements for recovery and recycling are at least as biased against
small firms. See Palmer et al. (1980), Sec. III.A.
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-59-
produced by a few large companies. [6]
These large companies have some
plants producing relatively small quantities of foam.
Moreover, the
industry is so concentrated that there is little scope for change in
industry structure even if small tirms were greatly disadvantaged by
regulation.
For reasons given below, the TPS foam industry could decline due to
CFC regulation.
The survival of large as well as small TPS foam produc-
ers might be endangered.
The capital bias might mean small plants will
be among the first to close.
But they may not be the only ones--and
closures are likely among plants owned by large as well as small firms.
PLANT CLOSURES AND WORKER LAYOFFS
All of the scenarios we have investigated reasonably assume some
expansion in all final product markets between 1980 and 1990--despite
higher CFC prices.
Some markets, home refrigeration for example, will
grow rather slowly--but they would grow slowly even in regulation's
absence.
Regulation might reduce the growth rate for some user indus-
tries.
Scenario VI, for example, assumes that consumer response to
higher final product prices would reduce growth in the flexible foam and
residential insulation markets.
But all of the scenarios assume user
industries will make more (inal products in 1990 than today. [7]
[6] See Palmer et al. (1980), p. 106.
[7] There are some declining segments of user industries. Within
the retail food industry, for example, the number of "Mom and Pop" food
stores has been declining for several years and will continue to do so.
Higher CFC prices--or any other unfavorable change in market
conditions--might speed the decline of these borderline firms.
even if plant closures are observed under these conditions, it
impossible to say whether regulation or natural processes were
ble.
However,
would be
responsi-
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-60-
In most user industries, firms in business today should be able to
remain in business despite regulation--provided they respond efficiently
to higher CFC prices.
The foreseeable technological responses can take
place within existing plants, through replacement, modification or addi-
tion of some equipment, or through conversion to alternative chemicals.
By making such changes at the appropriate time, existing firms can con-
tinue to operate at their current levels, perhaps even participating in
market growth over time.
The one case we have identified where CFC regulation could seri-
ously injure existing firms (and their workers) is the TPS packaging
foam industry.
Many of the products made by this industry--egg cartons
and fast-food packages, for example--compete with cardboard and paper
products.
The overall market for packaging materials will grow over the
next decade, but TPS packaging could decline substantially as its price
rises relative to nonfoam packaging.
And the workers and equipment for
TPS manufacturing cannot convert readily to producing nonfoam packag-
ing. [8]
Available data provide only a crude indication of how many firms
and workers might be affected by a decline in the TPS foam industry~
Fewer than ten firms supply most of today's market.
These include Mobil
Chemical Corporation, W.R. Grace Foampak Division, Western Foam Pak,
[8] All of our scenarios assume TPS firms will convert to pentane
at high CFC prices, thereby remaining in business while reducing CFC use
to zero. If, instead, many of these firms go out of business early in
the decade, our estimates of resource costs for this industry will be
too high throughout the decade, and our estimates of market-wide permit
prices will be too high for the early years. In short, cardboard or pa-
per substitution for TPS foams is a mixed blessing. It would cause
plant closures in existing TPS firms, but reduce the economic costs of
regulation.
-------
-61-
Dolco Packaging COLporation, and Huntsman Container Corporation.
Some
of these firms' plants already use pentane and would not be affected by
CFC regulation.
Though the remaining plants belonging to these firms
might be susceptible to closures, we do not know how many; and there
could be closures among other plants owned by other firms not identified
by our study.
Available data indicate there are two to three thousand
workers in TPS foam plants, with perhaps 1800 workers employed in the
small plants most susceptible to the capital bias discussed previously.
Information about the miscellaneous CFC-using products is too scant
for us to predict the likelihood or extent of plant closures.
The
industries in question include firms with multiple product lines.
How-
ever, some plants produce only a single CFC-based product and are
located in small communities where they could be a major source of
employment.
Though we expect many of these firms to adapt to higher CFC
prices by using alternative technologies, isolated cases of plant clo-
sures and worker layoffs cannot be ruled out.
ENERGY IMPLICATIONS
The production cap policy we have analyzed will not substantially
increase U.S. energy consumption.
Some industry sources anticipate that
severe CFC cutbacks in such products as home refrigeration, chillers,
and foam insulation would extract a heavy energy penalty.
But a produc-
tion cap would not severely cut CFC use in these user categories.
None
of our scenarios predicts any policy effect on CFC use in home refri-
geration, chillers, or foam insulation outside the residential construc-
tion market.
The predicted reductions in residential insulation (under
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-62-
Scenarios V and VI) are qui~e small.
And such energy effects as might
arise in any other product areas are even smaller.
To the extent that the production cap does increase energy use, the
financial cost already appears in our resource cost estimates.
Energy
costs enter our calculations as part of the cost of CFC-saving technolo-
gies.
In residential insulation, the amount of foam consumers will buy
at each price depends on the energy penalty associated with using fiber-
board sheathing instead; thus, energy cost also enters our calculations
as part of the consumer response analysis.
Wherever regulation predict-
ably increases energy use, the costs are included in the tables on
resource costs.
The largest energy use effects would be in the residential con-
struction market for foam insulation--and these effects would be very
small under any scenario.
For a "typical" residential structure,
replacing foam with nonfoam insulation increases annual energy consump-
tion by about 70 gallons of fuel oil (or by the energy-equivalent in
some other fuel).[9]
Of course, not all homes are the same:
some would
face a greater energy penalty, and some less.
