A Environmental Protection
Regulatory Impact Analysis  for the Final
Automobile and Light-Duty Truck Surface
Coating NESHAP

Final Report

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                                 EPA-452/R-04-007
                                     February2004
RegulatorylmpactAnalysisfortheFinalAutomobileand
            Light-DutyTruckSurfaceCoatingNESHAP
                U.S. EnvironmentalProtectionAgency
            OfficeofAirQualityPlanningandStandards
           AirQualityStrategiesandStandardsDivision
             InnovativeStrategiesandEconomicsGroup
                          ResearchTrianglePark,NC

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                            Disclaimer


This report is issued by the Air Quality Standards & Strategies
Division of the Office of Air Quality Planning and Standards of
the U.S.  Environmental Protection Agency  (EPA).   It presents
technical data on the National Emission Standard for Hazardous
Air Pollutants (NESHAP)for Reciprocating Internal Combustion
Engines, which is of interest to a limited number of readers.  It
should be read in conjunction with the Technical Support Document
(TSD)  for the NESHAP and other background material used to
develop the rule, which are located in the public docket for the
NESHAP  rulemaking.  Copies of these reports and other material
supporting the rule are in Dockets OAR-2002-0093 and A-2001-22
at the EPA Docket Center, EPA West (6102T), 1301 Constitution
Avenue, NW., Room B-102, Washington,  DC 20460.   The EPA may
charge a reasonable fee for copying.   Copies are also available
through the National Technical Information Services, 5285 Port
Royal Road, Springfield, VA  22161.  Federal employees, current
contractors and grantees, and nonprofit organizations may obtain
copies from the Library Services Office (C267-01) ,  U.S.
Environmental Protection Agency, Research Triangle Park, N.C.
27711; phone  (919) 541-2777.
                                VI

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                                   CONTENTS

Section

                                                                             Page

   ES    Executive Summary	ES-1

   1      Introduction	1-1

          1.1    Agency Requirements for Conducting an RIA 	1-1

          1.2    Organization of the Report  	1-2

   2      Industry Profile  	2-1

          2.1    Supply Side Overview	2-1
                2.1.1   Coating Process	2-1
                       2.1.1.1   Priming Operations	2-3
                       2.1.1.2   Finishing Operations	2-5
                       2.1.1.3   Final Assembly Activities	2-5
                2.1.2   Coating Characterization	2-6
                2.1.3   Final Products  	2-8
                2.1.4   Costs of Production	2-8
                2.1.5   Costs Associated with Coatings	2-9
                       2.1.5.1   Capital Costs for the Paint Shop	  2-9
                       2.1.5.2   Variable Costs for the Paint Shop	2-12

          2.2    Industry Organization	2-14
                2.2.1   Market Structure  	2-14
                2.2.2   Automobile and LDT Assembly Facilities  	2-17
                       2.2.2.1   Characteristics of Automobile and LDT
                               Assembly Plants	2-17
                       2.2.2.2   Trends in the Automobile and LDT Assembly
                               Industries	2-23
                2.2.3   Companies that Own Automobile and LDT Assembly
                       Facilities	2-24
                       2.2.3.1   Company Characteristics  	2-24
                       2.2.3.2   Vertical and Horizontal Integration  	2-25
                                       111

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              2.2.4  Companies that Manufacture Automotive Coatings	2-27


       2.3     Demand Side Overview Characteristics 	2-27
              2.3.1  Substitution Possibilities in Consumption	2-32
                    2.3.1.1   Demand Elasticity	2-33

       2.4     Market Data	2-33
              2.4.1  Domestic Production and Consumption  	2-34
              2.4.2  International Trade	2-35
              2.4.3  Market Prices	2-37
              2.4.4  Industry Trends  	2-38

3      Engineering Costs  	3-1

       3.1     Methodology  		3-1

       3.2     Results	3-4
4      Economic Impact Analysis  	4-1

       4.1     Methodology  	4-1
              4.1.1  Product Differentiation  	4-2
              4.1.2  Imperfect Competition	4-3
              4.1.3  Role of Dealerships	4-3
              4.1.4  Foreign Trade	4-4

       4.2     Operational Model	4-5

       4.3     Economic Impact Results  	4-8
              4.3.1  Market-Level Impacts 	4-8
              4.3.2  Industry-Level Impacts  	4-8
                    4.3.2.1   Changes in Profitability  	4-8
                    4.3.2.2   Facility Closures and Changes in Employment  .... 4-10
              4.3.3  Foreign Trade	4-11
              4.3.4  Social Costs	4-11
                                      IV

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      4.4    Energy Impacts  	4-13
             4.4.1  Increase in Energy Consumption	4-13
             4.4.2  Reduction in Energy Consumption	4-14
             4.4.3  Net Impact on Energy Consumption	4-14

5     Other Impact Analyses	5-1

      5.1    Small Business Impacts	5-1

      5.2    Unfunded Mandates	5-1

      5.3    Impact on New Sources	5-2

6     Benefits Analysis	6-1

      6.1    Identification of Potential Benefit Categories	6-1
             6.1.1  Benefits of Reducing HAP Emissions	6-2
                   6.1.1.1  Health Benefits of Reduction in HAP Emissions .... 6-2
                   6.1.1.2  Welfare Benefits of Reducing HAP Emissions 	6-6
             6.1.2  Benefits of Reducing VOC Emissions due to HAP Controls  . . 6-9

      6.2    Lack of Approved Methods to Quantify HAP Benefits	6-11

             6.2.1. Characterization of Industry Emissions and
                           Potential Baseline Health Effects	6-13
             6.2.1. Results of Rough Risk Assessments of Alternative Control
                   Options Under CAA Sections 112 (d)(4) and 112(c)(9)	6-14

References	R-l

Appendix A  Economic Model for Automobile and LDT Market Under
             Imperfect Competition	  A-l

Appendix B  Estimating Social Costs Under Imperfect Competition	B-l

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                               LIST OF FIGURES

Number                                                                    Page

   2-1    Car Painting Process  	2-2
   2-2    Priming Operations 	2-3
   2-3    Map of Facility Locations	2-18
   2-4    Consumer Price Indexes for All Items Compared to New Cars and
          Trucks (1992 = 100), 1990-1999  	2-40

   4-1    Pricing in Automobile Markets	4-3
   4-2    Baseline Equilibrium	4-6
   4-3    With-Regulation Equilibrium  	4-7
                                       VI

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                               LIST OF TABLES

Number                                                                    Page

   2-1   Properties of Coatings Used in Automobile and LDT Assembly Facilities  . . . 2-7
   2-2   Finished Vehicle Categorization	2-8
   2-3   Number of Establishments, Value of Shipments, and Production Costs
         for the SIC and NAICS Codes that Include Automobile and LDT
         Assemblers, 1992-1997	2-10
   2-4   Number of Establishments, Employment, and Payroll Costs for the SIC and
         NAICS Codes that Include Automobile and LDT Assemblers, 1992-1997  . . 2-11
   2-5   Automotive Coatings Usage, 1989, 1993, and 1998 with Projections
         to 2008	2-13
   2-6   Pricing Trends in Automotive Coatings, Sealants, and Adhesives, 1989,
         1993, and 1998 with Projections to 2008 (Dollars per Pound)	2-14
   2-7   Measures of Market Concentration for Automobile Manufacturers, 1992
         and 1998-1999	2-16
   2-8   Number of Automobile and LDT Assembly Plants by Employment Range,
         1998-1999	2-19
   2-9   Capacity Utilization	2-19
   2-10  Facility-Level Car Production Data by Market:  1999	2-20
   2-11  Plant-Level Truck Production Data by Market:  1999  	2-22
   2-12  Financial Data for Companies that Own Automobile and LDT Assembly
         Facilities, 1998-1999	2-26
   2-13  Examples of Subsidiaries and Affiliates Partially or Wholly Owned by
         Automotive Companies	2-28
   2-14  Market Shares in the Automotive Coatings Industry, 1998	2-29
   2-15  Company Data for Coatings Manufacturers,  1998 	2-29
   2-16  U.S. Car Sales by Market Sector, 1980-1997	2-30
   2-17  Demographics of New Automobile and LDT Buyers, 1998	2-31
   2-18  Own Price Elasticities of Demand by Vehicle Class	2-34
   2-19  Domestic Car and Truck Production: 1995-1999 (103 Units)  	2-35
   2-20  North American Consumption of Cars and Trucks:  1997-2000 (103 Units)  .2-36
                                      vn

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2-21   Imports for Consumption for NAICS 336111 (Automobiles and Light Duty
       Motor Vehicles, Including Chassis) by Country of Origin:
       1997-2000 (103 units)  	2-36
2-22   Domestic Exports for NAICS 336111 (Automobiles and Light Duty
       Motor Vehicles, Including Chassis) by Country of Origin:
       1997-2000 (103 units)  	2-37
2-23   Average Vehicle Prices by Class	2-39

3-1    Engineering Cost Estimates for Affected Facilities:  1999 ($103)	3-6
4-1    Market-Level Impacts by Vehicle Class: 1999	4-9
4-2    National-Level Industry Impacts:  1999  	4-10
4-3    Distributional Impacts Across Facilities: 1999	4-11
4-4    Foreign Trade Impacts:  1999  	': 4-12
4-5    Distributional of Social Costs: 1999	4-13
4-6    Energy Usage in Automobile and LDT Production (1997)	4-15
                                    vin

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                           LIST OF ABBREVIATIONS

AAMA       American Automobile Manufacturers Association
ABS         anti-lock braking systems
CAA         Clean Air Act
CPI          consumer price index
CR4s         four-firm concentration ratios
CR8s         eight-firm concentration ratios
EIA          economic impact analysis
EPA         U.S. Environmental Protection Agency
HAP         hazardous air pollutants
HHIs         Herfindahl-Hirschman indexes
ISEG         Innovative Strategies and Economics Group
LDT         light-duty truck
MACT       maximum achievable control technology
MSRP       Manufacturers Suggested Retail Price
NAFTA      North American Free Trade Agreement
NAICS       North American Industry Classification System
NESHAP     national emission standards for hazardous air pollutants
NUMMI      New United Motor Manufacturing, Inc.
OAQPS      Office of Air Quality Planning and Standards
SBA         Small Business Administration
SIC          Standard Industrial Classification
UMRA       Unfunded Mandates Reform Act
VOC         volatile organic compound
                                       IX

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                            EXECUTIVE SUMMARY
       Under the Clean Air Act (CAA), Congress gave the U.S. Environmental Protection
Agency (EPA) broad authority to protect air resources throughout the nation. Under Section
112 of the CAA, EPA has prepared a National Emission Standard for Hazardous Air
Pollutants (NESHAP) designed to reduce emissions generated during the automobile coating
process. This report presents a regulatory impact analysis (RIA) to evaluate the economic
impacts associated with the regulatory options under consideration for the final rule.
ES.l   Industry Profile

       The domestic automobile and light duty truck (LDT) manufacturing industry is a
large, mature industry spanning NAICS 336111 and NAICS 336112. In 1998 and 1999, this
industry comprised 65 establishments, which were owned by 14 domestic and foreign
companies and employed more than 160,000 workers. The industry operates in a global
marketplace and competes with foreign producers of vehicles. Many of the companies that
own these facilities are foreign-based companies.

       Three companies supply the majority of automobile coatings used in vehicle
assembly plants: DuPont Performance Coatings, PPG Industries, and BASF Coatings AG.
Sherwin-Williams is also a major player in automobile coatings, but they tend to supply auto
body shops and other aftermarket operations rather than assembly plants.

Market Structure

       Within the United States, the market for automobiles and LDTs is considered an
oligopolistic differentiated products market (Berry, Levinsohn, and Pakes, 1995) because the
facilities that assemble these vehicles in the United States are owned by only 14 companies
                                      ES-1

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and because the products produced are highly differentiated by manufacturer.  Entry and exit
of companies in the industry are difficult because the capital outlays required to begin
manufacturing cars are extremely large; thus, entry depends on the ability of a new
manufacturer to secure outside funding. Entry is also difficult because brand name
recognition is critical for establishing a market for a particular vehicle.

       Market structure of the industry is particularly influenced by the high degree of
product differentiation.  Vehicles vary in their functions as sedans, coupes, wagons, pickups,
and minivans, and in their characteristics such as carrying capacity, gas mileage, safety
features, comfort features, visual aesthetics, and reliability ratings. Brand names are also
important in this industry in that they embody consumers' perceptions of the characteristics
and reliability of the vehicles.  The prices for similar type vehicles across manufacturers can
vary based on multiple characteristics; thus, nonprice competition, if it occurs, would be
particularly difficult to discern.

Market Data

       Over 12 million cars and LDTs were manufactured in the United States in 1999.
LDT production accounted for approximately 55 percent of total production in 1999 and has
shown strong growth over the past 5 years.  In contrast, car production has shown small
declines over the same period with an average annual growth rate of-2.6 percent. These
trends reflect the growing consumer preference for SUVs and minivans (U.S. Department of
Commerce, 1999c). Although Japan is the primary source of imported cars and trucks, the
flow of imports has declined recently.  Exports have remained relatively stable over the past
4 years with Canada accounting for half of all domestic exports.

Industry Trends

       Domestic production of motor vehicles in the United States is projected to increase in
the next 5 years primarily due to two factors. First, foreign automobile manufacturers, such
as Honda and BMW, are locating more of their production facilities in the United States to
serve the U.S. market.  Second, the LDT market, in which U.S. manufacturers dominate, is
surging especially as manufacturers are offering more car-like amenities in these vehicles.
The U.S. Department of Commerce (1999c) projects that domestic automobile manufacturing
facilities will have capacity utilization rates of 90 percent or more over the next few years.

       Offsetting these increases in domestic production is the fact that U.S. manufacturers
are expected to move some production facilities to locations with lower costs of production
such as Mexico and Canada. Relocation to Mexico and Canada has become easier partly

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because of NAFTA. In addition to lower costs of production, other countries may have less
stringent environmental regulations than the United States' regulations, which translates into
lower costs as well. To serve the markets in other countries, however, U.S. manufacturers
have developed and will continue to develop smaller, less costly models than those produced
for the U.S. market. Most of the growth in the global vehicle market will be  in less
developed countries such as China, India, Latin America, and eastern Europe in which the
typical U.S. automobile is overly equipped and prohibitively expensive.

ES.2   Regulatory Control Costs

       For this analysis, EPA assumed that these facilities will adopt the following strategies
to reduce their emissions and comply with the final NESHAP:

       •   Strategy 1:  Facilities that do not presently have controls on the electrodeposition
          oven will add an oxidizer to control HAP emissions from  the oven.  This equates,
          on average, to about $8,200 per ton of HAP controlled.
       •   Strategy 2:  If the HAP/VOC ratio for the primer-surfacer coating material
          exceeds 0.3, a modified surface coating material will be used to meet this ratio.
          This equates, on average, to about $540 per ton of HAP controlled.
       •   Strategy 3:  If the HAP/VOC ratio for the topcoat material exceeds 0.3, a
          reformulated top coating material will be used to meet this ratio.
       •   Strategy 4:  Any remaining HAP emissions in excess  of the MACT floor will be
          reduced by introducing controls on the exhaust from automated zones of spray
          booths.
The associated abatement costs could include capital costs incurred to purchase or upgrade
pollution control equipment, cost for operation and maintenance  of this abatement equipment
such as cost of energy needed to operate it and coating materials replacement costs, and other
administrative costs associated with monitoring, reporting, and record keeping.

       New facilities and new paint shops would incur little additional cost to meet the final
emission limit. These facilities would already include bake oven controls and partial spray
booth exhaust controls for VOC control purposes. New facilities might need to make some
downward adjustment in the HAP  content of their materials to meet the final emission limit.

       The total annual capital cost estimate includes the annualized capital cost associated
with all applicable strategies. Similarly, the total variable cost estimate includes the variable
cost associated with all applicable  strategies. The nationwide total cost is estimated at $154
million, with  $75 million in annual capital costs, $76 million in operation and maintenance

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   costs, and $3 million in administrative costs.1 This equates, on average, to about $25,000 per
   ton of HAP controlled.

   ES.3  Summary of EIA Results

         Automobile/LDT manufacturers will attempt to mitigate the impacts of higher
   production costs by shifting as much of the burden .on other economic agents as market
   conditions allow. Potential responses include changes in production processes and inputs,
   changes in output rates, or closure of the plant. This analysis focuses on the last two options
   because they appear to be the most viable for auto assembly plants, at least in the short term.
   We expect upward pressure on prices as producers reduce output rates.  Higher prices reduce
   quantity demanded and output for each vehicle class, leading to changes in profitability of
   facilities and their parent companies.  These market and industry adjustments determine the
   social costs of the regulation and its distribution across stakeholders (producers and
   consumers). We report key results below:

         •  Price and Quantity Impacts: The EIA model predicts the following:

            — The regulation is projected to increase the price of all vehicle classes by at
                most 0.01  percent (or at most $3.08 per vehicle).  Similarly, the model
                projects small declines in domestic production across all vehicle classes
                (ranging from  17 to 384 vehicles).

            — Given the  small changes in domestic vehicle prices projected by the economic
                model, EPA estimates foreign trade impacts associated with the rule are
                negligible.

         •  Plant Closures and Changes in Employment: EPA estimates that no automobile
             or LDT assembly plant is likely to prematurely close as a result of the regulation.
             However, employment in the automobile and LDT assembly industry is projected
            to decrease by 37 full-time equivalents (FTEs) as a result of decreased output
             levels.  This represents a 0.02 percent decline in manufacturing employment at
            these assembly plants.

         •  Small Businesses: The Agency has determined that there are no small businesses
            within this source category that would be subject to this  final rule.  Therefore,
            because this final rule will not impose any requirements on small entities, EPA
            certifies that this action will not have a significant economic impact on a
             substantial number of small entities (SISNOSE).
All values are reported in 1999 constant dollars.

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       •   Social Costs: EPA estimates the total social cost of the rule to be $161 million.
          Note that social cost estimates exceeds baseline engineering cost estimates by $7
          million. The projected change in welfare is higher because the regulation
          exacerbates a social inefficiency (see Appendix B). In an imperfectly competitive
          equilibrium, the marginal benefit consumers place on the vehicles, the market
          price, exceeds the marginal cost to producers of manufacturing the product.  Thus,
          social welfare would be improved by increasing the quantity of the vehicles
          provided.  However, producers have no incentive to do this because the marginal
          revenue effects of lowering the price and increasing output is lower than the
          marginal cost of these extra units.
          —  Higher market prices lead to consumer losses of $9.1 million, or 6 percent of
              the total social cost of the rule.
          —  Although automobile or LDT producers are able to pass on a limited amount
              of cost increases to final consumers, the increased costs result in a net decline
              in profits at assembly plants of $ 152 million.
ES.4   Summary of Benefit Analysis

       The emission reductions achieved by the automobile and light-duty truck surface
coating source category will provide benefits to society by improving environmental quality.
In general, the reduction of HAP emissions resulting from the regulation will reduce human
and environmental exposure to these pollutants and thereby reduce the likelihood of potential
adverse health and welfare effects.

       Seven HAP account for over 95 percent of the total HAP emitted in this source
category.  Those seven HAP are toluene, xylene, glycol ethers (including ethylene glycol
monobutyl ether (EGBE)), MEK, MIBK, ethylbenzene, and methanol. According to
baseline emission estimates, this source category will emit approximately 10,000 tons per
year of HAPs at affected sources in the fifth year following promulgation. The regulation
will reduce approximately 6,000 tons of emissions per year of the HAPs listed above.

       Of the seven HAP emitted in the largest quantities by this source category, all can
cause toxic effects following sufficient exposure. The potential toxic effects of these HAP
include effects to the central nervous system, such as fatigue, nausea, tremors, and loss of
motor coordination; adverse effects on the liver, kidneys, and blood; respiratory effects; and,
developmental effects. In addition, one of the seven predominant HAP, EGBE, is a possible
carcinogen, although  information on this compound is not currently sufficient to  allow us to
quantify its potency.  None of the seven predominant HAP are included in the list of 30 HAP
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posing the greatest health risk in urban areas which are being addressed in the EPA's Urban
Air Toxics Program.

       The rule will also achieve reductions of 12,000 to 18,000 tons of VOCs and hence
may reduce ground-level ozone and particulate matter (PM).  Major adverse health effects
from ozone include alterations in lung capacity and breathing frequency; eye, nose and throat
irritation; reduced exercise performance; malaise and nausea; increased sensitivity of
airways; aggravation of existing respiratory disease; decreased sensitivity to respiratory
infection; and extra pulmonary effects (CNS, liver, cardiovascular, and reproductive effects).
Other welfare benefits associated with reduced ozone concentrations include the value of
avoided losses in commercially valuable timber and aesthetic losses suffered by
nonconsumptive users (EPA, 1995b).  There are a number of benefits from reduced PM
concentrations, including reduced soiling and materials damage, increased visibility,  and
reductions in cases of respiratory illness, hospitalizations, and deaths.

       We are unable to provide a monetized estimate of the benefits from the reduction of
HAP and VOC emissions associated with this rule due to a lack of scientific knowledge  of
the links between the reductions in incidence of the health and environmental effects  listed
and a value that can be placed on them. The Agency currently has research going on to
develop methodologies for providing such benefit estimates.
                                        ES-6

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                                        SECTION 1

                                     INTRODUCTION
          In 1999, the automobile and LDT assembly industry was comprised of 65
   establishments, which were owned by 14 domestic and foreign companies and employed
   more than 160,000 workers.2  The coating operations of 59 of these facilities are major
   sources of hazardous air pollutant (HAP) emissions.3 The majority of HAP emissions from
   the automobile coating process are released in the coating operations. Under Section 112 of
   the 1990 Clean Air Act (CAA) Amendments, the U.S. Environmental Protection Agency
   (EPA) is currently developing national emission standards for hazardous air pollutants
   (NESHAP) to limit these emissions. This report presents a regulatory impact analysis (RIA)
   to evaluate the economic impacts associated with the regulatory options under consideration.

   1.1    Agency Requirements for Conducting an RIA

          Congress and the Executive Office have imposed statutory and administrative
   requirements for conducting economic analyses to accompany regulatory actions. Section
   317 of the CAA specifically requires estimation of the cost and economic impacts for
   specific regulations and standards promulgated under the authority of the Act.  In addition,
   Executive Order (EO) 12866 and the Unfunded Mandates Reform Act (UMRA) require a
   more comprehensive analysis of benefits and costs for  significant regulatory actions.4 Other
   statutory and administrative requirements include examination of the composition and
   distribution of benefits and costs.  For example, the Regulatory Flexibility Act (RFA), as
   amended by the Small Business Regulatory Enforcement and Fairness Act of 1996
   (SBREFA)", requires EPA to consider the economic impacts of regulatory actions on small
 Automobiles are defined as vehicles designed to carry up to seven passengers but do not include sport utility
   vehicles (SUVs), vans, or trucks. Light duty trucks are defined as vehicles not exceeding 8,500 pounds that are
   designed to transport light loads of property and include SUVs and vans (AAMA/AIAM/NPCA, 2000).

 A major source of HAP emissions is defined as a facility that emits, or has the potential to emit, 10 or more tons of
   any HAP or 25 or more tons of any combination of HAPs.

4Office of Management and Budget (OMB) guidance under EO 12866 stipulates that a full benefit-cost analysis is
   required when the regulatory action has an annual effect on the economy of $100 million or more.

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entities. The Agency's Economic Analysis Resource Document provides detailed
instructions and expectations for economic analyses that support rulemaking (EPA, 1999).

1.2    Organization of the Report

       This report is divided into five sections and two appendixes that describe the industry
and economic methodology and present results of this RIA:

       •   Section 2 provides a summary profile of the automobile and light-truck industry.
          It describes the affected production process, inputs, outputs, and costs of
          production.  It also describes the market structure and the uses and consumers of
          automobiles and light trucks.

       •   Section 3 reviews the regulatory control alternatives and the associated costs of
          compliance. This section is based on EPA's engineering analysis conducted in
          support of the  final NESHAP.

       •   Section 4 outlines the methodology for assessing the economic impacts of the
          final NESHAP and the results of this analysis, including market, industry,  and
          social welfare  impacts.

       •   Section 5 addresses the final regulation's impact on small businesses, unfunded
          mandates, and new sources.

       •   Section 6 analyzes the benefits associated with the  final regulation.

       •   Appendix A provides a detailed description  of the Agency's economic model.

       •   Appendix B presents the methodology for estimating social costs under imperfect
          competition.
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                                    SECTION 2

                               INDUSTRY PROFILE
       The domestic automobile and light duty truck (LDT) manufacturing industry is a
large, mature industry spanning NAICS 336111 and NAICS 336112. In 1998 and 1999, this
industry was comprised of 65 establishments, which were owned by 14 domestic and foreign
companies and employed more than 160,000 workers. The industry's size is expected to
increase as foreign producers locate additional production facilities in the United States and
as the LDT market continues to grow.  The  final NESHAP will directly impact facilities
that use coatings in their automobile and LDT assembly operations.  This industry profile
provides information that will be used in Section 4 to estimate the size and nature of these
impacts.

       This section is organized as follows. Section 2.1 describes the supply side including
the affected production process, inputs, outputs, and costs of production.  Section 2.2
describes the industry organization, including market structure, manufacturing plants, and
parent company characteristics. Section 2.3 describes the demand side of the market
including the uses and consumers of automobiles and light trucks. Finally, Section 2.4
provides market data on the automobile and light truck industry, including market volumes,
prices, and projections.  While the industry profile focuses largely on the automobile and
light duty truck assembly industry, information is also provided when available on the
indirectly affected coating manufacturing industry.

2.1     Supply Side Overview

       Motor vehicle assembly plants combine automotive systems and subsystems to
produce finished vehicles.  Once the components of the vehicle body have been assembled,
the body goes through a series of coating operations. In this section, the coating process and
the characteristics of the coatings used are described.

2.1.1   Coating Process

       As illustrated in Figure 2-1, the coating process for automobiles and LDTs consists of
the following operations:
                                        2-1

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2-2

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                                                       Stepl
Body Shop
Bake V-
Step 2
Primer
Electrodeposition
w


Cleaning
Operation

Install Plastic
Parts
w
^

Zinc Phosphate
Bath
>
Chromic
r
Acid Dip
        Seal Deck
                                Step 3
Clearcoat Booth
>
r


Main Color Booth

^

Wet Sand Deck

Antichip Booth



Primer -
Surfacer Water -
Wash Booth
>
r
                                Finesse
                              Operations
Deadener
Trim Shop
                                           Repairs and
                                       Two-Tone Finishing
                      Assembly
                                                                         Final Repairs
Figure 2-1. Car Painting Process
Sources:  American Automobile Manufacturers Association. 1998. Motor Vehicle Facts and Figures 1998.
         Detroit: AAMA.
         U.S. Environmental Protection Agency. September 1995a.  Profile of the Motor Vehicle Assemble
         Industry.  EPA 310-R-95-009. Washington, DC: U.S. Government Printing Office.
                                             2-3

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       Step 1: Surface preparation operations—cleaning applications, phosphate bath, and
              chromic acid bath;
       Step 2: Priming operations—electrodeposition primer bath, joint sealant application,
              antichip application, and primer surface application; and

       Step 3: Finishing operations—color coat application, clearcoat application, and any
              painting necessary for two-tone color or touch-up applications (EPA, 1995a).


Most releases of HAPs occur during the priming operations (Step 2) and the finishing
operations (Step 3); thus, these steps are described in more detail here, followed by a
description of the final vehicle assembly activities. However, the order and the method by
which these operations occur may vary for individual facilities.  Once completed, the coating
system typically is as shown in Figure 2-2.

                                      Clearcoat
                                         t
                                      Basecoat
                                         t
                                   Primer Surfacer
                                         t
                                  Electrocoat Primer
                                         t
                            Substrate: Steel and Inhibition Layer

Figure 2-2. Priming Operations
Adapted from:   Poth, U. 1995. "Topcoats for the Automotive Industry." Automotive Paints and Coatings,
              G. Fettis, ed. New York:  VCH Verlagsgesellschaft mbH.

2.1.1.1 Priming Operations

       After the body has been assembled, anticorrosion operations have been performed,
and plastic parts to be finished with the body are installed, priming operations begin (Step 2).
The purpose of the priming operations is to further prepare the body for finishing by
applying various layers of coatings designed to protect the metal surface from corrosion and
assure good adhesion of subsequent coatings.

       First, a primer coating is applied to the body using an electrodeposition method in
which a negatively charged auto body is immersed in a positively charged bath of primer for
                                         2-4

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approximately 3 minutes (EPA, 1995a).  The coating particles migrate toward the body and
are deposited onto the body surface, creating a strong bond between the coating and the body
to provide a durable coating (EPA, 1995a).  Once deposition is completed, the body is rinsed
in a succession of individual spray and/or immersion rinse stations and then dried with an
automatic air blow-off (Vachlas, 1995).  Following the rinsing stage, the deposited coating is
cured in a electrodeposition curing oven for approximately 20 minutes at 350 to 380°F (EPA,
1995a).
       Next,  the body is further water-proofed by sealing spot-welded joints of the body. A
sealant, usually consisting of polyvinyl chloride and small amounts of solvent, is applied to
the joints. The body is again baked to ensure that the sealant adheres thoroughly to the spot-
welded areas  (EPA, 1995a).

       After  sealing, the body proceeds to the antichip booth. The purpose of antichip
primers is to protect the vulnerable areas of the body, such as the door sills, door sides,
under-body floor pan, and front and rear ends, from rocks and other small objects that can
damage the finish. In addition, antichip primers allow for improved adhesion of the top coat.
In the process, a substance usually consisting of a urethane or an epoxy ester resin, in
conjunction with solvents, is applied locally to certain areas along the base and sill sections
of the body (EPA, 1995a; Vachlas, 1995).

       The final step in the priming operation is applying the primer-surfacer coating. The
purpose of the primer-surfacer coating is to provide "filling" or hide minor imperfections in
the body, provide additional protection to the vehicle body, and bolster the appearance of the
topcoats (Ansdell, 1995). Unlike the initial electrodeposition primer coating, primer-surfacer
coatings are applied by spray application in a water-wash spray booth. The primer-surfacer
consists primarily of pigments, polyester or epoxy ester resins, and solvents. Because of the
composition of this coating, the primer-surfacer creates a durable finish that can be sanded.
Primer-surfacers can be color-keyed to specific topcoat colors and thus provide additional
color layers in case the primary color coating is damaged.  Since water-washed spray booths
are usually used, water that carries the overspray is captured and processed for recycling
(Poth,  1995; EPA, 1995a).  Following application of the primer-surfacer, the body is baked
to cure the film, minimize dirt pickup, and reduce processing time.
                                        2-5

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2.1.1.2 Finishing Operations

       After the primer-surfacer coating is baked, the body is then sanded, if necessary, to
remove any dirt or coating flaws. The next step of the finishing process is the application of
the topcoat, which usually consists of a color basecoat and a clearcoat.  This is accomplished
in a manner similar to the application of primer-surfacer in that the coatings are sprayed onto
the body.  In addition to pigments and solvents, aluminum or mica flakes can be added to the
color basecoat to create a finish with metallic or reflective qualities.

       After the color basecoat is allowed to flashoff, the clearcoat is applied.  The purpose
of the clearcoat is to add luster and durability to the vehicle finish and protect the total
coating system against solvents, chemical agents, water, weather, and other environmental
effects. This coating generally consists of acrylic resins or melamine resins and may contain
additives.  Once the clearcoat is applied, the vehicle body is baked for approximately 30
minutes to cure the basecoat and clearcoat.

2.1.1.3 Final Assembly Activities

       Once the clearcoat is baked, deadener is applied to certain areas of the automobile
underbody to reduce noise. In addition, anticorrosion wax is applied to other areas, such as
the inside  of doors, to further seal the automobile body and prevent moisture damage. Hard
and soft trim are then installed on the vehicle body. Hard trim, such as instrument panels,
steering columns, weather stripping, and body glass, is installed first. The car body is then
passed through a water test where, by using phosphorus and a black light, leaks are
identified. Soft trim, including seats, door pads, roof panel insulation, carpeting, and
upholstery, is then installed (EPA, 1995a).

       Next, the automobile body is fitted with the gas tank, catalytic converter, muffler, tail
pipe, bumpers, engine, transmission, coolant hoses, alternator, and tires. The finished
vehicle is then inspected to ensure that no damage has occurred as a result of the final
assembly stages. If there is major damage, the entire body part may be replaced.  However,
if the damage is minor,  such as a scratch, paint is taken to the end of the line and applied
using a hand-operated spray gun. Because the  automobile cannot be baked at temperatures
as high as in earlier stages of the finishing process, the paint is catalyzed prior to application
to allow for faster drying at lower temperatures.

2.1.2  Coating Characterization

       Automobile coatings enhance a vehicle's durability and appearance. Coatings
therefore add value to the vehicle. Some of the coating system characteristics that
                                         2-6

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automotive assemblers test for include adhesion, water resistance, humidity resistance, salt
spray resistance, color, gloss, acid etch resistance, and stone chip resistance.

       Coatings inputs are combined with other inputs, such as labor, capital, and energy, to
complete the coating process for automobiles and LDTs.  The primary coatings used in
vehicle assembly that the NESHAP will affect are the electrodeposition primer, the primer
surfacer coating, and the topcoat (basecoat and clearcoat). Table 2-1 shows the coatings and
their physical state, their purpose, and if they release HAPs.

       As the table indicates, powder coatings used for primer surface coating do not release
significant HAPs, but their liquid counterparts may (Green, 2000a); thus, automotive and
LDT assembly plants may consider substituting powder coatings for liquid coatings in
addition to installing control equipment to comply with the NESHAP. However, powder
coatings tend to be more costly to use than liquid coatings because the technology has not
been developed to allow powder to be applied as thinly as liquid coating. In particular, "the
normal liquid film build-up for a clearcoat is 2 mils while for a powder clearcoat it takes 2.5
to 3 mils or more to make it look good" (Galvin, 1999). As a result, using powder means
using a larger quantity of coating, thus an increased cost. However, some believe the cost
difference between powder and liquid may be eliminated for applications such as automobile
primers over the next 5 years (RTI, 2000). Already, one coating manufacturer, PPG, is
experimenting with charging automotive manufacturers based on the number of vehicles
coated rather than the units of coatings used (Galvin, 1999).

       HAP emissions depend on HAP content, transfer efficiency, and the presence and
extent of HAP control equipment.  To reduce HAP content, liquid coatings can be
reformulated. In addition, non-HAPs such as ethyl acetate and butyl acetate can substitute
for HAPs such as toluene and xylene. It should also be noted that there  are overlapping
ranges of HAP contents and HAP emission rates for solventborne and waterborne materials.