On aver age, the homeoWfi.-
ers (or builders) who would switch to fiberboard in Scenarios V or VI
would face lower energy penalties than owners of "typical" homes.
But
even if we were to assume all the consumers who switch to fiberboard
have "typical" homes--as we do for Scenario VI in Table 5.1--the aggie-
gate effect on energy consumption would be quite modest.
The table's
ten-year total energy consumption effect is only 83 million gallons (or
[9] See Palmer et al. (1980), pp. 113-116.
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-63-
Table 5.1
~IAXIMUM INCREASE IN ENERGY USE IN THE
RESIDENTIAL INSULATION MARKET
SCENARIJ VI:
1981 THROUGH 1990
Annual Energy Penalty in Millions of
Equivalent Gallons of Fuel Oi1a
Year
Rigid
Urethane
Market
Polystyrene
Board
Market
Total
1981 O.Ob
1982 0.2 0.3
1983 0.5 0.1 0.6
1984 1.2 0.2 1.4
1985 2.4 0.5 2.8
1986 4.3 0.9 5.1
1987 6.9 1.4 8.4
1988 10.9 2.3 13.2
1989 16.4 3.5 19.9
1990 25.6 5.5 31.1
c
Cumulative 68.5 14.4 82.8
a
Each year's penalty includes increased energy
use for all structures built without foam insula-
tion due to CFC regulation in prior years. Esti-
mates assume the penalty per million pounds of
foam not used is 134,927.3 equivalent gal10ns of
fuel oil for rigid urethane foam and 94,702.0
equivalent gallons for extruded polystyrene board.
b
Energy penalty positive, but less than 0.1
after rounding.
c
Sum of annual energy penalties. Detail may
not sum to totals aue to rounding.
-------
-64-
less than two million barrels) of fuel oil.[10]
The U.S. currently
imports three times that much crude oil in a single day.
Adjustments to a production cap by other user categories will also
have some energy implications.
For example, in the solvents category,
slight increases in energy use are expected.
Under all scenarios, some
solvent users switch to non-CFC solvents that have higher boiling points
than CFC-113.
As a result, the energy requirements for cleaning and
drying operations increase.
However, the amount of increased energy use
in the solvents category is surely smaller than even the slight impact
for insulation.
And the energy costs in solvents and other product
areas are already reflected in our estimates ,of the policy's resource
costs.
[10] For Scenarios III, IV, and V, energy impacts would be even
smaller. These scenarios show no effect until 1990, when energy use
would increase by the equivalent of'11.3 million gallons of fuel oil.
-------
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APPENDIX:
NETHODOLOGY
This appendix details the methodology used to simulate market out-
c0mes under a CFC production cap policy.
Because the policy under con-
sideration allows market forces to allocate CFC use, economic outcomes
will depend upon how the private sector responds to higher CFC prices.
Consequently, the critical methodological issue is the estimation of the
CFC demand schedule, which describes how CFC use varies as its price is
increased by regulation.
CAUTIOUS CFC DEMAND SCHEDULES
This report's underlying demand schedules are based on two types of
information supplied by industry sources.
First, many CFC-using and
producing firms provided data used to project "baseline" CFC use for
each user category in the absence of regulation.
Second, industry
sources supplied information on a wide variety of technical options for
reducing CFC use under regulation in various user categories; this
information is discussed in detail in Sec. III of Palmer et al. (1980).
The baseline forecast of CFC use is reported in Table 1.2 for 1980
and 1990, and in Table A.1 for the interim years.
Although these esti-
mates use a different CFC weighting scheme (discussed below), except for
solvents, the underlying forecasts of growth in the CFC markets are
identical with those of our earlier report.
The baseline forecast for CFC-113 is estimated from a simulation
model that relates solvent demand to the CFC supply price.[l]
Based on
[1] The supply price is the price at which producers will be wil-
ling to sell incremental units of output. Unlike the other CFCs, the
-------
Table A.l
PROJECTED CFC USE BY USER CATEGORY; BASELINE FORECAST, 1980 TO 1990
(In millions of weighted pounds)
Unregulated.CFC Usea
Cumu-
User Category 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1ative
Flexible foam. 46.8 48.8 50.9 53.1 55.4 57.8 60.4 63.0 65.7 68.5 71.5 641. 9
Solvents 60.3 63.7 67.3 71.0 75.0 79.2 83.7 88.4 93.3 98.6 104.1 884.6
Rigid foam I
TPS 11.5 12.0 12.6 13.1 13.7 14.3 15.0 15.7 16.4 17.1 17.9 159.3 0\
Insulation 72.3 78.3 84.9 91.9 99.6 107.9 116.9 126.6 137.2 148.6 161.0 1225.2 0\
I
Other 17.1 18.3 19.6 21.1 22.5 24.1 25.8 27.6 29.6 31.7 34.0 271.4
Mobile air conditioning
Manufacturing 30.0 30.3 30.7 31.0 31.4 31.7 32.1 32.5 32.8 33.2 33.6 349'.3
Servicing 47.6 49.1 50.7 52.3 53.9 55.6 57.4 59.2 61.1 63.0 65.0 614.9
Retail food refrigeration
CFC-12 8.5 8.4 8.4 8.3 8.3 8.2 8.2 8.1 8.1 8.0 8.0 90.5
CFC-502 2.3 2.4 2.4 2.5 2.5 2.6 2.6 2.7 2.8 2.8 2.9 28.5
Chillers 13.7 14.3 15.0 15.7 16.4 17.2 18.0 18.8 19.7 20.6 21.6 191.0
Home refrigeration 5.6 5.8 5.9 6.1 6.3 6.4 6.6 6.8 7.0 7.2 7.4 71.1
Miscellaneous 25.3 27.4 29.6 32.1 34.7 37.5 40.6 44.0 47.6 51.5 55.7 426.0
b 341. 0 358.9 377.9 398.2 419.8 442.8 467.3 493.4 521. 3 551.0 582.7 4954.3
Total
aBased on CFC weighting factors in Table, 1.1. See appendix text for discussion.
b
Detail may not sum to totals because of rounding.