       Volatile organic compound (VOC) emissions depend on VOC content, transfer
efficiency, and the presence and extent of VOC  control equipment. Although most of the
                                        2-7

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HAPs in these coatings are also VOCs, there are non-HAP VOCs.  To lower VOC content,

Table 2-1. Properties of Coatings Used in Automobile and LDT Assembly Facilities
Coating
Cleaning agents
Electrodeposition
primer
Purpose
To clean spray booths and
application equipment and
purge lines between color
changes
To prepare body for primer
surface and for corrosion
protection
Physical State
Solvent
Liquid — waterborne
Significant HAP
Releases1' b
Primarily specific
aromatics (toluene and
xylene),
blends containing
aromatics, MIBK
Primarily glycol ethers,
methanol, MIBK, xylene,
MEK
 Primer surfacer     To prepare body for paint
                            Liquid—solventborne or  Glycol ethers, methanol,
                            waterborne             xylene, ethylbenzene,
                                                   formaldehyde, MEK
 Basecoat
To add color
Powder

Liquid—waterborne or
solventborne
 Clearcoat
To protect the color coat
Liquid—solventborne
                                               Powder'
None

1,2,4 trimethyl benzene,
ethylbenzene, xylene,
toluene, aromatic 100,
naptha, formaldehyde,
mineral spirits, glycol
ethers, MEK, methanol

Ethyl benzene, xylene,
1,2,4 trimethyl benzene,
aromatic solvent 100,
napthol spirits, MIBK,
aromatic solvent,
formaldehyde

None
a Although liquid coatings may be associated with significant H AP releases, all can be reformulated using non-
  HAP chemicals.
b MIBK = methyl isobutyl ketone; MEK = methyl ethyl ketone.
c Powder clearcoats are currently not used in the United States.

Sources:        Adapted from U.S. Environmental Protection Agency.  September 1995a. Profile of the
               Motor Vehicle Assembly Industry. EPA310-R-95-009. Washington, DC: U.S. Government
               Printing Office.

        Green, David, RTI. Email correspondence with Aaiysha Khursheed, EPA.  November 8, 2000a.
                                             2-8

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liquid coatings can be reformulated. VOC contents and emission rates for solventborne and
waterbome materials also have overlapping ranges.

2.1.3  Final Products

       Motor vehicle assembly plants combine automotive parts from parts manufacturers to
produce finished vehicles. There is a great diversity in the type of final vehicles available for
sale to the consumer. Vehicles can vary in their functions such as sedans, pickup trucks, and
minivans as well as in their characteristics such as fuel efficiency, carrying capacity, and
comfort features.  In this report, the Agency has categorized automobiles and light trucks into
the eight vehicle classes listed below in Table 2-2.

Table 2-2. Finished Vehicle Categorization

 Vehicle Class                            Examples of Vehicle Models
 Subcompact                              Honda Civic, Nissan Sentra
 Compact                                 Ford Focus, Toyota Corolla, Chevrolet Prizm
 Intermediate/standard                      Honda Accord, Dodge Stratus, Toyota Camry
 Luxury                                  Cadillac Deville, Lincoln Towncar
 Sports                                  Chevrolet Corvette, Dodge Viper
 Pick-up                                 Dodge Ram, Ford F Series
 Van                                    Dodge Caravan, Ford Windstar
 Sports utility vehicle (SUV)                Jeep Grand Cherokee, Ford Explorer
2.1.4  Costs of Production

       The overall costs of production for automobiles and LDTs include capital
expenditures, labor, energy, and materials. The cost of coating a vehicle is only a subset of
these overall costs.  Costs of production, as reported by the Census Bureau for the relevant
SIC and NAICS codes, include costs for automobile and LDT assemblers and for
establishments that manufacture chassis and passenger car bodies. In addition, the relevant
SIC code includes establishments that assemble commercial cars and buses and special-
purpose vehicles for highway use, none of which are included in the NAICS code. In either
case, the data presented here overstate the costs of production for plants that assemble
vehicles. However, the hourly wages and the proportion of costs relative to the value of
shipments provide us with information on relative costs in the industry.

                                         2-9

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       Table 2-3 presents data on the value of shipments, payroll, cost of materials, and new
capital expenditures for SIC 3711 and for NAICS 336111 (automobiles) and 336112 (LDTs).
As indicated, payroll costs, which include wages and benefits, for these codes account for
approximately 6 to 7 percent of the value of shipments.  Materials account for a large portion
of value of shipments at 64 to 73 percent. According to  the Census definition, materials
include parts used in the manufacture of finished goods (materials, parts, containers, and
supplies incorporated into products or directly consumed in the process); purchased items
later resold without further manufacture; fuels; electricity; and commission or fees to outside
parties for contract manufacturing (U.S. Department of Commerce, 1996).  The energy
component of the materials cost averages less than 1 percent.  Finally, new capital
expenditures account for approximately 2 percent of the value of shipments.

       Table 2-4 provides further detail on the labor component of production costs.
Average hourly wages including benefits for production workers ranged from $21.66 per
hour in 1992 to $26.30 per hour in 1997. However, real wages have been relatively constant
over this time period.

2.1.5   Costs Associated with Coatings

       According to the National Paint and Coatings Association (2000), the cost of paint on
an average automobile accounts for approximately 1 percent of the showroom price. In
addition to the costs of the coatings themselves, the total costs of coating a vehicle also
include annualized capital expenditures for the "paint shop," labor, energy, and other
material inputs.  The costs associated with the coating process are described in more detail
below.   *

2.1.5.1 Capital Costs for the Paint Shop

       The capital costs associated with coating vehicles, or the "paint shop," include the
cost of

       •   physical space within the assembly plant;
       •   conveyor system;
                                        2-10

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Table 2-3. Number of Establishments, Value of Shipments, and Production Costs for the SIC and NAICS Codes that
Include Automobile and LOT Assemblers, 1992-1997
Year
1992
1993
1994
1995
1996
1997


Number of
Industry Code Establishments
SIC 37 11
SIC 37 11
SIC 37 11
SIC 3711
SIC 3711
Total NAICS
3361 11 and
336112
NAICS 3361 11
(autos)
NAICS 3361 12
(LDTs)
456
NA
NA
NA
NA
306
194
112
Value of
Shipments
($10')
152,949
167,826
197,554
201,171
200,704
205,786
95,386
110,400
Payroll
($10')
10,439.8
11,154.2
12,437.7
12,955.9
12,310.9
11,773.9
6,412.0
5,362.0
%ofVOS
7%
7%
6%
6%
6%
6%
7%
5%
Cost of Materials
($10')
107,636.6
120,458.8
144,809.9
145,143.7
145,134.1
137,473.5
66,546.2
70,927.3
%ofVOS
70%
72%
73%
72%
72%
67%
70%
64%
New Capital
• Expenditures
($10')
2,989.5
4,033.9
4,245.7
4,521.0
4,381.7
5,125.4°
3,355.8"
1,769.6"
%ofVOS
2%
2%
2%
2%
2%
2%
4%
2%
" Capital expenditures for the NAICS codes include both new and used capital equipment purchases. Used capital expenditures are not reported for SIC 3711 in the
  Annual Survey of Manufactures.
NA = Not available
Sources: U.S. Department of Commerce. 1995. 1992 Census of Manufactures: Industry Series—Motor Vehicles and Equipment. Washington, DC: Government Printing
        Office.   '
        U.S. Department of Commerce.  1996.  1994 Annual Survey of Manufactures. Washington, DC: Government Printing Office.

        U.S. Department of Commerce. 1998. 1996 Annual Survey of Manufactures. Washington, DC: Government Printing Office.

        U.S. Department of Commerce, Census Bureau. October 1999a.  "Automobile Manufacturing." 1997 Economic Census Manufacturing Industry Series.
        EC97MO-3361A. Washington, DC: Government Printing Office.

        U.S. Department of Commerce, Census Bureau. October 1999b.  "Light Truck and Utility Vehicle Manufacturing." 1997 Economic Census Manufacturing
        Industry Series. EC97M-3361B.  Washington, DC: Government Printing Office.

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     Table 2-4. Number of Establishments, Employment, and Payroll Costs for the SIC and NAICS Codes that Include
     Automobile and LDT Assemblers, 1992-1997
NJ

to
All Employees
Production Workers
Payroll ($10')
Year
1992
1993
1994
1995
1996
1997


Industry Code
SIC 37 11
SIC 37 11
SIC 3711
SIC 3711
SIC 3711
Total NAICS
3361 11 and
336112
NAICS
336111
(autos)
NAICS
336112
(LDTs)
Number of
Establishments
456
NA
NA
NA
NA
• 306
194
112
(103)
228.4
234.0
224.2
237.9
225.2
208.1
114.1
94.0
Currents
10,438.8
12,437.7
11,154.2
12,955.9
12,310.9
11,773.9
6,412.0
5,362.0
1992$
10,438.8
12,075.4
10,562.7
11,929.9
11,011.5
10,292.0
5,604.9
4,687.1
(103)
193.3
202.5
191.0
208.3
196.3
184.4
98.0
86.5
Hours (10')
397.3
447.5
409.6
449.1
418.8
377.9
197.6
180.3
Average Hourly Wage
Payroll ($10')
Current$
8,606.8
10,448.3
9,262.6
10,996.0
10,304.2
9,936.8
5,197.2
4,739.6
1992$
8,606.8
10,144.0
8,771.4
10,125.2
9,216.6
8,686.0
4,543.0
4,143.0
Current$
21.66
23.35
22.61
24.48
24.60
26.30
26.30
26.29
1992$
21.66
22.67
21.40
22.54
22.00
22.99
22.99
22.98
     NA = Not available
     Sources: U.S. Department of Commerce. 1995.  1992 Census of Manufactures: Industry Series—Motor Vehicles and Equipment. Washington, DC: Government Printing
             Office.

             U.S. Department of Commerce. 1996. 1994 Annual Survey of Manufactures. Washington, DC: Government Printing Office.

             U.S. Department of Commerce. 1998.  1996 Annual Survey of Manufactures.  Washington, DC: Government Printing Office.

             U.S. Department of Commerce, Census Bureau. October 1999a. "Automobile Manufacturing." 1997 Economic Census Manufacturing Industry Series.
             EC97MO-3361A. Washington, DC: Government Printing Office.

             U.S. Department of Commerce, Census Bureau. October 1999b. "Light Truck and Utility Vehicle Manufacturing." 1997 Economic Census Manufacturing
             Industry Series. EC97M-3361B. Washington, DC: Government Printing Office.

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       •  sanding, paint spray, and demasking booths;
       •  vats for storing coatings;
       •  flash and cooling tunnels;
       •  electrocoat, sealer, and topcoat ovens;
       •  inspection and repair decks;
       •  pollution abatement system; and
       •  various other equipment (Graves, 2000).
Industry estimates that the capital costs for a new powder primer-surfacer system within an
existing plant are $26 to $30 million (Praschan, 2000) and the total cost of removing and
demolishing the previous equipment is in the range of $8 to $10 million. The expected life
of a paint shop is approximately 15 years (Green, 2000b).

2.1.5.2 Variable Costs for the Paint Shop

       The variable costs associated with coating vehicles include the coatings, labor,
energy, and other material inputs. While specific information on the labor, energy, and other
material input costs for the coating process could not be obtained, information on the costs of
the coatings themselves is available. First, the relative size of the coating input cost can be
estimated based on Census data. According to  the 1997 Economic Census (U.S. Department
of Commerce, Bureau of the Census, 1999a and 1999b), establishments classified in NAICS
336111 Automobile Manufacturing, which includes both assembly plants and chassis
manufacturing, spent $605.8 million on materials purchased from establishments classified in
NAICS 32551 Paints, Varnishes, Lacquers, Stains, Shellacs, Japans, Enamels, and Allied
Products.  This implies that the coatings themselves accounted for approximately 0.9 percent
of the cost of materials ($66.5 billion) and 0.6 percent of the value of shipments ($95.4
billion) in 1997. Correspondingly, establishments classified in NAICS 336112 Light Truck
and Utility Vehicle Manufacturing, which also  include both assembly plants and chassis
manufacturing, spent $969.8 million on materials purchased from establishments classified in
NAICS 32551. Thus, coatings accounted for approximately 1.4 percent of the cost of
materials ($137.5 billion) and 0.9 percent of the value of shipments ($205.8 billion).in 1997.

       Table 2-5 provides a breakdown of automotive coatings usage for both motor vehicle
assembly and parts manufacturing establishments in 5-year increments from 1989 with
projections to 2008. In 1998, the majority of coatings were solvent-based (67.5 percent in
                                        2-13

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1998). Water-based coatings accounted for 19.8 percent of coating usage and powder

Table 2-5. Automotive Coatings Usage, 1989,1993, and 1998 with Projections to 2008

                  Item                    1989      1993     1998     2003     2008
 Motor vehicle assembly and parts          $246.1    $255.1    $337.6    $388.0    $448.2
 manufacturing shipments (109 $1992)

 Pounds of coatings per $1,000 in            3.69      3.32      2.70      2.44      2.19
 shipments

 Total automotive coating usage              909      847       910       945       980
 (106 pounds)

 Coating weight by application
 (106 pounds)
Solvent-based
Water-based
Powder
Other
Coating weight by resin (106 pounds)
Acrylic
Urethane
Epoxy
Alkyd
Other
765
100
24
20

310
285
89
150
75
675
109
41
. 22

300
280
90
110
67
615
180
65
50

330
290
110
100
80
560
225
95
65

350
305
115
90
85
505
260
135
80

370
320
120
80
90
Source: Freedonia Group. September 1999. Automotive Coatings, Sealants and Adhesives in the United States
       to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
coatings accounted for 7.1 percent.  Over the next 10 years, Freedonia projects that the
relative quantities of both water-based and powder coatings will increase relative to solvent-
based coatings.
                                         2-14

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       When comparing liquid coatings to powder coalings, a general rule of thumb in the
industry is to equate the cost of 3 pounds of powder, at a cost of $2.50 to $6.00 per pound, to
1 gallon of liquid coatings (RTI, 2000). One can also compare the cost of reformulated
liquid coating materials that contain ethyl acetate and butyl acetate to those containing
aromatics such as toluene and xylene.  Inputs to coating, such as ethyl acetate and butyl
acetate, cost about $0.40/lb, while toluene and xylene cost about $0.17/lb (Green, 2001).
Overall coatings used in the automobile industry averaged $3.74 per pound in 1998. Table
2-6 shows an example of one private research firm's estimates of the pricing trends in
automotive coatings, sealants, and adhesives in 5-year increments from 1989 with
projections to 2008 (Freedonia Group, 1999).

Table 2-6.    Pricing Trends in Automotive Coatings, Sealants, and Adhesives, 1989,
              1993, and 1998 with Projections to 2008 (Dollars per Pound)
Item
Weighted average
Coatings
Sealants
Adhesives
1989
2.48
3.36
1.09
1.18
1993
2.60
3.66
1.17
1.20
1998
2.59
3.74
1.23
1.33
2003
2.69
3.92
1.31
1.41
2008
2.76
4.08
1.39
1.48
Source: Freedonia Group. September 1999. Automotive Coatings, Sealants and Adhesives in the United States
       to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
2.2    Industry Organization

       This subsection describes the market structure of the automobile and LDT assembly
industries, the characteristics of the assembly facilities, and the characteristics of the firms
that own them.  In addition, we provide information on the market structure of the
automotive coatings industry and the characteristics of the firms that manufacture the
coatings used at the assembly facilities.

2.2.1   Market Structure

       Market structure is important because it determines the behavior of producers and
consumers in the industry. If an industry is perfectly competitive, then individual producers
are not able to influence the price of the output they sell or the inputs they purchase. This
condition is most likely to hold if the industry has a large number of firms, the products sold
and the inputs purchased are undifferentiated, and entry and exit of firms are unrestricted.
Product differentiation can occur both from differences in product attributes and quality and

                                        2-15

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from brand name recognition of products. Entry and exit are unrestricted for most industries
except, for example, in cases where one firm holds a patent on a product, where one firm
owns the entire stock of a critical input, or where a single firm is able to supply the entire
market.
      The automobile and LDT assembly industry operates in a global marketplace and
competes with foreign producers of vehicles. Many of the companies that own these
facilities are foreign-based companies. Within the United States, the market for automobiles
and LDTs is considered an oligopolistic differentiated products market (Berry, Levinsohn,
and Pakes, 1995) because the facilities that assemble these vehicles in the United States are
owned by only 14 companies and because the products produced are highly differentiated by
manufacturer. Entry and exit of companies in the industry are difficult because the capital
outlays required to begin manufacturing cars are extremely large; thus, entry depends on the
ability of a new manufacturer to secure outside funding.  Entry is also difficult because brand
name recognition is critical for establishing a market for a particular vehicle.

      Market structure of the industry is particularly influenced by the high degree of
product differentiation.  Vehicles vary in their functions  as sedans, coupes, wagons, pickups,
and minivans, and in their characteristics such as carrying capacity, gas mileage, safety
features, comfort features, visual aesthetics,  and reliability ratings.  Brand names are also
important in this industry in that they embody consumers' perceptions of the characteristics
and reliability of the vehicles.  The prices for similar type vehicles across manufacturers can
vary based on multiple characteristics; thus, nonprice competition, if it occurs, would be
particularly difficult to discern.