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industry-supplied information, the supply price of CFC-113, P , is given
s
by
P
s
-(VO)O.5
- - P
V 0'
(1)
where V is the current volume of production and Vo and Po are the volume
of production and price per pound of CFC-113 in a base year.
This
report revised the CFC-113 supply price assumption in Palmer et al.
(1980) and bases the supply price equation on 1980 data.
From Tables
1.2 and 1.3, the 1980 base-year values in Expression (1) are Vo = 78.3
million pounds of CFC and
Po = $0.60. [2]
While this revision has little effect on projected base-
line CFC use early in the decade, revised 1990 CFC-113 use is 135.1 mil-
lion pounds of CFC (or 104.1 million weighted pounds), about 8 percent
lower than in Palmer et al. (1980).
The baseline CFC use-levels in Table A.1 assume that CFC supply
prices (except for solvents) remain constant at the levels indicated in
Table 1. 3.
At higher CFC prices, some technical options for reducing
CFC use will become attractive to regulated firms.
These options gen-
erally involve the acquisition of capital equipment (e.g., a CFC
recovery unit) or conversion to an alternative chemical.
These
supply price of CFC-113 solvent is not independent of the size of the
market. The production of this CFC is subject to economies of scale
over a wide range of output. As a result, when the demand for CFC-113
grows, producers tend to compete by lowering the CFC price. This
results in a higher quantity of CFC demanded than if the supply price
remained constant.
[2] In Palmer et a!. (1980), the
lion pounds, which implies CFC supply
those computed here.
assumed value. for V 0 was 68.0 mil-
prices about 7 percent less than
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responses by firms account for the majority of CFC use-reductions under
all our scenarios.
Our analysis translates industry-supplied data on technical options
into two variables: the cost per pound of CFC use-reduction, including
amortized fixed expenses and any change in variable costs, and the
amount that CFC use is reduced by the implementation of the activity.
The first variable defines a "critical price increment" for the
activity:
i.e., how much the CFC price must be raised above the base-
line level to induce the activity's voluntary implementation.
The
second variable determines the effectiveness of the activity.
As an illustration, consider CFC recovery and recycle for smaller
plants producing molded flexible urethane foam.
According to Palmer et
al. (1980, pp. 53-61), the cost of installing and operating a carbon
absorption unit for these plants is $0.70 per pound of recovered CFC-11.
If the price of CFC-11 rises by this amount, we expect the option will
voluntarily be undertaken, reducing CFC use in these plants by 50 per-
cent below baseline levels.
This amounts to a reduction of 3.7 million
pounds of CFC-11 use in 1980 and 5.7 million pounds in 1990, if the
price increase is applicable to both years.
Within each user category, there may be a number of CFC-saving
activities.
The critical price increment and effectiveness of an option
generally depends upon the characteristics of the CFC-using plant.
For
example, recovery and recycle costs more per pound of CFC recovered in
small plants than in large plants.
Thus, we can describe the technical
responses of firms to higher prices by Expression (2):
[(lIP1j' lIC1j)' "'J (lIPnj' lICnj)]'
(2)
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-69-
. th .. t ( . ) f
where 6Pij = the critical price increment for the 1 act1v1 y 1En 0
h . th A
t e J user category, UCij = emissions reduction of activity i,j, and
the activities are ordered from the least costly (i.e., lowe6t critical
price increment) to the most costly (i.e., highest critical price incre-
ment) .
We estimated this information for each user category for 1980
and 1990.
In Palmer et al. (1980), the analysis of technical options was
based on cautious assumptions in two respects.
First, when alternative
data for the cost of ' an option were available, we generally based esti-
mates of critical price increments on the higher cost data.
Second,
where available information was inadequate to estimate the critical
price increment or effectiveness of a technical option, we assumed the
option would not be implemented, regardless of the increase in CFC
prices.
The latter assumption affects estimates of CFC use under regu-
lation in the Group C user categories, for which CFC-saving activities
are available, but have unreliable data.
These cautious assumptions are
carried over here in the analysis of Scenario I.
However, the other
scenarios relax the stringent (and unrealistic) assumption that Group C
user categories are unresponsive to higher prices.
When combined with the baseline forecast of CFC use by user
category, the information summarized by Expression (2) identifies points
on the CFC demand schedule of the user categories, based on our cautious
assumptions.
Specifically, given a permanent increase in the price of a
CFC, all CrC-saving activities with critical price increments less than
or equal to the increment in the crc price are assumed to be imple-
mented.
If regulation increases the CFC price by an amount equal to
-------
-70-
.th t i
APkj' then the quantity of CFC demanded by the J user ca egory s:
k
CkJ' = CBJ' - ~ AC..,
i=1 1J
(3)
where CBj is baseline CFC use for the user category.