      In addition to evaluating the factors that affect competition in an industry, one can
also evaluate four-firm concentration ratios (CR4s), eight-firm concentration ratios (CR8s),
and Herfindahl-Hirschmann indexes (HHIs). These values are reported at the four-digit SIC
level for 1992, the most recent year available, in Table 2-7. Also included in the table are the
same ratios independently calculated from sales data for 1998/1999 for the 14 companies that
own vehicle assembly plants.  Comparing these two sets of numbers provides some insights
into how the companies owning assembly plants differ from the rest of the SIC 3711
companies.
                                        2-16

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Table 2-7. Measures of Market Concentration for Automobile Manufacturers, 1992
and 1998-1999

Description
SIC 3711 (1992)"
Companies that own
assembly plants (1998/99)b

CR4
84
72

CR8
91
94

HHI
2,676
1,471
Number of
Companies
398
14
Number of
Establishments
465
65
a Concentration ratios, as calculated by the Department of Commerce, are based on value added for the SIC
 code.
b Independently calculated concentration ratios were based on overall sales for the companies that own
 assembly plants.
Sources:  U.S. Department of Commerce. 1992. Concentration Ratios in Manufacturing. Washington, DC:
        Government Printing Office.
        Hoover's Online. Company capsules, . As obtained on January 13, 2000.
       Table 2-7 suggests that companies that own assembly plants have similar
concentration ratios compared to all companies in SIC 3711 based on the CR4s and CR8s.
The values for both of these measures are high relative to other industries.  The criteria for
evaluating the HHIs are based on the 1992 Department of Justice's Horizontal Merger
Guidelines.  According to these criteria, industries with HHIs below 1,000 are considered
unconcentrated (i.e., more competitive), those with HHIs between 1,000 and 1,800 are
considered moderately concentrated (i.e., moderately competitive), and those with HHIs
above 1,800 are considered highly concentrated (i.e., less competitive). The HHI as
calculated by the Department of Commerce indicates that SIC 3711 is considered highly
concentrated, whereas the HHI calculated based on the sales of companies that own assembly
plants indicates that the industry is moderately concentrated. In general, firms in less-
concentrated industries are more likely to be price takers, while firms in more-concentrated
industries are more likely to be able to influence market prices.  While the concentration
measures are high for the automobile and LDT industries, the high degree of product
differentiation is likely a more important determinant of the industry's structure.

       As with the assembly industry, the automotive coatings industry is oligopolistic in
that three companies provide nearly all of the coatings used by vehicle assemblers.  These
multinational companies—Dupont, BASF, and PPG Industries—provide coatings to a variety
of industries. The  coatings they provide to the vehicle assemblers are differentiated based on
their uses and specific formulations. Because little information is available on how they
                                         2-17

-------
market their products to the automotive industry, the degree of competition in the automotive
coatings industry is not known.

2.2,2   Automobile and LOT Assembly Facilities

       Facilities comprise a site of land with a plant and equipment that combine inputs (raw
materials, fuel, energy, and labor) to produce outputs (in this case, automobiles and light
trucks, and coatings). The terms facility, establishment, and plant are synonymous in this
report and refer to the physical locations where products are manufactured. As of 1999,
there were 65 facilities that assemble autos and LDTs.  This section provides information on
their characteristics, the vehicles manufactured at these facilities, and trends for these
facilities.
2.2.2.1 Characteristics of Automobile and LDT Assembly Plants

       As shown in Figure 2-3, most automobile and LDT facilities are located in Michigan
(30 percent of plants) and six Midwestern and Southern states south of Michigan (50 percent
of plants). The remaining plants are located primarily in California and on the Eastern
seaboard.  Most assembly plants employ from 2,000 to 3,999 workers (see Table 2-8).
However, the largest plant, a Honda plant in Marysville, Ohio, employs 13,000 people.

       Capacity utilization indicates how well the current facilities meet current demand.
For the years  1988-1997 the automobile industry capacity utilization was lower than the
manufacturing sector (see Table 2-9).  However, capacity utilization is highly variable from
year to year depending on economic conditions.  In comparison to the data in Table 2-9,
capacity utilization for automotive manufacturers, including those that make medium- and
heavy-duty trucks, reached 91 percent in  1997  (U.S. Department of Commerce, 1999c) and
nearly 100 percent in 1999 (Tables 2-10 and 2-11).

       Tables 2-10 and 2-11 provide detailed information on automobile and LDT assembly
facilities by company, including the location of each facility, production volume, capacity,
utilization rate, and the class of vehicles produced at the plant in 1999. As these tables
illustrate, a variety of vehicle classes can be produced at a single plant.  Car companies
engage in joint ventures since several  models can be produced with one plant. Generally
models that are produced within one plant are similar (i.e., Prizm and Corolla). The New
United Motor Manufacturing, Inc. (NUMMI) facility is owned and used for manufacture by
both Toyota and General Motors (GM). In other cases, the facility may be wholly owned by
                                       2-18

-------
            00
            o
t-J

>—*
VO
             3

             0>

             00
             o
             c
            00
            o
            Q.

            O


            5'
            o
            o


            I
            I
            u«
            ta
            3
            C
            P
                   ore

                    n
                    Ut
•a
 o
 a
 o

-------
Table 2-8. Number of Automobile and LDT Assembly Plants by Employment Range,
1998-1999

             Employment Range                          Number of Plants
       < 1,000                                                      I
       1,000 to 1,999                                                6
       2,000 to 2,999                                               13
       3,000 to 3,999                                               14
       4,000 to 4,999                                                5
       5,000 to 5,999                                                5
       6,000 or greater                                              3
       Not available                                               18
	Total plants	65	

Source: Harris Info Source. 2000. Selected Online Profiles. As obtained on January 2000.
Table 2-9. Capacity Utilization

Year
1988
1989 .
1990
1991
1992
1993
1994
1995
1996
1997
Average
AH
Manufacturing
83.8
83.6
81.4
77.9
79.4
80.5
82.5
82.8
81.4
81.7
81.5

Percent Change
3.1
-0.2
-2.6
-4.3
1.9
1.4
2.5
0.4
-1.7
0.4
0.1
Motor Vehicle
and Parts Mfg.
81.2
79.5
71.6
64.0
69.9
77.3
83.5
76.9
72.4
73.4
75.0

Percent Change
5.7
-2.1
-9.9
-10.6
9.2
10.6
8.0
-7.9
-5.9
1.4
-0.2
Source: American Automobile Manufacturers Association. 1998. Motor Vehicle Facts and Figure 1998.
       Detroit: AAMA.

                                         2-20

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Table 2-10.  Facility-Level Car Production Data by Market: 1999
Plant ID
City
State
Market
Capacity
Production
Utilization
Rate
Daimler-Chrysler
010A
010B
010E

Ford
012A
012N
012M
012C
012K
012L

GM
013A
015A
016A

017A
01 8A
030B
030A

035A

031 A

019A
032A
033A

Belvidere
Detroit
Sterling Heights


Atlanta
Chicago
Dearborn
Kansas City
Wayne
Wixom


Bowling Green
Flint
Detroit-
Ham trarnck
Fairfax
Lake Orion
Lansing (C)
Lansing (M)

Lansing (Craft
Center)
Lordstown

Oklahoma City
Spring Hill
Wilmington

IL
MI
MI


GA
IL
MI
MO
MI
MI


KY
MI
MI

KS
MI
MI
MI

MI

OH

OK
TN
DE

Compact
Sports
Intermediate/Standard


Intermediate/Standard
Intermediate/Standard
Sports
Compact
Compact
Luxury


Sports
. Luxury
Luxury

Luxury
Luxury
Compact
Subcompact and
Compact
Compact

Subcompact and
Compact
Intermediate/Standard
Compact
Intermediate/Standard

244,160
5,712
258,944
508,816

247,520
247,520
186,592
239,904
285,600
198,016
1,405,152

28,560
190,400
228,480

228,480
228,480
160,320
210,240

NR

388,960

247,520
288,200
122,080
2,321,720
232,134
4,468
195,231
431,833

243,842
245,443
191,432
152,918
243,544
147,938
1,225,117

33,243
66,759
214,375

272,368
143,223
212,804
192,996

318

385,754

249,413
238,140
83,942
2,093,335
0.951
0.782
0.754
0.849

0.985
0.992
1.026
0.637
0.853
0.747
0.872

1.164
0.351
0.938

1.192
0.627
1.327
0.918

NR

0.992

1.008
0.826
0.688
0.902
Auto Alliance
005A


Flat Rock


MI


Compact and
Intermediate/Standard

178,976

178,976
165,143

165,143
0.923

0.923
                                                                          (continued)
                                       2-21

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Table 2-10.  Facility-Level Car Production Data by Market:  1999 (continued)
Plant ID
City
BMW
007A Spartanburg
Honda
034A&B Marysville
002A East Liberty
Mitsubishi
001 A Normal
NUMMI
009A Fremont
Nissan
004A Smryna
Subaru-Isuzu
003A South Bend
Toyota
008A Georgetown •
State Market
SC Sports
OH Intermediate/Standard
and Luxury
OH Subcompact and
Compact
IL Intermediate/Standard,
Sports
CA Compact
TN Subcompact
IN Intermediate/Standard
KY Intermediate/Standard
Total:
Capacity
50,000
50,000
383,040
220,864
603,904
228,480
228,480
228,480
228,480
224,672
224,672
106,624
106,624
357,952
357,952
6,214,776
Production
48,393
48,393
448,140
237,760
685,900
161,931
161,931
210,726
210,726
167,742
167,742
93,070
93,070
356,840
356,840
5,640,030
Utilization
Rate
0.968
0.968
1.170
1.076
1.136
0.709
0.709
0.922
0.922
0.747
0.747
0.873
0.873
0.997
0.997
0.908
NR = Not reported

Sources:        Grain Automotive Group. 2000.  Automotive News Market Databook—2000. Detroit, MI:
               Grain Automotive Group.
       U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer
       file], . As obtained December 13,2000.
       Edmunds.com. 2001. "New and Used Vehicles."  . As obtained January
       2001.
                                           2-22

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Table 2-11. Plant-Level Truck Production Data by Market:  1999
Plant ID
City
State
Market
1999
Capacity
1999
Production
1999
Utilization
Rate
DaimlerChrysler
010J
010C
010F
010G
010H&I
010D
006A

Ford
0121
012B
012D
0120
012E
012F
012G
012H
012J
012P

GM
021A
020A
014A
022A
023A
024A
025A
026A
027A
028A
029A

Warren
Detroit
St. Louis (N)
St. Louis (S)
Toledo
Newark
Vance


Avon Lake
Edison
Kansas City
Louisville
Lorain
Louisville
Wayne
Norfolk
St. Louis
St. Paul


Baltimore
Arlington
Doraville
Flint
Fort Wayne
Janeville
Linden
Moraine
Pontiac (E)
Shreveport
Wentzville

Ml
MI
MO
MO
OH
DE
AL


OH
NJ
MO
KY
OH
KY
MI
VA
MO
MN

.
MD
TX
GA
MI
IN
WI
NJ
OH
MI
LA
MO

Pickup
SUV
Pickup
Van
SUV
SUV
SUV


Van .
Pickup
Pickup
Pickup and SUV
Van
Pickup and SUV
SUV
Pickup
SUV
Pickup


Van
SUV
Van
Van and Pickup
Pickup
Pickup and SUV
Pickup and SUV
SUV
Pickup
Pickup
Van

236,096
324,870
133,280
285,600
266,560
171,360
72,352
1,490,118

110,880
152,320
182,784
301,400
213,248
312,256
286,000
182,784
190,400
159,936
2,092,008

190,400
190,400
239,904
66,640
201,600
201,824
190,400
285,600
252,000
190,400
152,320
2,161,488
256,955
343,536
160,162
260,471
287,062
220,097
77,696
1,605,979

94,658
169,024
224,637
392,701
233,178
331,161
299,251
237,142
249,700
213,836
2,445,288

- 168,057
123,593
285,872
120,558
257,574
242,581
202,513
303,312
• 309,775
219,741
173,221
2,406,797
1.09
1.06
1.20
0.91
1.08
1.28
1.07
1.08

0.85
1.11
1.23
1.30
1.09
1.06
.05
.30
.31
.34
.17

0.88
0.65
1.19
.81
.28
.20
.06
.06
.23
.15
0.88
1.11
                                                                         (continued)
                                       2-23

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Table 2-11. Plant-Level Truck Production Data by Market: 1999 (continued)
Plant ID
City
BMW
007A Spartanburg
NUMMI
009B Fremont
Nissan
004B Smryna
Subaru-Isuzu
03 8 A Lafayette
Toyota
008B Georgetown
NA Princeton
State Market
SC SUV
CA Pickup
TN Pickup and SUV
IN SUV
KY Van
IN Pickup
Total:
1999
Capacity
NR
NR
152,320
152,320
217,056
217,056
103,680
103,680
121,856
102,816
224,672
6,441,342
1999
Production
2,413
2,413
156,395
156,395
155,398
155,398
99,130
99,130
120,686
56,176
176,862
7,048,262
1999
Utilization
Rate
NR
NR
1.03
1.03
0.72
0.72
0.96
0.96
0.99
0.55
0.55
1.09
NR = Not reported

Sources:        Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI:
              Grain Automotive Group.
       U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer
       file], . As obtained December 13, 2000.
       Edmunds.com. 2001. "New and Used Vehicles."  . As obtained January
       2001.
one company, while another company contracts with them to have their vehicles produced
there. For instance, DaimlerChrysler contracts with Mitsubishi to produce its Sebring and
Avenger models at Mitsubishi's Illinois facility.  In this relationship, Mitsubishi assembles
the vehicles for DaimlerChrysler based on Mitsubishi components (U.S. Department of
Commerce, 1999c).
2.2.2.2 Trends in the Automobile and LDT Assembly Industries
       Because of the large capital outlays necessary to build a new plant, new plants come
online on average less than one per year. Most recently, Toyota finished construction of a
new plant in 1999 to produce its new Toyota Tundra, which is a LDT.  In 2000, GM
announced that it will open two new plants near Lansing, Michigan. Honda is currently
                                        2-24

-------
building a new auto and engine plant in Lincoln, AL (Honda, 2000). Both Nissan and
Hyundai are also considering new facilities in the United States.

       Although new plants are not built often, companies are constantly revamping old
equipment in existing plants to replace aging equipment, upgrade to new technologies, and
switch to new car models. The paint shops within assembly plants are refitted every 10 to 15
years.  When refitted with new equipment, new technologies have allowed for lower
pollutant emissions than the replaced equipment. The innovations for these new
technologies come from both the coatings manufacturers as well  as automobile assembly
company engineers.  Examples of paint shop innovations include lower VOC and lower HAP
content materials, electrostatic spray equipment, robotic spray equipment, waterbome
coatings, and powder coatings.

2.2.3   Companies that Own Automobile and LDT Assembly Facilities

       Companies that own individual facilities are legal business entities that have the
capacity to conduct business transactions and make business decisions that affect the facility.
The terms "company" and "firm" are synonymous, and refer to the legal business entity that
owns one or more facilities.  This subsection presents information on the parent companies
that own automobile and LDT assembly plants.

2.2.3.1 Company Characteristics

       The 65 automobile and LDT assembly facilities listed in Tables 2-10 and 2-M are
owned by 14 domestic and foreign companies (see Table 2-12). The largest number of
facilities is operated by GM—23 facilities or 35 percent of the total^and by Ford Motor
Company—16 facilities or 25 percent of the total.  The foreign-based companies—BMW,
DaimlerChrysler, Mitsubishi Motors Corporation, Honda, Nissan, and Toyota—own between
one and 11 facilities in the United States. Isuzu and Subaru jointly operate one facility as do
Mazda and Ford. NUMMI, which is wholly owned through a joint partnership between
Toyota and GM, is not individually publicly traded; all of the remaining companies are
publically traded.

       Sales in the 1998 and 1999 time period for all lines of business at companies that own
automobile and LDT facilities range from $4.7 billion for the jointly owned Toyota and GM
company, NUMMI, to $161.3 billion for GM itself. With the exception of Nissan Motors,
which generated a loss of $229 million in 1999, all of these companies generated positive
returns ranging from $43 million for Mitsubishi to $22.1 billion for Ford.  Profit-to-sales
                                       2-25

-------
 ratios ranged from 0.2 percent for Mitsubishi Motors Corporation to 15.3 percent for Ford.

       Employment for all lines of business at companies that own automobile and LDT
assembly facilities ranges from 4,800 workers for NUMMI to 594,000 for GM.  The Small
Business Administration (SBA) defines a small business in this industry as follows:

       •   NAICS 33611 (Automobile Manufacturing)—1,000 employees or less
       •   NAICS 336112 (Light Truck and Utility Vehicle Manufacturing)—1,000
          employees or less.
Based on these size standards and company employment data presented in Table 2-12, there
are no small businesses within this industry.

2.2.3.2 Vertical and Horizontal Integration

       Companies within the automotive industry may be horizontally and/or vertically
integrated.  Vertical integration refers to the degree to which firms own different levels of
production and marketing. Vertically integrated firms may produce the inputs used in their
production processes and own the distribution network to sell their products to consumers.
These firms may own several plants, each of which handles these different stages of
production. For example, a company that owns an automobile assembly plant may also own
a plant that molds the dashboard or makes the seat coverings. An automotive company may
be integrated as far back as the foundry that makes parts for an automobile, as in the cases of
Ford, GM, and DaimlerChrysler.  However, it may not be integrated into retail dealership
operations because of various state franchise laws.