Thus, the demand
schedule for user category j is defined by the set of price-quantity
pairs: [3]
[(0, CB,L (AP1" C1')' ..., (AP " C.)].
J J J nJ nJ
(4)
In this demand schedule, the pair (0, CBj) corresponds to the
absence of regulation.
In addition, each price, AP,., is expressed as
1J
an increase over the CFC supply price (in 1976 dollars).
That is, the
prices in Expression (4) are the full prices paid for the CFC less the
CFC supply price.
These price increments could be in the form of a per-
mit price, a CFC tax, or an increase in the CFC manufacturers' price,
depending upon how the policy is implemented.
Expression (4) specifies the user category demand schedules
estimated in Palmer et al. (1980).
These demand schedules are step
functions:
All CFC users who implement a particular activity do so at
the same permit price (or at the same cost per pound).
Each critical
price increment for a user category defines a new step in the demand
schedule.
The height of each step determines the resource cost per
pound of the activity.
This represents the value of resources used by
the economy to reduce CFC use.
Because estimates of critical price
[3] Consistent with the assumptions in Palmer et al. (1980) and
Scenario I of this report, this demand schedule also assumes that consu-
mers take no actions to reduce their use of CFC-made products. This as-
sumption is relaxed in Scenarios III to VI, as discussed below.
-------
-71-
increments are generally based on cautious (i.e., high cost) assump-
tions, the implied resource costs per pound correspond to the cost
characteristics of firms in the least advantageous position to reduce
CFC use.
It is likely that some firms could implement an activity at a
lower cost than others.
By assuming that no firms react to the regula-
tion until the CFC price is raised by the full critical price increment,
our previous estimates of resource costs are probably too high.
To correct for this bias, the demand schedules described by Expres-
sion (4) are transformed from step functions into piecewise linear func-
tions.
Methodologically, this is accomplished by using linear interpo-
lation to determine the quantity of CFC demanded when the price incre-
ment is between the levels implied by adjacent price-quantity pairs in
Expression (4).
Thus, if the CFC price increase, ~P, is such that
APkj ~ AP < ~Pk+1,j' the quantity of CFC demanded in user category j as
a function of the price increment is:
C . (~P)
J
(b,Pk 1 .
= C++ ,J
k+1 , j b,P k+ 1, j
- b,P )
(C .
b,Pkj kJ
- Ck+1 .).
, J
(5)
For each user category, Expression (5) identifies a unique quantity of
CFC use in 1980 and 1990 for any price increment.
For years between 1980 and 1990, the user category demand schedules
are assumed to shift horizontally at each possible price increment at a
constant annual rate of growth.
If we let C~O and C~O denote the quan-
J J
tity of CFC demanded by user category j in 1980 and 1990 at the incre-
ment AP, then the rate of growth in demand is:
(C~O~O .1
r - -L - 1
- 80 '
C.
J
(6)
-------
-72-
and the quantity of CFC demanded t years after 1980 is:
C7 = (1 + r)tC~O.
J J
(7)
WEIGHTING
The ozone depletion potential of a pound of CFC varies among the
various CFC chemicals.
To account for these differences, we define a
standard unit of measure, the weighted pound.
Conceptually, each
weighted pound poses the same environmental hazard to the ozone layer.
The weighting factors used to convert CFC pounds to weighted pounds in
this report are contained in Table 1.1.
Under the production cap policy, all user categories and all types
of CFCs would compete in a common market for the restricted amount of
CFC production.
The price increases generated by this market are speci-
fied in terms of price increments (or permit prices) per weighted pound.
While all CFC purchasers would pay the same price for a weighted pound,
this translates into higher price increases per CFC pound for more
heavily weighted CFCs.
As a result, incentives for CFC use reductions
are greatest where they will do the most good.
Before the demand schedules of individual user categories can be
aggregated to predict outcomes in the common market, they must be con-
verted into weighted pound units.
In effect, this conversion generates
an adjusted set of price-quantity pairs for the user category, analogous
to Expression (4):
a a a a a
[(0, CBj)' (P1j' C1j), ..., (Pnj' C1j)] ,
(8)
-------
-73-
a a
where P.. = ~P. ./w., e.. = w.C.., and w. is the eFC weighting factor for
~J ~J J ~J J ~J J
the CFC used in the jth user category.
a
In Expression (8), P.. is the critical permit price for a CFC-
~J
a
saving activity[4] and C.. is CFC use measured in weighted pounds at the
~J
critical permit price.
For example, suppose a technical option reduces
CFC-12 use by 100 pounds in a user category and has a critical price
increment of $1.00 per pound of CFC-12.
If implemented, this option
would reduce use by 79 weighted pounds, since the weight of CFC-12 is
w=0.79.
In a permit market, producers would be required to purchase
0.79 permits for each pound of CFC~12 used.
Therefore, the permit price
required to induce this activity is $1.27 = 1.00/0.79.
Using these adjusted price and quantity data, we derive an adjusted
piecewise linear demand schedule for each user category:
C. (P)
J
(a )
Pk+l . - P
= C + ,J
k+1,j pa - pa
k+l,j kj
(Ckj - Ck+ 1 , j ) .
(9)
Expression (9), which is analogous to Expression (5), defines CFC demand
in user category j, measured in weighted pounds, at any permit price, P,
that emerges from the common CFC market.
The weighting factors employed in this report differ in two
respects from those in Palmer et al. (1980).
First, different CFCs are
convenience, this appendix refers to regulated
CFCs in terms of permit prices. However, the
if the price increases were in the form of a
the price charged by CFC manufacturers.
[4] For expositional
increases in the price of
same results would obtain
CFC tax or an increase in
-------
-74-
used as the base unit of measure for the weighting factors.
Second, the
relative weighting factors differ among the CFCs.
In the earlier report, CFC-113 was used as the base unit of meas-
ure: one weighted pound was defined to correspond to one pound of CFC-
113.
In this report, CFC-11 is used as the base unit of measure to be
consistent with the weighting factors proposed by EPA.
While this revi-
sion results in lower numbers to describe CFC use in weighted pounds,
the choice of a base unit of measure actually has no economic implica-
tions.
Thus, aggregate 1980 baseline CFC use is estimated at 455 mil-
lion "permit" (or weighted) pounds in Palmer et al. (1980) and at 341
million weighted pounds here; but, aside from the minor revisions noted
earlier, the underlying CFC use-levels in pounds of CFC are identical.
In contrast, the revision in the relative weighting factors among
the CFCs does have economic implications.
Under EPA's proposed weight-
ing factors, CFC-11 has a lower weighting factor relative to the other
CFCs than implied by the previous weights.
The economic effect of this
revision is that under regulation the price of CFC-ll will rise by rela-
tively less (and the prices of other CFCs by relatively more) than if
the earlier weighting factors were used as the basis for policy forma-
tion.
This revision reflects a change in the scientific basis of the
weighting factors.
The factors in Palmer et al. (1980) were based
solely on the chlorine content of each CFC; the revised factors also
account for the expected atmospheric lifetimes of the CFCs.
-------
-75-
AGGREGATE CFC DE HAND UNDER ALTERNATIVE SCENARIOS
The aggregate demand for CFCs as a function of the permit price,
a
CT(P), is determined by the horizontal summation of the user category
demand schedules:
CTa(p) = I ,C~(P).
J J
(10')
While all six scenarios involve this aggregation procedure, each
differs in its assumptions about whether and when various CFC-saving
activities are implemented in response to higher prices.
The demand schedules in Scenario I (and our previous report) assume
that only the CFC-saving technical options in the Group A user
categories are implemented in response to higher prices.
For these user
a a
categories, estimates of the variables P.. and ACi' are based directly
1J J
on industry data.
For Group Band C user categories, ACij under
Scenario I is always zero and CFC use equals the baseline level, regard-
less of how much CFC prices rise.
Scenario I also assumes that final
product consumers will not engage in activities to reduce their pur-
chases ot CFC-using products.
Given these underlying assumptions, aggregate CFC use in weighted
1
pounds under Scenario I, CT(P), can be written as:
1 a a
CT(P) = CBT - IjIiACij
(11)
where C:T = total baseline CFC use, i is summed only over CFC-saving
activities that have critical prices less than or equal to the permit
price, P,[5] and j is summed only over Group A user categories.
Like
[5] That is, the values of the subscript i in Expression (9) are
defined by the set {itnlPij S P}.
-------
-76-
the individual user category demand schedules, this aggregate CFC demand
schedule is piecewise linear, with slight "kinks" at all the critical
permit prices implied by the various user categories.
Scenario II increases the price responsiveness of Scenario I by
including technical options for Group C user categories.
For each Group
C user category, this scenario assumes that at each permit price the
percentage reduction in CFC use below baseline levels is the same as the
average percentage reduction of the Group A user categories.
To compute
market outcomes, we define a variable 6, which under Scenario II equals
baseline CFC use in the Group C user categories as a fraction of base-
line use in Group A.
Given the "equal percentage reduction" assumption,
the total reduction in CFC use under Scenario II is (1 + 6) times the
reduction under Scenario I at each permit price, P.
Therefore, Scenatio
2
II aggregate CFC demand in weighted pounds, CT(P), is:
2 a a 1
CT(P) = CBT - (1 + 6)(CBT - CT(P)),
(12)
Scenarios III to VI postulate that consumers of residential foam
insulation and some flexible foam products switch to non-CFC products as
the production cap policy raises the prices of the former goods.
These
scenarios assume that the amount of CFC used to produce these foam pro-
ducts is a fixed proportion"of final product output levels.
Therefore,
if the permit price is P, the percentage increase in final product
prices is (w.P/P )s., where w. is the CFC weighting factor, P is the
J c J J c
baseline CFC price (see Table 1.3), and s. is the CFC share of total
J
production costs for the user category.
Further assuming that final
-------
-77-
product demand has a constant arc elasticity of demand, n. < 0,[6] the
J
CFC demand schedule for these products is:
[ [w.oPos.
a - a J J
C . (P) - CB' 1 + P
J J c
] OJ] .
(13)
For 1990, the aggregate demand schedules of Scenarios III to VI are
identical and reflect the same CFC-saving activities:
The responsive-
ness of Group A users is the same as under Scenario I; the responsive-
ness of Group B users is the same as under Scenario II; and the consumer
responses in flexible foams and residential insulation correspond to
demand arc elasticities of -1.0 and -0.5, respectively.
The 1990 aggre-
gate demand schedule for these scenarios is presented in Table A.2.
However, these scenarios differ substantially as regards the timing
of Group C and consumer responses in earlier years.
Prior to 1990,
Scenarios III to VI use the same methodology to estimate CFC reductions
for Group C user categories and for consumers, but each scenario assumes
different values for the variables 0 and n.:[7]
J
Scenario III:
Assumes 0 is the same as under Scenario II for all
years and each n. is zero for 1980 to 1989.