       Vertical integration within the automotive industry has been decreasing as
competition has increased and outsourcing has become a more attractive option.
Outsourcing refers to hiring an outside company to produce some of the materials necessary
for manufacture. As a result, companies may not produce a number of the inputs used in
their automobiles.  In 1997, Ford outsourced 50 percent of its vehicle content. GM was
expected to have similar levels after it spun off Delphi automotive systems, a subsidiary of
GM. And, finally, before Chrysler merged with Daimler-Benz, it outsourced 70 percent of
its inputs (Brunnermeier and Martin, 1999). "Reduced vertical integration allows vehicle
makers to buy parts from the best suppliers. The spun-off parts companies are assumed to
operate more efficiently and become more competitive (and thus yield lower unit costs) as
independent entities" (U.S. Department of Commerce, 1999c).
                                       2-26

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          Table 2-12.  Financial Data for Companies that Own Automobile and LOT Assembly Facilities, 1998-1999
to
-J


Company
AAI (Auto Alliance
International)
BMW
DaimlerChrysler AG
Ford Motor Company

Fuji Heavy Industries (owns
Subaru)
General Motors Corporation

Honda Motor Company, Ltd.
Isuzu Motors Limited
Mazda Motor Corporation
Mitsubishi Motors Corporation
Nissan Motor Co., Ltd.
NUMMI

Renco Group Inc. (AM
General/Humvee)c
Toyota Motor Corporation

* The AAI plant jointly owned by

Joint
Ownership
Mazda-Ford

—
—
—

GM owns 20%

—

—
GM owns 49%
Ford owns 33%
—
—
GM-Toyota
(50-50)
—

—

Mazda and Ford
Number of
Assembly
Plants
r

i
11
16"

ib

23

3
lb
	 a
1
2
2

1

4

is included only
Company
Company
Sales ($10e)
NA

$37,881
$154,615
$144,416

$11,355

$161,315

$51,688
$13,593
$17,271
$26,832
$54,380
$4,699

$2,500

$105,832

in the AAI plant
Profits
($106)
NA

$542
$5,656
$22,071

$283

$2,956

$2,530
$52
$325
$43
-$229
NA

NA

$3,747

total.
Profit/Sales
Ratio
NA

1.4%
3.7%
15.3%

2.5%

1.8%

4.9%
0.4%
1.9%
0.2%
-0.4%
0.0%

NA

3.5%


Company
Employment
NA

115,927
441,500
345,175

14,945

594,000

112,200
13,035
24,076
11,650
143,681
4,800

15,000

183,879



Year
NA

1998
1998
1998

1999

1998

1999
1999
1999
1999
1999
1998

1999

1999


b Isuzu and Subaru jointly own one plant.
c Vehicles manufactured may now be outside of the auto/LDT source category.
W
0
o'
1
5°
ff
o'
3
3
$
£
w
o
I
"0
3-
R
3
Q.
O
a
CO
0=
Q.
n
2
3
0
f
o
CL
O
          Source: Hoover's Online. 2000. Company Capsules, . As
on January 13,

-------
companies may be directly integrated by direct ownership of additional facilities or indirectly
integrated by owning additional facilities through affiliations with other companies and
subsidiaries. Several of the automobile manufacturers have high degrees of horizontal
integration. First, most of the companies are horizontally integrated within their own
industry in that they own multiple assembly plants and produce multiple automobile and
LDT models.  Second, most companies are also involved in other activities including
automobile rentals, automobile and other credit financing, and electronics manufacturing.
Table 2-13 provides examples of the subsidiaries and affiliates associated with companies
that assemble automobiles and LDTs (Hoover's, 2000).

2.2.4   Companies that Manufacture Automotive Coatings
       Three companies supply the majority of automobile coatings used in vehicle
assembly plants: DuPont Performance Coatings, PPG Industries, and BASF Coatings AG.
Sherwin-Williams is also a major player in automobile coatings, but they tend to supply auto
body shops and other aftermarket operations rather than assembly plants. Other minor
suppliers may supply adhesives and sealers to the vehicle assembly industry (Green, 2000c).
In total, the industry had estimated sales of $3.4 billion in 1998 (Freedonia, 1999). Table 2-
14 lists the market shares of U.S. automotive coating manufacturers, including both sales to
assembly plants and to aftermarket users.

       The parent companies for DuPont, PPG, and BASF, are all large with 1998 sales
ranging from $7.5 billion for PPG to $32.4 billion for BASF (Hoover's, 2000). Table 2-15
shows sales, income, and employment for these three coating manufacturers. Based on the
SBA definition of a small company for NAICS 32551  (paint and coating manufacturing)
(i.e., 500 or fewer employees), none of these companies are small.

2.3    Demand Side Overview Characteristics

       Individual consumers, companies, and the government lease or purchase automobiles
and LDTs. Over the past several years, consumption by  individual consumers, which
accounted for 47 percent of 1997 sales, has decreased, while consumption by businesses,
which accounted for 51 percent of 1997 sales, has increased (see Table 2-16). Government
purchases make up 1 to 2 percent of consumption. While individuals generally purchase
automobiles and LDTs for personal use, companies purchase automobiles so their employees
                                       2-28

-------
Table 2-13. Examples of Subsidiaries and Affiliates Partially or Wholly Owned by
Automotive Companies
DaimlerChrysler AC
    Detroit Diesel Corporation
    DaimlerChrysler Canada Inc.
DaimlerChrysler Rail Systems GmbH
Freightliner Corporation  	
Ford Motor Company
    Automobile Protection Corporation
    Ford Motor Company of Canada, Ltd.
    Ford Motor Credit Company
    The Hertz Corporation
Kwik-Fit Holdings PLC
Mazda Motor Corporation
Visteon Automotive Systems
Ford Motor Company/Buffalo Stamping Division
General Motors Corporation
    Adam Opel AG
    GM Acceptance Corporation
    GM of Canada Ltd.
    Hughes Electronics Corporation
    Integon Corporation
    Isuzu Motors Ltd.
    Saab Automobile AB
    AMI instruments, Inc.
    Delco Defense Systems Operations
    Delphi Harrison Thermal Systems
GM Corporation/Allison Transmission Divisions
GM Corporation/Powertrain
HRL Laboratories, LLC
Hughes Network Systems
Hughes Space and Communications Company
Lexel Imaging Systems, Inc.
Packard Hughes Interconnect
Rockwell Collins Passenger Systems
Spectrolab, Inc.
Isuzu Motors Limited
    American Isuzu Motors Inc.
Tri Petch Isuzu Sales Company, Ltd.
Toyota Motor Corporation
    Daihatsu Motor Company, Ltd.
    New United Motor Manufacturing, Inc.
    Toyota Motor Credit Corporation	
Toyota Motor Sales, USA, Inc.
Toyota Motor Thailand Company Ltd.
Source: Hoover's Online. 2000. Company Capsules, . As obtained January 13,
       2000.
may use them on work-related business or so their customers may use them, as in the case of
automobile rental companies. Federal, state, and local governments purchase automobiles
for use during government-related work, including military operations, escorting officials,
and site visits. In general, government-purchased vehicles are more utilitarian than vehicles
purchased by individual consumers and companies.
                                            2-29

-------
Table 2-14. Market Shares in the Automotive Coatings Industry, 1998

 Company                                                 Percent
 DuPont                                                    29.4
 PPG Industries                                               28.8
 BASF                                                     15.9
 Sherwin-Williams                                             8.8
 Others	17.1	

Source:  Freedonia Group. September 1999. Automotive Coatings, Sealants and Adhesives in the United States
       to 2003—Automotive Adhesives, Market Share and Competitive Strategies.
Table 2-15. Company Data for Coatings Manufacturers, 1998
Company
BASF Aktiengesellschaft
E.I du Pont de Nemours and Co.
PPG Industries
Location of HQ
Germany
Wilmington, DE
Pittsburgh, PA
Sales (106)
$32,439
$24,767
$7,510
Income (106)
$1,994
$4,480
$801
Employment
105,945
101,000
32,500
Source: Hoover's Online. Company Capsules, . As obtained on January 13, 2000.


       In 1997, sales of passenger cars and LDTs were approximately equal (AAMA, 1998).
However, the individual consumers who purchase new passenger cars differ somewhat from
those who purchase new LDTs. As shown in Table 2-17, purchasers of new passenger cars
are fairly evenly split between male and female, but men make up three-quarters of the LDT
purchasers. New passenger car purchases are greatest for the 45 to 54 age range, but LDT
purchases are high for the broader 35 to 54 age range. The highest education level for
vehicle purchases is similar for both vehicle types, with the high percentages for the
categories of some college and college graduates. Passenger car purchases are higher than
LDT purchases in the Northeast and lower than LDT purchases in the North Central.
Differences in these purchases are minor in the South and West.  Finally, median household
income for passenger car purchasers is lower at $59,900 compared to $68,000 for LDT
purchasers.
                                        2-30

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Table 2-16. U.S. Car Sales by Market Sector, 1980-1997
Year
1980
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Units
Consumer
6,062
7,083
7,658
6,748
6,802
6,375
5,768
4,538
4,558
4,669
4,612
4,313
4,065
3,880
by Consuming
Sector (103)
Business Government
2,791
3,822
3,666
3,395
3,699
3,402
3,567
3,752
3,683
3,941
4,255
4,211
4,328
4,233
126
134
127
135
138
136
149
97
113
108
124
162
134
131

Total
8,979
11,039
11,450
10,278
10,639
9,913
9,484
8,387
8,354
8,718
8,991
8,686
8,527
8,245

Consumer
67.5%
64.2%
66.9%
65.7%
63.9%
64.3%
60.8%
54.1%
54.6%
53.6%
51.3%
49.7%
47.4%
47.1%
% of Total
Business
31.1%
34.6%
32.0%
33.0%
34.8%
34.3%
37.6%
44.8%
44.1%
45.2%
47.3%
48.5%
50.7%
51.3%
Sales
Government
1.4%
1.2%
1.1%
1.3%
1.3%
1.4%
1.6%
1.2%
1.4%
1.2%
1.4%
1.9%
1.6%
1.6%
Source: U.S. Department of Commerce, Bureau of Economic Analysis, as reported in American Automobile
       Manufacturers Association (AAMA).  1998. Motor Vehicle Facts and Figure 1998. Detroit: AAMA.
       When choosing an automobile or LDT to purchase or lease, consumers consider the
following characteristics:

       •  function of the vehicle (e.g., sedan, coupe, wagon, pickup truck, minivan, SUV);

       •  performance characteristics, such as capacity, mileage per gallon, horsepower,
          four-wheel drive versus two-wheel drive;

       •  aesthetic characteristics, such as design and visual appeal;

       •  comfort characteristics, such as seating, equipment adjustments, and air
          conditioning;

       •  safety characteristics, such as air bags and advanced braking systems (ABS);
                                         2-31

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Table 2-17. Demographics of New Automobile and LDT Buyers, 1998
Characteristic
Gender
Male
Female
No Answer
Total
Age of Principal Purchaser (in years)
Under 25
25-29
30-34
35-39
40-44
45^t9
50-54
55-59
60-64
65 and over
No Answer
Total
Highest Education Level
8th grade or less
Some high school
High school/no college
Some college
College graduate
Post graduate
Trade/technical
Other
No answer
Total
Census Region
Northeast
North central
South
West
Total
Median Household
Income
New Passenger Car Buyers
Total

51.6%
43.1%
5.3%
100.0%
7.0%
7.7%
8.3%
8.0%
9.3%
11.5%
11.0%
7.6%
6.7%
17.3%
5.6%
100.0%
0.6%
2.1%
15.5%
23.5%
28.7%
20.2%
4.7%
1.3%
3.3%
100.0%
21.8%
28.4%
31.6%
18.2%
100.0%

$59.900
New Light Truck Buyers
Total

71.2%
24.3%
4.5%
100.0%
4.0%
7.4%
10.0%
12.7%
13.3%
12.7%
12.3%
8.5%
6.2%
8.7%
4.1%
100.0%
1.1%
3.0%
18.1%
23.9%
25.5%
16.1%
8.3%
1.0%
3.1%
100.0%
17.2%
32.4%
32.0%
18.4%
100.0%

$68.000
Source: J.D. Power and Associates, 1998 Vehicle Quality Survey as reported in American Automobile
       Manufacturers Association (AAMA). 1998.  Motor Vehicle Facts and Figure 1998. Detroit: AAMA.
                                          2-32

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       •  perceived reliability and durability; and
       •  price, including financing and leasing options.
According to a survey conducted by Consumers Union, reliability, price, and appearance are
the top three reasons why a consumer chooses a particular vehicle (Consumer Reports,
2000c).

       Coatings obviously affect the appearance of a vehicle, but they also affect its
durability since they provide protection from rust, acid rain, chipping, and scratching. A
consumer can readily observe the appearance characteristics of coatings, including, most
obviously, its color and gloss. For the year 2000, metallic silver is expected to make up 22
percent of car sales, followed by black at 17 percent, white at 15 percent, blue at 12 percent,
and green at 11 percent (Consumer Reports, 2000a). In the future, metallic paints on
vehicles are expected to remain popular and special effects coatings are expected to increase.

       While the benefits of coatings for the appearance of vehicles are  easily observable
when a consumer purchases a car, the durability aspects of the coatings are only observable
over time. The average age of a passenger vehicle on the road in 1997 was 8.7 years and has
been increasing over time from an average age of 5.6 years in the 1970s  (AAMA, 1998). As
the vehicle ages, coatings that rust, chip, and scratch easily greatly diminish the appearance
and, hence, value of the vehicle. Thus, because the quality of the coating cannot be entirely
observed at the time of purchase, the reputation of the company that manufactures the cars is
important.

2.3.1   Substitution Possibilities in Consumption

       The possibilities for substitution in the automobile and LDT industries arise from the
choices among different makes and models of vehicles, between purchasing a vehicle versus
leasing, between new versus used vehicles, and among different  forms of alternative
transportation. The quality of the coatings on a vehicle may subtly affect these choices. As
described above, a company with a history of problems with its coatings may lose market
share over time to companies that manufacture vehicles with durable coatings. The market
for used vehicles may also be potentially  affected by the quality of coatings because
consumers would be more willing to purchase a used vehicle if its appearance is satisfactory
but less willing if the coatings are declining as the vehicle ages.  Thus, the market for used
vehicles may affect manufacturers of new vehicles in two opposite directions. If good
quality used vehicles are available for purchase, consumers may purchase used vehicles as a
substitute for new vehicles, thus reducing the size of the market for new  vehicles. However,
if the resale market for a particular model is good (i.e., the model retains its value over time),

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then the manufacturer may be able to obtain a higher price for the same model when it is
new. The last possibility for substitution, the use of alternative forms of transportation such
as buses, subways, and bicycles, is likely much less affected by appearance and quality of
coatings because these forms of transportation tend to be lifestyle choices for particular
individuals.
2.3.1.1 Demand Elasticity

       Estimates of own-price elasticity of demand for vehicles are available at different
levels of aggregation from a number of sources in the economics literature. Trandel (1991)
estimates an overall own-price elasticity of-2.42 by aggregating data for 210 models from
1983-1985. Berry, Levinsohn, and Pakes (1995) report own-price elasticities of demand for
vehicles ranging from -3.515 to -6.358 for individual models. Aggregate elasticity estimates
for domestic, European, and Asian vehicles of-1.06, -1.85 and -1.42 respectively are
reported in McCarthy (1996). One of the most disaggregated sets of elasticity estimates is
available from Goldberg (1995).  She estimates own price elasticities for different vehicle
classes using micro data on transaction prices and make/models from the Consumer
Expenditure Survey and the Automotive News Market Data Book. Her estimates of average
own price elasticities by vehicle class  are reported in Table 2-18. All estimates are greater
than one in absolute value, but vary in an intuitive manner across vehicle classes. For
example, the demand for intermediate and standard automobiles is highly elastic, while that
for sports and luxury cars is the least price elastic.

       Cross-price semi-elasticities refer to the percentage change in quantity demanded of
model j when price of model i changes, but all other model prices remain unchanged.
Goldberg (1995) estimates cross price semi-elasticities of demand for some specific vehicle
models and finds that these  semi-elasticities are low if the models belong to different classes.
For example, the cross price semi-elasticity between a Honda Civic and a Honda Accord is
only 14.9E-07.  McCarthy (1996) also finds that the cross-price elasticities of demand are
relatively inelastic.

2.4     Market  Data

       EPA collected the market information to characterize the baseline year of the
regulatory impact analysis and identify trends in production, consumption, prices, and
international trade.  The primary sources of this data are the Automotive News Market Data
Book, U.S. International Trade Commission's trade data base, and the Commerce
Department's U.S. Industry and trade
                                       2-34

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Table 2-18. Own Price Elasticities of Demand by Vehicle Class

 Vehicle Class                              Elasticity
 Subcompact                                -3.286
 Compact                                  -3.419
 Intermediate                                -4.179
 Standard                                  -4.712
 Luxury                                    -1.912
 Sports                                     -1.065
 Pick-up                                   -3.526
 Van                                      -4.363
 Other                                     -4.088

Sources:  Goldberg, Pinelopi K. 1995. "Product Differentiation and Oligopoly in International Markets: The
        Case of the U.S. Automobile Industry." Econometrica 63(4): 891-951.

outlook. The following section provides a discussion of these data, with emphasis on the
baseline data set used to develop an economic model of the industry.