J
Scenario IV:
Assumes 0 is the same as under Scenario II and each
n. is at the indicated 1990 level for 1980 to 1989.
J
[6] This elasticity is defined as the percentage change in quantity
demanded from the baseline level divided by the percentage change in
price from the baseline price.
[7] Lower values of 0 and n. correspond to less responsive annual
J
demand schedules. Note that the minimum value of 0 (zero)
to zero responsiveness by Group C users; the maximum value
"l d ." t.
corresponds to the equa percentage re uct10n assump 10n
II.
corresponds
of 0
of Scenario
-------
-78-
Scenario V:
Assumes 0 is zero until 1986 and gradually increases
to the Scenario II level; each n. is zero until
J
1990.
Scenario VI:
Assumes 0 and each n. are zero in 1980 and as indi-
J
cated above in 1990. Interim year demand schedules
are then calculated using Expressions (6) and (7).
Table A.3 shows the resulting differences in the annual aggregate
demand schedules of Scenarios III to VI for 1986, the year when equili-
brium prices differ the greatest.
CFC PRICES, RESOURCE COSTS, AND TRANSFER PAYMENTS
The shape of the aggregate demand schedule determines the estimated
economic impacts of a production cap policy, including the effects on
CFC prices and the magnitude of resource costs and transfer payments.
These economic impacts of regulation are illustrated in Fig. A.l, where
the curve DD represents a hypothetical demand schedule, C represents
e
the CFC production cap constraint, and CB is baseline CFC use.[8]
The CFC price increment caused by regulation is the price level
which clears the market, i.e., that price where the aggregate quantity
of CFC demanded just equals the restricted CFC production level.
In
Fig. A.l, this price increment is illustrated by P -
e
The equilibrium
price increments calculated for our scenarios are presented in Tables
2.1, 3.1, and 4.1.
The form in which higher CFC prices are actually
paid (but not necessarily their magnitude) will depend upon how the pro-
duction cap policy is implemented.
If, for example, CFC permits were
[8] For convenience, Fig. A.l illustrates the demand schedule as a
smooth curve. As noted previously, the demand schedules actually used
in the market simulation are piecewise linear.
-------
-79-
Table A.2
AGGREGATE CFC DEMAND SCHEDULE FOR THE
PLAUSIBLE SCENARIOS: 1990
Permit Price a
Aggregate CFC Use
(millions of weighted pounds)
$0.00
0.10
0.16
0.21
0.22
0.24
0.27
0.30
0.34
0.39
0.42
0.60
0.69
0.70
0.73
0.79
0.90
1.16
1.18
1.29
1.42
1.56
1.57
1.67
1.72
1.81
2.01
2.56
2.81
582.7
531. 9
519.6
515.0
514.0
511.8
509.9
502.9
493.7
491. 0
489.4
449.7
442.0
441. 2
438.6
434.1
422.6
399.1
384.4
380.9
375.8
370.4
369.4
359.7
354.6
352.4
349.6
343.7
341.0
aAssumesnmnufacturers' CFC prices are indicated
by Table 1.3 for all years. A permit entitles the
holder to use one -weighted pound of CFC. Each permit
price corresponds to a critical price increment for
one or more user categories.
-------
-80-
Table A.3
AGGREGATE CFC DEMAND SCHEDULES FOR THE
PLAUSIBLE SCENARIOS: 1986
Aggregate CFC Use
(In millions of weishted pounds)
Permit Price a Scenario III Scenario IV Scenario V Scenario VI
$0.00 467.3 467.3 467.3 467.3
0.10 429.8 426.2 441.3 435.0
0.16 ,421.3 416.9 435.5 427.4
0.21 416.8 411. 8 432.2 423.1
0.22 415.7 410.6 431.5 422.1
0.24 413.'0 407.4 429.5 419.8
0.27 409.8 403.9 427.2 416.9
0.30 402.7 396.0 422.2 411. 6
0.34 393.4 385.7 415.7 404.5
0.39 388.5 380.1 412.2 399.8
0.42 386.9 378.3 ',11.1 397.9
0.60 364.9 354.8 '2" 2 377.8
0.69 359.1 348.5 3~".i. 371. 3
0.70 358.5 347.8 391. 8 370.7
0.73 356.7 345.8 390.5 , 368.9
0.79 353.5 342.4 388.3 365.7
0.90 345.3 333.4 382.7 358.2
1.16 327.4 313.9 370.3 341. 3
1.18 316.0 3Q1.4 362.4 333.8
1.29 313.4 298.6 360.6 330.1
1. 42 309.6 294.4 358.0 325.2
1.56 305.5 289.9 355.2 319.9
1.57 304.8 289.1 354.7 319.3
1.67 297.7 281. 4 349.8 312.9
1.72 294.0 277.3 347.2 309.6
1.81 292.6 275.9 346.3 306.9
2.01 290.6 273.6 344.9 304.5
2.56 286.1 268.8 341. 8 298.7
2.81 284.9 267.5 341. 0 296.5
~Assumes manufacturers' CFC prices are indicated by Table 1.3 for all
years. A permit entitles ~he holder to use one weighted pound of CFC.
Each permit price corresponds to a critical price increment for one O~
more user categories.
-------
i
i
1
'.
...
!
\:
.!!
'0
3!
1: Pe
e
.~
8
;E
-81-
Transfer
payments
Resource
costs
D
Ce
CFC use (weighted pounds)
CB
Fig. A.1-A hypothetical aggregate CFC demand schedule
-------
-82-
distributed among CFC users, higher CFC prices would take the form of a
permit price that must be paid to acquire a weighted pound of CFC.
If,
in contrast, a quota were merely set on the total output of CFC manufac-
turers, these price increments would take the form of an increase in the
CFC prices received by the manufacturers above the baseline level.
The resource costs of the policy reflect the cost of activities
undertaken to reduce CFC use--whether by regulated firms or, in the
cases of flexible foam and residential insulation, by consumers.
Recall
that the critical price increment of an activity (i.e., the CFC price
increase which results in its voluntary implementation) is determined by
the cost of the activity per pound of CFC use reduction.
Thus, the
resource cost of a unit reduction in CFC use in Fig. A.1 is illustrated
by the height of the derived CFC demand schedule.
It follows that the
total resource costs of the policy are illustrated-by the area under the
demand curve and between Ce and CB in Fig. A.1.[9]
Resource costs for each user category are determined similarly by
the area under the user category demand schedules.
Estimates of
resource costs in a user category reflect both the costs borne by firms
that implement technical options and the costs borne by consumers who
switch from products in that category to non-CFC substitutes.
Given the
piecewise linear specification of demand schedules in our simulations
[9] When the price of a productive input increases, less of the in-
put is used because (1) producers seek ways to manufacture the final
product using less of the more costly input and (2) consumers turn to
relatively less costly final products. Both of these effects are sum-
marized in an input demand schedule, such as the one illustrated in Fig.
A.1. Thus, the indicated Resource Cost area in Fig. A.1 reflects the
costs borne by both consumers and producers to reduce CFC use. For
further discussion of the relationship between consumer losses and the
derived demand for an input, see Wisecarver (1974).
-------
-83-
and the equilibrium price increment, P = Pka., resource costs in user
e J
category j are given by the following formula:
RC. =
J
k
6
1=1
a a a
f(P.. + P. 1 .)t.C..,
1J 1 -,J 1J
(14)
where all variables are defined as in Expression (8).
Aggregate resource costs, RCT' are the sum of resource costs over
all user categories: [10]
RCr = E. RC . .
J J
(15)
The transfer payments that result from the regulatory policy simply
equal the equilibrium price increment times the quantity of CFC
demanded.
Thus, for user category j:
a
TP. = PC. (P) ,
J e J
(16)
and for all CFC users:
TPT = E.TP..
J )
(17)
Conceptually, this report treats transfer payments as a transfer of
wealth away from regulated firms and consumers.
If EPA instituted a
permit system and initially sold permits for the production cap through
[10] In this report, all measures of cumulative resource costs and
transfer payments are discounted. Discounting is necessary because the
time profile of annual costs and transfer payments differs among our
scenarios and because firms are not indifferent to when regulatory ex-
penses are incurred. If regulatory expenses are incurred immediately,
rather than deferred, a firm must forego the interest income that would
have been earned had it invested in an alternative income-generating ac-
tivity. Throughout this report, we employ a discount rate of 11 percent
in real terms. This rate is intended to reflect the current real yield
on nonconstruction investment in the United States. For further discus.
sion, see Palmer et a!. (1980, pp. 32-33).
-------
-84-
an auction, our estimates of transfer payments would take the form of
money that is paid to the government by CFC users for their initial
allocation of permits.
Alternatively) if a quota were established on
the total output of CFC manufacturers and permits were not issued,
transfer payments would represent a transfer of wealth from CFC users
and their customers to CFC manufacturers.
However, the distributive effects of transfer payments depend crit-
ically on how the policy is actually implemented.
In particular) poli-
cies can be designed to compensate for or prevent these large wealth
transfers.
An economic analysis of the distributive and allocative
effects of alternative "compensation policies" is beyond the scope of
this report.
However) this task is the subject of ongoing research for
the EPA, which will be published in a later Rand report.
-------
-85-
BIBLIOGRAPHY
Environmental Protection Agency, "Ozone-Depleting Chlorofluorocarbons,
Proposed Production Restriction," Federal Register, Vol. 45, No. 196,
Tuesday, October 7, 1980, pp. 66726-66734.
National Academy of Sciences, Protection Against Depletion of Strato-
spheric Ozone £y Chlorofluorocarbons, Washington, D.C., 1979.
Nordhaus, W. D., The Efficient Use of Energy Resources, Yale University
Press, New Haven and London, 1979.
Mooz, William E., and Timothy H. Quinn, Flexible Urethane Foams and
Chlorofluorocarbon Emissions, The Rand Corporation, N-1472-EPA, June
1980.
Palmer, A., et a1., Economic Implications of Regulating Chlorofluorocar-
bon Emissions from Nonaerosol Applications, The Rand Corporation,
R-2425-EPA, June 1980.
Taylor, L. D., "The Demand for Energy: A Survey of Price and Income
Elasticities," in W. D. Nordhaus (ed.), International Studies of the
--
Demand for Energy, North Holland, Amsterdam, 1977.
U.S. Department of Commerce, Survey of Current Business, Vol. 57, No.4,
April 1977, and Vol. 60, No.7, July 1980.
Utterback, James M., "Innovation in Industry and the Diffusion of Tech-
nology, Science, Vol. 183, February 15, 1974, pp. 620-626.
Wisecarver, Daniel, "The Social Costs of Input-Market Distortions,"
American Economic Review, Vol. 64, No.3, June 1974, pp. 359-372.