2.4.1  Domestic Production and Consumption

       Over 12 million cars and LDTs were manufactured in the United States in 1999. As
shown in Table 2-19, this was an increase of 8 percent from 1998.  LDT production
accounted for approximately 55 percent of total production in 1999 and has shown strong
growth over the past 5 years. The average annual growth rate for trucks is 5.3 percent
between 1995  and 2000. In contrast, car production has shown small declines over the same
period with an average annual growth rate of-2.6 percent.  These trends reflect the growing
consumer preference for SUVs and minivans (U.S. Department of Commerce, 1999c).
                                        2-35

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   Table 2-19.  Domestic Car and Truck Production: 1995-1999 (103 Units)
Year
1995
1996
1997
1998
1999
2000
Average annual growth rate
Cars
6,327
6,056
5,922
5,550
5,640
5,543
-2.6%
Trucks'
5,392
5,488
5,958
6,163
7,048
6,949
5.3%
Total
11,719
11,544
11,880
11,713
12,688
12,492
1.4%
   a Excludes other medium/heavy trucks.
   Sources: Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI:  Grain
          Automotive Group.
          Grain Automotive Group. 2001. Automotive News Market Databook—2001. Detroit, MI:  Grain
          Automotive Group.

         Industry data and forecasts show North American sales1 of cars and trucks peaked in
   1999-2000 with sales reaching 19 million (see Table 2-20). Total annual sales are projected
   to be 18.1 and 19 million between 2001 and 2005.  Truck sales are projected to grow,
   increasing from 9.1 million in 1999 to 9.7 million in 2005, or 6.6 percent. However, cars
   sales are projected to decline from 10.0 million in 1999 to 9.3 million in 2005, or 7 percent.
   Again, this reflects the growing use of LDTs for personal transportation.

   2.4.2  International Trade

         Although Japan is the primary source of imported cars and trucks, the flow of imports
   has declined recently (see Table 2-21). Levy (2000) attributes this decline to currency
   fluctuations that have encouraged the production of foreign models in North America. He
   notes Japanese and European automakers are increasing their U.S. production capacity,
   suggesting additional future declines in imports.
Includes the United States, Canada, and Mexico.

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Table 2-20. North American Consumption of Cars and Trucks: 1997-2000" (103 Units)
Year
1997
1998
1999
2000
2001°
2002C
2003"
2004C
2005°
Cars
9,333
9,353
10,017
10,453
9,575
9,363
9,319
9,224
9,336
Trucks"
7,710
8,275
9,111
9,361
8,782
8,811
9,208
9,604
9,703
Total
17,043
17,628
19,128
19,814
18,357
18,174
18,527
18,828
19,039
a North American sales (includes the United States, Canada, and Mexico).
b Excludes other medium/heavy trucks.
c Forecast.
Source:  Grain Automotive Group.  2001. Automotive News Market Databook—2001. Detroit, MI: Grain
        Automotive Group.
Table 2-21. Imports for Consumption for NAICS 336111 (Automobiles and Light Duty
Motor Vehicles, Including Chassis) by Country of Origin: 1997-2000 (103 units)
Country
Japan
Canada
Mexico
Germany
Other
Total
1997
3,763
1,726
778
707
522
7,495
1998
3,490
1,839
594
844
421
7,188
1999
3,431
2,170
640
974
736
7,953
2000
2,941
2,139
934
611
942
7,567
Source:  U.S. International Trade Commission. 2001. ITC Trade Dataweb. http://205.197.120.17/. Obtained
        May 31, 2001.
                                         2-37

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       Exports have remained relatively stable over the past 4 years (see Table 2-22) with
Canada accounting for half of all domestic exports. As a result of NAFTA, the Mexican
export market has recently expanded.  U.S. vehicles are typically equipped with bigger
engines and more accessories relative to other vehicles produced overseas. This limits
demand from countries with lower incomes and higher fuel prices (Levy, 2000).  As a result,
U.S. companies will increasingly have to consider development of manufacturing operations
in foreign countries where production costs are lower. This will likely further limit growth in
exports of U.S. manufactured vehicles (Levy, 2000).
Table 2-22.  Domestic Exports for NAICS 336111 (Automobiles and Light Duty Motor
Vehicles, Including Chassis) by Country of Origin: 1997-2000 (103 units)
Country
Canada
Mexico
Germany
Japan
Other
Total
1997
633
68
64
84
386
1,236
1998
608
97
57
53
329
1,144
1999
637
135
53
48
226
1,099
2000
666
190
55
39
221
1,171
Source:  U.S. International Trade Commission. 2001. ITC Trade Dataweb. http://205.197.120.17/. Obtained
       May 31, 2001.

2.4.3   Market Prices
       The relationship between the prices paid by consumers for cars and the wholesale
prices received by car manufacturers is not readily known. The Manufacturers Suggested
Retail Price (MSRP) is usually above the price that consumers actually pay for a vehicle and
includes the markup received by the dealership that sells the vehicle. Invoice prices, which
would appear to be a wholesale price, are readily available from automobile pricing services,
such as Autobytel.com, nadaguides.com, and Edmunds.com, but do not reflect the actual
prices received by manufacturers (Consumer Reports, 2000b).  The prices they receive may
be below the invoice base price because of dealer holdbacks, dealer incentives, and rebates
(Edmunds, 2000a). Dealer holdback is a percentage of the MSRP that the manufacturer pays
the dealer to assist with the dealer's financing of the vehicle while it is on the dealer's lot
(Edmunds.com, 2000b).
                                       2-38

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          EPA collected price information by vehicle class using the following methodology.
   First, EPA identified car and truck models produced in 1999.2 Models were assigned a
   vehicle class using EPA's Fuel Economy Guide data (EPA, 2000), car buyers guides such as
   Edmunds.com (Edmunds, 2001), and the Automotive News Market Data Book (Grain
   Automotive Group, 2000). Next, the Agency collected base price data for the low and high
   values for these models reported in the Automotive News Market Data Book (Grain, 2000).
   The prices includes the MSRP and destination price.  Finally, EPA computed a sales-
   weighted average price for each vehicle class using the median base price for each model and
   1999 model sales.  Prices for each class  are reported in Table 2-23.

          In addition to 1999 price data, the Agency collected data on price trends from the
   U.S. Bureau of Labor Statistics. As shown in Figure 2-4, the consumer price index (CPI) for
   new cars rose more slowly than the CPI for all items, even while new cars improved and
   added safety and emissions equipment.  In comparison, the CPI for new truck rose slightly
   faster than the CPI for all items.

   2.4.4  Industry Trends

          The motor vehicle industry in the United States is a large, mature market in which
   most of the vehicles produced are geared toward the  preferences of U.S. consumers.  U.S.
   consumers generally prefer larger, more powerful vehicles than consumers in other parts of
   the world, in part because gas prices  are significantly lower in the United  States relative to
   other countries.

          Domestic production of motor vehicles in the United States is projected to increase in
   the next 5 years primarily due to two factors.  First, foreign automobile  manufacturers, such
   as Honda and BMW, are locating more of their production facilities  in the United States to
   serve the U.S. market. Automobiles  produced from these facilities would previously have
   been classified as imports, but after relocation of production facilities, they are considered
   domestic production. Second, the LDT market,  in which U.S. manufacturers dominate, is
   surging especially as manufacturers are offering more car-like amenities in these vehicles.
2For LDTs, we selected sample of top sales models (with price data) in each market class reported by Grain
   Automotive Group 2000. pp. 50-51.

                                           2-39

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Table 2-23. Average Vehicle Prices by Class"
                Vehicle Class                               Price ($/unit)
Compact                                                     $16,487
Intermediate/standard                                           $21,155
Luxury                                                       $33,587
Pick-up                                                       $22,126
Sports                                                       $25,797
Subcompact                                                  $15,522
SUV                                                       •  $27,694
Van                                                         $22,910

a  Includes the MSRP and destination price reported by the Automotive News Market Data Book (Grain, 2000;
  p: 75).  Prices current as of April 2000 and were considered representative of 1999 prices.
Sources:  Grain Automotive Group. 2000. Automotive News Market Databook—2000. Detroit, MI: Grain
        Automotive Group.
        Edmunds.com. 2001. "New and Used Vehicles."  . As obtained
        January 2001.
        U.S. Environmental Protection Agency (EPA). 2000. Fuel Economy Guide Data—1999. [computer .
        file], . As obtained December 13,2000.

The U.S. Department of Commerce (1999c) projects that domestic automobile manufacturing
facilities will have capacity utilization rates of 90 percent or more over the next few years.

       Offsetting these increases in domestic production is the fact that U.S. manufacturers
are expected to move some production facilities to locations with lower costs of production
such as Mexico and Canada. Relocation to Mexico and Canada has become easier partly
because of NAFTA.  In addition to lower costs of production, other countries may have less-
stringent environmental regulations than the United States' regulations, which translates into
lower costs as well. When production facilities are relocated to other countries, what was
formerly considered domestic production becomes imports if the vehicles are delivered to the
U.S. market.  However, if the vehicles are intended for the domestic country in which they
are produced, they are no longer considered either "domestic production" or "imports." To
serve the markets in other countries, however, U.S. manufacturers have developed and will
                                         2-40

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   1.2 n
   1.1
         1990    1991    1992    1993   1994    1995   1996    1997   1998    1999
                           -All Items
- New Cars
- New Trucks
Figure 2-4. Consumer Price Indexes for All Items Compared to New Cars and Trucks
(1992 = 100), 1990-1999

Sources:  U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers:
        CUUROOOOSAO, All Items: 1990-1999. . As obtained on September 9, 2000.
        U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers:
        CUUROOOOSS45011, New Cars: 1990-1999. . As obtained on January 3,
        200 la.
        U.S. Bureau of Labor Statistics (BLS). Consumer Price Index—All Urban Consumers:
        CUUROOOOSS45021, New Trucks: 1990-1999. . As obtained on January 3,
        2001b.
continue to develop smaller, less costly models than those produced for the U.S. market.
Most of the growth in the global vehicle market will be in less-developed countries such as
China, India, Latin America, and eastern Europe in which the typical U.S. automobile is
overly equipped and prohibitively expensive.

       Over time, automobile manufacturers are adopting a more global approach to
automobile manufacturing. This change in approach comes as the industry continues to
consolidate and foreign and domestic firms merge or form joint ventures (e.g., Mazda and
Ford, Daimler-Benz and Chrysler). In the more global approach, automobile manufacturers
are reducing the number of unique automobile platforms and using them throughout the
                                         2-41

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world. This approach allows them to reduce product development costs and spread the
development costs over a greater number of vehicles. In addition, under the global approach,
automobile manufacturers can locate plants in the countries in which production costs are
lowest.
       Overall, the U.S. Department of Commerce (1999c) projects that the U.S. share of the
world motor vehicle markets, including cars, trucks, and buses, will increase from 22 percent
in 1997 to 27 percent in 2003.  U.S. output in these markets is projected to rise an average of
4.6 percent per year from 1997 to 2003 with a corresponding net increase of 25 percent in
value of shipments.
                                        2-42

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                                        SECTION 3

                                 ENGINEERING COSTS
          This section presents the Agency's estimates of the compliance costs associated with
   the regulatory alternatives developed to reduce HAP emissions during automobile and light-
   truck coating operations.  These engineering costs are defined as the annual capital, operation
   and maintenance, and monitoring costs assuming no behavioral market adjustment by
   producers or consumers.  An overview of the methodology used to develop these engineering
   cost estimates is provided below. A more detailed discussion of this methodology can be
   found in docket A-2001-22.

   3.1     Methodology

          As indicated in Tables 2-10 and 2-11, there were 65 facilities operating in the U.S.
   automobile and LDT assembly industry in our baseline year of 1999.  The final regulation
   will affect 60 of those assembly facilities.1  It is assumed that these facilities will adopt the
   following strategies to reduce their emissions and comply with the NESHAP:

          •   Strategy 1: Facilities that do not presently have controls on the electrodeposition
             oven will add an oxidizer to control HAP emissions from the oven.  This equates,
             on average, to about $8,200 per ton of HAP controlled.
          •   Strategy 2: If the HAP/VOC ratio for the primer-surfacer coating material
             exceeds 0.3, a modified surface coating material will be used to meet this ratio.
             This equates, on average, to about $540 per ton of HAP controlled.
          •   Strategy 3: If the HAP/VOC ratio for the topcoat material exceeds 0.3, a
             reformulated top coating material will be used to meet this ratio.
          •   Strategy 4: Any remaining HAP emissions in excess of the MACT  floor will be
             reduced by introducing controls on the exhaust from automated zones of spray
             booths.
Five facilities would not incur significant costs under the final regulation because they only assemble vehicles and
   do not paint them.  One of these facilities, AM General, is not subject to the  final rule because it is no longer
   producing or planning to produce vehicles classified as autos or LDTs. Hence, it is more appropriately
   regulated under the Miscellaneous Metal Parts Subcategory.

                                            3-1

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         As part of this discussion of regulatory strategies, it should be noted that the
Agency examined regulatory options beyond the MACT floor for existing and new sources
as part of the analyses completed for the proposal. The process for doing this involves
identification and consideration of reasonable and technically achievable regulatory
alternatives that provide emissions control beyond the MACT floor. It also takes into account
cost and economic impacts (including small business), non-air quality health and
enviromental impacts, and energy requirements. These alternatives may be different for
existing and new sources because different MACT floors and separate standards may be
established for existing and new sources.

       The floor for existing electrodeposition primer, primer-surfacer, topcoat, final repair,
glass bonding primer  and glass bonding adhesive operations was based on the performance
of the best eight facilities. These facilities employed a combination of various organic HAP
emission reduction techniques, including the use of lower organic HAP content coatings,
improved transfer efficiency, control of bake oven exhaust streams, and control of the
exhaust streams from automated zones of spray booths where solvent-borne coatings are
used.  However, no single technology or combination of technologies representing a beyond-
the-floor MACT was  identified, nor  did we identify any other available technologies which
are  not presently in use with the potential to decrease organic HAP emissions beyond-the-
floor for either new or existing sources.

       We selected MACT floor level standards for electrodeposition primer, primer-
surfacer, topcoat, final repair, glass bonding primer and glass bonding adhesive operations
because we were unable to identify any specific technologies that would result in a lower
level of emissions for existing sources. We will require in the final rule a more stringent
emission limit for electrodeposition primer, primer-surfacer, topcoat, final repair, glass
bonding primer and glass bonding adhesive operations  for new sources. This more  stringent
limit applied to new sources as compared to existing sources is not appropriate for existing
sources because of the difficulty, uncertainty, and in some cases, impossibility of retrofitting
the  best combination  of emission limitation techniques to existing facilities, as well as the
high incremental cost associated with what would be a beyond-the-floor limit for existing
facilities.

       We expect that most existing plants will control the exhaust streams from the
automated zones of spray booths where solvent-borne coatings are used to achieve the
MACT floor level of  control. Control options beyond-the-floor would involve additional
control of the exhaust streams from automated zones of spray booths, if they have not
already been controlled to achieve the MACT floor level of control, and control of the
                                        3-2

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exhaust streams from manual zones of spray booths.  The cost of such a beyond-the-floor
limit would exceed $40,000 per ton of incremental organic HAP controlled through
additional control of the exhaust streams from automated zones of spray booths and would
exceed $80,000 per ton of incremental organic HAP controlled through control of the
exhaust streams from manual zones of spray booths. This incremental cost of control is much
higher than that from baseline to the MACT floor alternative (roughly $25,000 per ton of
organic HAP controlled). Therefore, the limits in the final rule are based on the MACT
floor. Following a future analysis of residual  risk for this source category, EPA may propose
a beyond-the-floor emission limit, if it is found to be justified at that time.

        We believe this analysis of beyond the floor options done for the proposed rule is
sufficient to satisfy the guidance in OMB Circular A-4 (September 17, 2003) calling for
analysis of multiple regulatory alternatives in  an RIA. Therefore, only one alternative is
assessed in this RIA.

       The associated abatement costs could include capital costs incurred to purchase or
upgrade pollution control equipment, cost for  operation and maintenance of this abatement
equipment such as cost of energy needed to operate it and coating materials replacement
costs, and other administrative costs associated with monitoring, reporting and record
keeping. The following assumptions were used to estimate the engineering costs associated
with each of the strategies listed above:

       •   All capital costs are anmialized over the equipment's expected lifetime of 15
           years at a 7 percent discount rate in accordance with OMB guidelines (OMB,
           1996).
       •   For Strategy 1, Vatavuk (1999) estimates that a regenerative thermal oxidizer of
           15,000 standard cubic feet per minute (scfhi) capacity with 95% heat recovery
           costs approximately $1.08 million. This  equipment is associated with annualized
           capital costs of $117, 967 and annual operating costs of $127,000.
       •   Strategies 2 and 3 essentially involve the purchase of reformulated coating
           materials that contain ethyl acetate and butyl acetate instead of coating materials
           containing aromatics such as toluene and xylene. Ethyl acetate costs about
           $0.40/lb while xylene costs about $0.17/lb (Green, 2001). No new capital
           equipment is required to apply  these reformulated coatings.
       •   The Agency estimates that it costs  $ 10,000/ton to reduce VOC emissions from
           automated zones of spray booths.  For Strategy 4, it is assumed that annual VOC
           control costs of $ 10,000/ton imply annual HAP control costs of $40,000 per ton.
           This cost is split evenly between annual capital and operating expenses.
                                         3-3

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         •   Monitoring, reporting and record keeping activities will involve professional,
             technical, and clerical labor at an hourly wage rate of $40, $30, and $18
             respectively.

         •   The Agency assumes that a performance test is required if a facility installs or
             upgrades a control system but not if it merely switches to a reformulated.coating
             input. Facilities that adopt both Strategy 1 and Strategy 4 are required to perform
             two performance tests. Testing is assumed to take 280 technical hours per
             system; once every 15 years; plus 10 percent for repeat tests.  These performance
             test costs are amortized over the life of the control system.

         •   All plants have in place elaborate record keeping programs to demonstrate
             compliance with existing VOC regulations. These programs will have to be
             modified to accommodate the tracking of HAP emissions.  The Agency assumes
             that this modification will require 500 professional hours and these costs are
             amortized over the life of the system.

         •   Record keeping is estimated to take 1 technical hour per shift for 10 shifts per
             week.

         •   Monitoring activities are also estimated to take 1 technical hour per shift for 10
             shifts per week.

         •   Finally, reporting is assumed to take 40 technical hours per year plus 40 clerical
             hours per year.

         New facilities and new paint shops would incur little additional cost to meet the final
   emission limit. These facilities would already include bake oven controls and partial spray
   booth exhaust controls for VOC control purposes.  New facilities might need to make some
   downward adjustment in the HAP content of their materials to meet the final emission limit.

   3.2    Results

         The Agency's facility level engineering cost estimates are  summarized in Table 3-1.
   The total annual capital cost estimate includes the annualized capital cost associated with all
   applicable strategies. Similarly, the total variable cost estimate includes the variable cost
   associated with all applicable strategies.  The nationwide total cost is estimated at $154
   million, with $75 million in annual capital costs, $76 million in operation and maintenance
   costs, and $2 million in administrative costs.2  This equates, on average, to about $25,000 per
   ton of HAP controlled.
All values are reported in 1999 constant dollars.

                                           3-4

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    Table 3-1. Engineering Cost Estimates for Affected Facilities:  1999 ($103)"
u<
Plant ID Plant Name
005A
007A
010A
010B
010C
010D
010F
010G
010E
010H
0101
010J
006A
012A
0121
012N
012M
012B
012C
012D
012O
012E
012F
012G
AutoAlliance International Inc.
BMW Manufacturing Corp.
DC-Belvidere Assembly Plant
DC-Connor Assembly Plant
DC-Jefferson North Assembly Plant
DC-Newark Assembly Plant
DC-St. Louis North Assembly Plant
DC-St. Louis South Assembly Plant
DC-Sterling Heights Assembly Plant
DC-Toledo Assembly Plant I
DC-Toledo Assembly Plant II
DC-Warren Truck Assembly Plant
Mercedes-Benz U.S. Interational, Inc.
Ford Atlanta Assembly Plant
Ford Avon Lake Assembly Plant
Ford Chicago Assembly Plant
Ford Dearborn Assembly Plant
Ford Edison Assembly Plant
Ford Kansas City Passenger Assembly
Ford Kansas City Truck Plant
Ford Kentucky Truck Plant
Ford Lorain Assembly Plant
Ford Louisville Assembly Plant
Ford Michigan Truck Plant
City
Flat Rock
Greer
Belvidere
Detroit
Detroit
Newark
Fenton
Fenton
Sterling Heights
Toledo
Toledo
Warren
Vance
Hapeville
Avon Lake
Chicago
Dearborn
Edison
Plant Kansas City
Kansas City
Louisville
Lorain
Louisville
Wayne
State
MI
SC
IL
MI
MI
DE
MO
MO
MI
OH
OH
MI
AL
GA
OH
IL
MI
NJ
MO
MO
KY
OH
KY
MI
Total
Annualized Total Annual Total Monitoring, Total
Capital Operating and Recordkeeping, and Annual
Costs Maintenance Costs Reporting Costs Costs
$0
$0
$0
$0
$0
$0
$0
$0
$0
$754
$0
$0
$164
$1,898
$1,795
$2,896
$2,028
$1,301
$2,206
$1,983
$1,796
$0
$6,447
$0
$0
$2
$0
$0
$0
$0
$0
$0
$0
$763
$0
$0
$169
$1,960
$1,795
$2,905
$2,037
$1,323
$2,248
$1,993
$1,819
$0
$6,491
$42
$20
$20
$20
$0
$20
$20
$20
$20
$20
$37
$0
$20
$36
$37
$36
$37
$37
$36
$37
$37
$36
$0
$36
$20
$20
$21
$20
$0
$20
$20
$20
$20
$20
$1,555
$0
$20
$369
$3,896
$3,625
$5,838
$4,102
$2,660
$4,491
$4,013
$3,651
$0
$12,974
$61
                                                                                                                 (continued)

-------
Table 3-1.  Engineering Cost Estimates for Affected Facilities:  1999($103)a (Continued)
Plant ID Plant Name
012H
012J
012P
012K
012L
003A
020A
013A
015A
014A
017A
u> 022A
c* 023A
016A
024A
030B
030A
03 5 A
025A
031 A
026A
021 A
019A
018A
Ford Norfolk Assembly Plant
Ford St. Louis Assembly Plant
Ford Twin Cities Assembly Plant
Ford Wayne Assembly Plant
Ford Wixom Assembly Plant
Subaru-Isuzu Automotive Inc.
GM Arlington Assembly Plant
GM Bowling Green Assembly
GM Buick City Assembly Center
GM Doraville Assembly Plant
GM Fairfax Assembly Plant
GM Flint Assembly Plant
GM Ft. Wayne Assembly
GM Hamtramck Assembly Plant
GM Janesville Assembly Plant
GM Lansing Car Assembly - C Plant
GM Lansing Car Assembly - M Plant
GM Lansing Craft Centre Plant #2
GM Linden Assembly
GM Lordstown Assembly Plant
GM Morain Assembly Plant
GM North American Truck Group
GM Oklahoma City Assembly Plant
GM Orion Assembly
City
Norfolk
Hazelwood
St. Paul
Wayne
Wixom
Lafayette
Arlington
Bowling Green
Flint
Doraville
Kansas City
Flint
Roanoke
Detroit
Janesville
Lansing
Lansing
Lansing
Linden
Lordstown
Dayton
Baltimore
Oklahoma City
Lake Orion
State
VA
MO
MN
MI
MI
IN
TX
KY
MI
GA
KS
MI
IN
MI
WI
MI
MI
MI
NJ
OH
OH
MD
OK
MI
Total
Annualized Total Annual Total Monitoring, Total
Capital Operating and Recordkeeping, and Annual
Costs Maintenance Costs Reporting Costs Costs
$720
$3,360
$308
$892
$75
$1,568
$2,813
$1,568
$901
$4,643
$2,064
$400
$2,252
$1,760
$1,811
$333
$268
$0
$738
$1,606
$121
$686
$1,922
$1,527
$786
$3,457
$324
$926
.$75
$1,528
$2,813
$1,528
$926
$4,794
$2,123
$409
$2,313
$1,769
$1,816
$344
$282
$0
$738
$1,645
$131
$686
$1,932
$1,545
$37
$36
$36
$36
$36
$33
$36
$33
$36
$36
$37
$37
$36
$37
. $36
$36
$36
$0
$36
$36
$36
$36
$37
$36
$1,543
$6,852
$668
$1,855
$186
$3,129
$5,662
$3,129
$1,863
$9,473
$4,224
$846
$4,601
$3,566
$3,663
$713
$587
$0
$1,511
$3,287
$288
$1,408
$3,891
$3,107
                                                                                                          (continued)

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Table 3-1. Engineering Cost Estimates for Affected Facilities: 1999 ($103)" (Continued)
Plant ID Plant Name
027A
028A
029A
033A
032A
002A
034B
034A
001A
004B

004A

009A

009Bb

038AC
500
008A

008B

Totals
GM Pontiac East Assembly Plant
GM Shreveport Assembly Plant
GM Wentzville Assembly Center
GM Wilmington Assembly Plant
Saturn Corporation
Honda East Liberty Auto Plant
Honda Marysville Auto Plant-Line 2
Honda Marysville Auto Plant-Line 1
Mitsubishi Normal Assembly Plant
Nissan Motor Manfacturing Corp., USA-
Line HF
Nissan Motor Manufacturing Corp. USA-
Line IV
New United Motor Mfg. Inc. NUMMI- Car
Line
New United Motor Mfg. Inc. NUMMI-
Truck Line
AM General Assembly Plant
Toyota
Toyota Motor Manufacturing Kentucky Inc.
Paint #1
Toyota Motor Manufacturing Kentucky Inc.
Paint #2

City
Pontiac
Shreveport
Wentzvile
Newport
Spring Hill
East Liberty
Marysville
Marysville
Normal
Smyrna

Smyrna

Fremont

Fremont

South Bend
Princeton
Georgetown

Georgetown


State
MI
LA
MO
DE
TO
OH
OH
OH
IL
TO

TO

CA

CA

IN
IN
KY

KY


Total
Annualized Total Annual Total Monitoring, Total
Capital Operating and Recordkeeping, and Annual
Costs Maintenance Costs Reporting Costs Costs
$3,679
$0
$2,396
$357
$1,988
$614
$1,512
$1,928
$675
$1,985

$0

$1,268

$455

$0
$0
$2,037

$772

$75,270
$3,870
$0
$2,409
$358
$1,988
$639
$1,512
$1,928
$715
$1,994

$0

$1,268

$461

$0
$0
$2,037

$772

$76,387
$36
$20
$36
$36
$36
$36
$36
$36
$37
$37

$20

.$36

$72

$0
$33
$36

$36

$2,004
$7,585
$20
$4,842
$751
$4,012
$1,289
$3,060
$3,893
$1,426
$4,016

$20

$2,572

$989

$6
$33
$4,109

$1,580

$153,661
' All costs are reported in 1999 dollars, the base year of the economic analysis. EPA used the GDP deflator to make these adjustments.
b TABC, Inc. only manufactures parts such as truck beds and does not assemble vehicles. These truck beds are supplied to NUMMI—Truck Line. Since our economic
  model pertains to final vehicles and not to parts, TABC Inc. compliance costs will be assigned to NUMMI—Truck Line in the subsequent analysis.
c AM General is not subject to the final rule because it is more appropriately regulated under the Miscellaneous Metal Parts Subcategory.

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3-8

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                                    SECTION 4

                         ECONOMIC IMPACT ANALYSIS
       Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for
specific regulations and standards promulgated under the authority of the Act.  In addition,
Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs
for significant regulatory actions. Office of Management and Budget (OMB) guidance
under EO 12866 stipulates that a full benefit-cost analysis is only required when a regulatory
action has an annual effect on the economy of $ 100 million or more.  Other statutory and
administrative requirements include examination of the composition and distribution of
benefits and costs. For example, the Regulatory Flexibility Act (RFA), as amended by the
Small Business Regulatory Enforcement and Fairness Act of 1996 (SBREFA), requires EPA
to consider the economic impacts of regulatory actions on small entities. The OAQPS
Economic Analysis Resource Document, which can be found at
http://www.epa.gov/ttn/ecas/econdata/Rmanual2/index.html,  provides detailed instructions
and expectations for economic analyses that support rulemaking (EPA, 1999).

       The engineering analysis described in Section 3 provides estimates of the total annual
costs associated with the abatement  strategies that bring each facility into compliance with
the final standards.  Note, however, that these engineering cost estimates do not account for
behavioral responses by facilities, such as changes in output quantities and prices. In this
section, engineering cost estimates are used as inputs to an economic model of the
automobile and LDT assembly industry to predict market, industry and social welfare
impacts of the final regulation.  Small business impacts are addressed in Section 5 and a
benefits analysis is presented in Section 6 of this report.

4.1    Methodology

       This analysis will address several special characteristics of the automobile industry.
First, the industry's products are highly differentiated with vehicles varying along
dimensions such as their functions, carrying capacity, fuel efficiency, and comfort features.
Second, the market for automobiles  within the United States may be characterized as
imperfectly competitive. Only 14 companies operate in this market. In 1998-1999, the

                                        4-1

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   Herfindahl-Hirschmann Index for the industry was 1,471, and the four-firm concentration
   ratio (CR4) was 72 percent.  Third, exclusive dealerships play an intermediary role between
   manufacturers and final consumers.1 Finally, international trade is a major component of the
   U.S. market for automobiles. In 1999, imports accounted for approximately 20 percent of
   car sales in the United States (Grain Automotive Group, 2000).  Given the data available, we
   will evaluate the economic effects of the final regulation at the  facility level within the
   context of the overall industry conditions. This approach is consistent with accepted
   economic logic and provides consistent estimates for the impacts on all the required
   variables.

   4.1.1   Product Differentiation

          To address the high degree of product differentiation in this industry, the Agency has
   segmented the market into eight vehicle classes: subcompacts, compacts, intermediate/
   standard, luxury, sports, pickups, vans, and other.2 Separate demand and cost curves are
   developed for each of these market segments.

          Since all domestic vehicle categories are subject to price changes due to the  final
   regulation, we will estimate the consumer response to these price changes within each
   vehicle class.  However, we will not estimate spillover impacts between domestic vehicle
   classes because available estimates of the cross-price elasticities of demand suggest that
   consumers rarely substitute between vehicle classes in response to relatively small price
   changes.  In particular, Goldberg (1995) estimates cross price semi-elasticities of demand for
   some specific vehicle models and finds that these semi-elasticities are low if the models
   belong to different classes.3  For example, the cross price semi-elasticity between a Honda
   Civic and a Honda Accord is only 14.9  x 10"7. Furthermore, our priors suggest that the
   tendency to switch between vehicle categories will be low given the relatively small
   magnitude of price changes expected for this NESHAP. Therefore, our basic market
   segmented model is designed to capture the within-segment, first order impacts of the
   regulation.
 Exclusive dealership arrangements are also found in the sewing machine, agricultural machinery and gasoline
   markets.

2EPA's 1999 Fuel Economy Guide Data (EPA, 2000), car buyers guides such as Edmunds.com (Edmunds, 2001),
   and the Automotive News Market Databook (Grain Automotive Group, 2000) were used to assign vehicle
   models to the appropriate market segments.

3Recall that a semi-elasticity refers to the percentage change in quantity demanded of model j when price of model i
   changes by $1 but all other model prices remain unchanged.

                                            4-2

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4.1.2   Imperfect Competition

       Although the U.S. automobile industry comprises 14 firms, a smaller subset of these
firms operates within each vehicle category segment. Given our assumption of imperfect
competition in the industry as a whole and within each segment in particular, we will use a
Cournot model to characterize the market for each vehicle category. The implicit assumption
is that vehicles within a given category are close substitutes. In the Coumot model, one of
several models of oligopoly, firms are modeled as choosing production quantities. Unlike a
competitive market, in which the price equals the marginal cost of production and firms take
the price as given, the Cournot model reflects the fact that automobile manufacturers may
have market power and thus charge a price in excess of marginal cost by producing a
quantity that is less than in a competitive equilibrium.

4.1.3   Role of Dealerships

       Manufacturers in the U.S. automobile industry do not actually set final consumer
prices. Instead, they set wholesale prices for dealers which are then marked up to form retail
or list prices.  The final transaction price paid by the consumer can also differ from these
retail prices because of dealer-specific rebates, local and state taxes, and individual
bargaining power. This pricing scheme is summarized in Figure 4-1.  Note that manufacturer
decisions are based on wholesale prices, while consumer decisions are based on transaction
prices.
      Manufacturer
                                      Dealer
Consumer
Figure 4-1.  Pricing in Automobile Markets

       This relationship can be viewed as a successive oligopoly game, with the
manufacturer adding a markup over the marginal cost of production, and the dealer adding
his own markup. In stage 1, the manufacturer maximizes his profits by comparing his
marginal costs to his marginal revenues.  His marginal revenue depends on the wholesale
price and the wholesale price elasticity of demand.  In the second stage, the dealer maximizes
her profits by comparing her own marginal costs to her marginal revenue, which depends on
the transaction price and the transaction price elasticity of demand.

                                        4-3

-------
          If the marginal cost of production increases, the impacts can be borne by the
   manufacturer who changes input-output quantities, the dealer who earns a reduced markup,
   or the consumer who faces a higher list price.  Gron and Swenson (2000) examine the degree
   of cost pass-through to final consumers in the U.S. automobile market.  They find that cost
   shocks common to all manufacturers have a greater effect on list price than do model-
   specific cost shocks. This is consistent with the theoretical predictions of Dornbusch (1987)
   who showed in the context of exchange rate shocks that firms competing in a Coumot game
   will increase the level of cost pass-through as the proportion of the market that is exposed to
   the cost increase grows.

          Because the final regulation covers all facilities assembling vehicles in the United
   States, we have made the simplifying assumption that the dealer can charge the same
   percentage markup as before the regulation. Assuming that the percentage markup
   (including discounts, taxes, etc.) between the wholesale price (Pw) and the  transaction price
   (P7) is constant, i.e. Pw = A.PT, the demand elasticity with respect to wholesale prices
   coincides with the transaction price elasticity.  Thus we can collapse the two-stage game
   between the manufacturer, dealer, and consumer to a one-stage game between the
   manufacturer and a "composite customer" (dealer/consumer).

   4.1.4  Foreign Trade

          While the final NESHAP will directly affect domestic facilities that use coatings in
   automobile and LDT assembly operations, the rule can also have indirect foreign trade
   implications.4 On the import side, the demand for imported cars could increase if they
   become inexpensive relative to domestic cars that are affected by the coating process
   standard. We will assume that foreign firms can meet this spillover demand by using excess
   capacity in their existing plants. On the export side, foreign demand for vehicles produced in
   the United  States can decrease if they become relatively more expensive because of the
   regulation. Finally, domestic facilities could relocate to foreign countries with laxer
   environmental regulations if domestic production costs increase. However, given the small
   size of the compliance costs relative to company sale it is unlikely that the  final regulations
   will trigger industrial flight at least in the short run. This assumption is consistent with
   empirical studies in the literature that have found little evidence of environmental regulations
   affecting industry location decisions (Levinson, 1996).  This discussion illustrates the theory
4A11 production facilities located within the United States are subject to the final NESHAP regardless of whether they
    are owned by domestic or foreign companies.  For the purposes of this analysis, imports refers to vehicles
    produced outside of the United States.