Wolf, Kathleen A., Regulating Chlorofluorocarbon Emissions: Effects on
Chemical Production, The Rand Corporation, N-1483-EPA, August 1980.
-------
S..mp!o A. oT.S Documciit C!curan::'t' Form
1. Titlt of pocument. No. pages -
! Economic Impact Assessment
of a C1Ylbr-Of1.1l0rocaI:bon
Production Cap
2. O~AuthOrf?'oit'C't Offic~r (PO J
Ellen B. Warhit
I~~ :?~f~8J
In-Haul!
2a. ~:horr.o
2c. Teleohone Num er
:0. ,,)T!ğerz"'~"'\/C:""$lon
C2zo 1 e:rJ:>
4. Type of Document
2d. E"1r~l,wr:31 Orig",:~or
support Document
Extramural
x
426-0601
Rand Corp.
5. Does tl'l8 document contain copyrlgt'lu:d mat&rial?
2&. Document Completion Date
2f. ExUDI1,Ursl 1.0. No.
Yes 0
No 0
2/15/81.
)
68-01-6236
Sa. If yes. has p8rmissiOl1 been granted for use of &!!
COpyrighted or ott'lerNise restricted material?
6. P'ff!'i.er
YuO
No 0
7. AbStract: Ollerview; list of principal finoing!!
and/or conclusions; re/uionshic of document
to EPA activitY
'Amc:h ~of Plltrmiuion letters to this form.
This report projects the economic costs of a regulatory cap
that would restrict total U.S. annual chlorofluorocarbon (CFC)
production to the 1980 levels. Alternative cost estimates
reflect alternative hypothp.ses about U.S. industries' responses
to high CFC prices. Six s~enarios are developed with different
assumptions regarding elasticities of demand for the final
products and the availablity of substitute technologies. Cost
estimates range between $1.3 billion and $3 billion in transfer
payments and between $184 million and $341 million in resource
costs. The most reasonable estimate, with assumptions likely to
reflect actual market outcomes, is $1.8 billion in transfer
payments and $275 million in resource costs.
a. Revlewer!$)
A 'filiati on
Cate
10.Acprovau
Ellen Warhi t
Michael Brown
Project
Officer
CCD-CFC
team memb
12/80
1/81
r
0':116
'3 I). 31 I I
RIB Actin
Branch
Chief
1Ob. OT!l0ivision Olrec~Qr
D.G. Bannerman
11. Policy
luues
Data
'3/J]/f/
Judith Nelson
,:1. jf, aSS
".Iease
1/81
14, OAA Si9nature {if 1Ppropriate)
I D.I/
I
/
9. E::1itor
I
115. EP A Document Identlfic:ltJon NumOer
EPA 560/4-81-003
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Sample C. Tc:hnica! Report Oat:! Shoat, :1'.0. Form 2220-1
TECHNICAL R E?ORT DATA I
(Pfc:a:c read InslruCtlOIlS on 111, rel'u!e before comniC/IfI.srJ I
,. REPOAT NOF 12. 13, RECIPIENT'S ACCeSSION NO, \
EPA 560/4-81-003 J
4. ii-toe AND SU6T!'!''-,;, 5. REPORT OATE
Economic Impact Assessment of a Chlorofluoro..- Feb. 1981
carbon Production Cap s. peRFORMING ORGANIZA TION ceoe
U.S. EPA/OTS/ETD/RIB
1. AUTHOR(SI 9. PERFORMING ORGANIZATION REPO;:\T ~O.
Adele R. Palmer, Timothy H. Quinn N-1656-EPA
9. ;>eRFOAMING ORGANIZATION NAME ANO AOORess 10. PROGRAM ELEMENT NO.
The Rand Corporation A2CL2S
1700 Main street 1" CONTRACT/GRANT NO.
Santa Monica, California 90460
68-01-6236
12. SPONSORING AGENCY NAME AND AOORESS 11:3. Type OF REPORT AND pe;:\loo COVEi'lEO
U.S. Environmental Protection Agency Final Report
14. SPONSORING ..a.GeNCY cooe
401 M st. S. W.
Washington, D.C. 20460
15. SUPPI..EMENTARY NOTES
16. AaSTi'lACi"
This report projects the economic costs of regulatory I
a cap \
that would restrict total U.S. annual chlorofluorocarbon ( ,CFC )
production to the 1980 levels. Alternative cost estimat1es
reflect alternative hypotheses about U.S. industries' responses
to high CFC prices. Six scenarios are developed with different I
assumptions regarding elasticities of demand for the final 1
products and the availablity of substitute technologies. Cost
estimates range between $1. 3 billion and $3 billion in transfer
payments and between $184 million and $341 million in resource
costs. The most reasonable estimate, with assumptions likely to
reflect actual market outcomes, is $1.8 billi.on in transfer
payments and $275 million in resource costs.
17. II:EY WORCS ANO OOCUMENT ANALV$IS
I. ceSCRIP"OR$ b.IOENTIFIERs/opeN ENOED TEAMS C. CO SA TI Field/Group
-.. OISiFlISuTION ST.a.7EMeNT i 19. ScCWFlI7Y C:."SS (111/'; RrpOrf) 121. NO. OF ~..GcS
Release Unlimited ~O~. ~...~ ..1.. l)~
. :0. seC\JI'IITY C:.ASS (ThU PGC~I I:::' P\'\ICE ,
~ot.:)... S ~~.. t-l uS' ~
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United States
Environmental Protection
Agency
Washington DC 20460
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