                                            4-4

-------
underlying estimation of the economic impacts of the final MACT standard. The next task is
to operationalize this model to calculate the impacts.

4.2     Operational Model
       The final regulation will increase the cost of production for existing vehicle
assembly plants. The regulated facilities may alter their current levels of production or even
close a plant in response to the increased costs. These responses will in turn determine the
impact of the regulation on total market supply and ultimately on the equilibrium price and
quantity. To determine the impact on equilibrium price and quantity, we will

       •  characterize the demand for each domestic vehicle type;
       •  characterize the costs of production for classes of domestic vehicles at the
          individual facility and at the market level;
       •  develop the solution algorithm to determine the new with-regulation equilibrium;
       •  characterize spillover impacts on the demand for imported and exported cars and
          LDTs; and
       •  compute the values for all the impact variables.
An intuitive overview of our economic model is presented below.  Details of the modeling
exercise and its implementation are relegated to Appendix A.

       The Agency has modeled separate markets for each of the eight vehicle categories:
subcompacts, compacts, intermediate/standard, luxury, sports, pickups, vans, and other.
Given the imperfect competition observed within each market segment, Cournot models are
used to reflect the fact that oligopolistic manufacturers can charge  a price in excess of
marginal cost by producing a quantity that is less than the competitive optimum.

       U.S. demand for domestic vehicles in each category is characterized by a downward-
sloping demand curve, which implies that the quantity demanded is low when prices are high
and quantity demanded is high when prices are low due to the usual income and substitution
effects.  The demand curve for each vehicle category is constructed using baseline quantity
and retail price data and available estimates of own price elasticities of demand.

       Given the capital in place, each automobile and LDT assembly facility will be
assumed to face an upward-sloping marginal cost function. In addition, it is assumed that if
revenue falls below its minimum average variable costs, then the firm's best response is to
cease production because total revenue does not cover total variable costs of production.  In
                                        4-5

-------
this scenario, producers lose money on operations as well as capital. By shutting down, the
firm avoids additional losses from operations.

       Figure 4-2 shows how the market prices and quantities are determined by the
intersection of the marginal revenue and marginal cost curves in a concentrated market
model. The baseline consists of a market price and quantity (P0, Q0) that is determined by the
downward-sloping market demand curve (D) and the upward-sloping marginal cost curve
(MC0) that reflects the sum of the individual marginal cost curves of the assembly facilities.
Any individual supplier would produce amount Q0 (at price P0) and the facilities would
collectively produce amount Q0.
                                                   MCo
                                                           MR
                              Qo

 Figure 4-2. Baseline Equilibrium
       Now consider the effect of the regulatory control costs (see Figure 4-3).
Incorporating the regulatory control costs will involve shifting the marginal cost curve
upward for each regulated facility by the per-unit variable compliance cost. As a result, the
market output declines from Q0 to Q, and the market price (as determined from the market
demand curve, DM) increases from P0 to P,.
                                        4-6

-------
       Because the final coating standard will only be binding on automobile and LDT
assembly facilities operating within the U.S., the Agency has also modeled the impact of the
predicted domestic price increase on foreign trade.  Imports of foreign vehicles into the U.S.
could increase because they become cheap relative to domestic vehicles.  The ratio between
quantities of imported versus domestic vehicles purchased by U.S. consumers is modeled as
                 ;t
                                                   MC,
                                                           MR
Figure 4-3. With-Regulation Equilibrium

a function of their relative prices and the ease of substitution between these vehicles.
Exports of U.S.-made vehicles can also decline if their price increases while other exogenous
determinants of foreign demand are held constant. Foreign demand is modeled as a
downward sloping function that depends on average price of exported U.S. vehicles and the
export elasticity of demand.

4.3    Economic Impact Results
       Based on the simple analytics presented above, automobile/LDT manufacturers will
attempt to mitigate the impacts of higher production costs by shifting as much of the burden
on other economic agents as market conditions allow. Potential responses include changes in
production processes and inputs, changes in output rates, or closure of the plant. This
analysis focuses on the last two options because they appear to be the most viable for auto
assembly plants, at least in the short term.  We expect upward pressure on prices as
producers reduce output rates. Higher prices reduce quantity demanded and output for each
vehicle class, leading to changes in profitability of facilities and their parent companies.
                                        4-7

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These market and industry adjustments determine the social costs of the regulation and its
distribution across stakeholders (producers and consumers).

4.3.1   Market-Level Impacts
       The increased costs of production due to the regulation are expected to slightly
increase the price of automobiles/LDT and reduce their production and consumption from
1999 baseline levels. As shown in Table 4-1, the regulation is projected to increase the price
of all vehicle classes by at most 0.01 percent (or at most $3.08 per vehicle). Similarly, the
model projects small declines in domestic production across all vehicle classes (ranging from
17 to 384 vehicles).

4,3,2   Industry-Level Impacts

       Industry revenue, costs, and profitability change as prices and production levels
adjust in response to the increased compliance costs.  These impacts are described in detail
below.

4.3.2.1 Changes in Profitability

       As shown in Table 4-2, the economic model projects that pre-tax earnings for
assembly plants will decrease by $152 million, or 1.1 percent.  This is the net result of three
effects, the first two of which partially offset each other:

       •   Decrease in revenue ($21 million):  Revenue decreases as a result of reductions in
          output. However, these losses were mitigated by increased revenues as a result of
          small increases in vehicle prices.
       •   Decrease in production costs ($22.5 million):  Production costs decline as output
          declines.
                                        4-8

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Table 4-1. Market-Level Impacts by Vehicle Class;  1999
Vehicle Class
Subcompacts
Wholesale Price ($/unit)
Domestic Production (103/yr)
Compacts
Wholesale Price ($/unit)
Domestic Production (103/yr)
Intermediate/Standard
Wholesale Price ($/unit)
Domestic Production (103/yr)
Luxury
Wholesale Price ($/unit)
Domestic Production (103/yr)
Sports
Wholesale Price ($/unit)
Domestic Production (103/yr)
Pickups
Wholesale Price ($/unit)
Domestic Production (103/yr)
Vans
Wholesale Price ($/unit)
Domestic Production (103/yr)
SUV
Wholesale Price ($/unit)
Domestic Production (103/yr)
Baseline

$15,522
586,257

$16,487
1,766,657

$21,155
2,187,415

$33,587
749,746

$25,797
349,955

$22,126
2,908,018

$22,910
1,447,482

$27,694
2,692,763
Absolute
Change

$0.40
-50

$1.05
-384

$0.61
-280

$3.08
-131

$1.21
-17

$0.23
-106

$0.80
-220

$0.41
-163
Relative Change

0.00%
-0.01%

0.01%
-0.02%

0.00%
-0.01%

0.01%
-0.02%

0.00%
0.00%

0.00%
0.00%

0.00%
-0.02%

0.00%
-0.01%
                                      4-9

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Table 4-2.  National-Level Industry Impacts;  1999

Revenues ($106/yr)
Costs ($106/yr)
Compliance
Production
Pre-Tax Earnings ($106/yr)
Plants (#)
Employment (#)
Baseline
$290,789
$276,746
$0
$276,746
$14,043
65
219,817
Absolute
Change
-$20.7
$131.1
$153.6
-$22.5
-$151.8
0
-37
Relative Change
-0.01%
0.05%
NA
-0.01%
-1.08%
0.00%
-0.02%
       •   Increase in control costs ($154 million): Costs associated with coating operation
          HAP controls increase.
       Although aggregate industry pre-tax earnings decline, the regulation creates both
winners and losers based on the distribution of compliance costs across facilities. As shown
in Table 4-3, 18 of the 65 plants (28 percent) are projected to become more profitable with
the regulation with a total gain of $2 million. These plants are either not subject to additional
controls or have lower per-unit control costs (less than $1 per vehicle) relative to other
assembly plants.  The remaining 47 plants are projected to experience a total loss of $154
million. These plants have higher per-unit costs ($16 per vehicle on average). This results in
an average loss of $3.3 million and represents a 1.5 percent decline in the average pre-tax
profit of these plants.

4.3.2.2 Facility Closures and Changes in Employment

       Economic theory suggests that a facility will cease production if market prices fall
below the minimum average variable cost. EPA estimates that no automobile or LDT
assembly plant is likely to prematurely close as a result of the regulation. However,
employment in the automobile and LDT assembly industry is projected to decrease by 37
full-time equivalents (FTEs) as a result of decreased output levels.  This represents a 0.02
percent decline in manufacturing employment at these assembly plants.
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Table 4-3. Distributional Impacts Across Facilities;  1999

Assembly Plants (#)
Baseline Production
Total (units/yr)
Average (units/facility)
Baseline Compliance Costs
Total ($106/yr)
Average ($/unit)
Change in Pre-Tax Earnings ($106/yr)
Change in Employment (#)
Pre-Tax
Loss
47

9,642,611
205,162

$153.2
$15.89
-$153.6
-37
Earnings
Gain
18

3,045,681
169,205

$0.5
$0.16
$1.7
1
Total
65

12,688,292
195,204

$153.66
$12.11
-$151.8
-37
4.3.3   Foreign Trade

       Given the small changes in domestic vehicle prices projected by the economic model,
EPA estimates foreign trade impacts associated with the rule are negligible.  The price of
domestic vehicles, averaged across all eight vehicle categories, is expected to rise by 0.003
percent as a result of the final regulation, while the price of imported cars will remain
unchanged. The Agency computed two quantitative measures of foreign trade impacts based
on this predicted price impact. As shown in Table 4-4, the ratio of imports to domestic sales
is expected to rise by approximately 0.01 percent. Furthermore, export sales are predicted to
decline by approximately 0.01 percent.

4.3.4   Social Costs
       The social impact of a regulatory action is traditionally measured by the change in
economic welfare that it generates. The social costs of the final rule will be distributed
across consumers and producers alike. Consumers experience welfare impacts due to
changes in market prices and consumption levels associated with the rule.  Producers
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   Table 4-4. Foreign Trade Impacts:  1999
                                                                % change
    Ratio of imports-to-domestic vehicles                                0.01%
    Exports                           	-0.01%
   experience welfare impacts resulting from changes in profits corresponding with the changes
   in production levels and market prices. However, it is important to emphasize that this
   measure does not include benefits that occur outside the market, that is, the value of reduced
   levels of air pollution due to the regulation.5

          The national baseline compliance cost estimates are often used as an approximation
   of the social cost of the rule.  The engineering analysis estimated annual costs of $154
   million (1999$). In this case, the burden of the regulation falls solely on the affected
   facilities that experience a profit loss exactly equal to these cost estimates. Thus, the entire
   loss is a change in producer surplus with no change (by assumption)  in consumer surplus.
   This is typically referred to as a "full-cost absorption" scenario in which all factors of
   production are assumed to be fixed and firms are unable to adjust their output levels when
   faced with additional costs.

          In contrast, the economic analysis conducted by the Agency accounts for behavioral
   responses by producers and consumers to the regulation (i.e., shifting costs to other economic
   agents). This approach results in a social cost estimate that may differ from the engineering
   estimate and also provides insights on how the regulatory burden is distributed across
   stakeholders.

          Higher market prices  lead to consumer losses of $9.1 million, or 6 percent of the total
   social cost of the rule. Although automobile or LDT producers are able to pass on a limited
   amount of cost increases to final consumers, the increased costs result in a net decline in
   profits at assembly plants of $152 million.  As shown in Table 4-5, EPA estimates the total
   social cost of the rule to be $161 million. Note that social cost estimates exceeds baseline
   engineering cost estimates by $7 million. The projected change in welfare is higher because
   the regulation exacerbates a social inefficiency (see Appendix B).  In an imperfectly
   competitive equilibrium, the marginal benefit consumers place on the vehicles, the market
   price, exceeds the marginal cost to producers of manufacturing the product. Thus, social
5Those impacts are the focus of the benefits analysis presented in Section 6 of this report.

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Table 4-5. Distribution of Social Costs: 1999$
                                                           Value (SlO'/yr)
 Change in Consumer Surplus                                    -S9.1
   Subcompacts                                                 -$0.2
   Compacts                                                    -$1.9
   Intermediate/Standard                                          -$1.3
   Luxury                                                      -$2.3
   Sports                                                       -$0.4
   Pickups                                                      . -$0.7
   Vans                                                        -$1.2
   SUV                                                        -$1.1
 Change in Producer Surplus                                   -$151.8
 Total Social Cost                                             -$160.9
welfare would be improved by increasing the quantity of the vehicles provided.  However,
producers have no incentive to do this because the marginal revenue effects of lowering the
price and increasing output is lower than the marginal cost of these extra units.

4.4    Energy Impacts

       Executive Order 13211 "Actions Concerning Regulations that Significantly Affect
Energy Supply, Distribution, or Use" (66 Fed. Reg. 28355, May 22, 2001) requires federal
agencies to estimate the energy impact of significant regulatory actions.  The final NESHAP
will trigger both an increase in energy use due to the operation of new abatement equipment
as well as a decrease in energy use due to a small decline in automobile production. The net
impact will be an overall increase in the automobile industry's energy costs by about $26.41
million per year. These impacts are discussed below in greater detail.

4.4.1  Increase in Energy Consumption

       As described earlier in Section 3 of this report, automobile and LDT coating facilities
can adopt multiple strategies to reduce their HAP emissions in compliance with the final
regulation. Input substitution strategies 2 and 3 will not require significant amounts of extra
energy because they only involve the application of modified coating materials.  However,
adoption of strategy 1 and/or strategy 4 will necessitate extra fan horsepower to convey
additional air streams to add-on control devices, as well as additional natural gas and
electricity for operating these devices (which are assumed to be regenerative thermal

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oxidizers).  The operation of such abatement equipment is estimated to require an additional
4.9xl09 standard cubic feet per year of natural gas and l.SxlO8 kilowatt hours per year of
electricity nationwide at a cost of $3.20 per thousand cubic feet of natural gas and $0.06 per
kilowatt hour of electricity (Green, 2002). Therefore, the nationwide cost of the energy
needed to operate the control equipment required by strategies 1 and 4 is estimated at $26.48
million per year.  This incremental energy cost was included in the operation and
maintenance component of the engineering cost estimates presented in Section 3.

4.4.2  Reduction in Energy Consumption

       The economic model described in Section 4.2 predicts that increased compliance
costs will result in an annual production decline of approximately 1,300 vehicles valued at
$21 million collectively.  This production decline will lead to a corresponding decline in
energy usage by automobile manufacturers. EPA has computed an average "energy per unit
output ratio" and multiplied it by the decline in production to quantify this impact.

       Census data presented in Table 4-6 indicates that the U.S.  automobile and LDT
industry incurred energy costs of $669 million to produce $205.8 billion worth of vehicles in
1997. This translates into an energy consumption per unit of output ratio of about 0.3
percent for the automobile and LDT industry. Therefore, energy costs are estimated to
decline by approximately $0.07 million per year if the industry's production declines by
1,300 vehicles valued at $21 million per year.

4.4.3   Net Impact on Energy Consumption

       The operation of additional abatement capital is estimated to result in an increase in
energy use worth $26.48 million per year, while the decline in automobile production will
result in a decrease in energy use worth $0.07 million per year. These competing factors will
result in a net increase in annual energy consumption by the automobile industry of
approximately $26.41 million, on balance.

       The total electricity generation capacity in the U.S. was 785,990 Megawatts in 1999
(DOE, 1999a). Thus, the electricity requirements associated with the  additional abatement
capital represent a small fraction  of domestic generation capacity. Similarly, the natural gas
requirements associated with the  final NESHAP are insignificant  given the 23,755 billion
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Table 4-6. Energy Usage in Automobile and LPT Production (1997)

                                              Value of Shipments  Fuel & Electricity Costs
	Industrial Sector	NAICS	(S106)	($106)	

Automobile Mfg.                    336111           $95,385               $339

Light Truck and Utility Vehicle Mfg.   336112	$110,400	$330	

Total	$205,785	$669	
Source: U.S. Department of Commerce, Census Bureau.  October 1999a. "Automobile Manufacturing." 1997
       Economic Census Manufacturing Industry Series. EC97MO-3361A.  Washington, DC: Government
       Printing Office.

       U.S. Department of Commerce, Census Bureau.  October 1999b. "Light Truck and Utility Vehicle
       Manufacturing." 1997 Economic Census Manufacturing Industry Series. EC97M-3361B.
       Washington, DC: Government Printing Office.


cubic feet of natural gas produced domestically in the U.S. in 1999 (DOE, 1999b). Hence,
the final NESHAP is not likely to have any significant adverse impact on energy prices,
distribution, availability, or use.
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                                   SECTION 5

                          OTHER IMPACT ANALYSES
      The economic- and energy-impacts associated with the final NESHAP were
described in the previous section.  Statements discussing additional impacts on small
businesses, unfunded mandates, and new sources are presented below.

5.1   Small Business Impacts

      The Regulatory Flexibility Act (RFA) of 1980 as amended in 1996 by the Small
Business Regulatory Enforcement Fairness Act (SBREFA) generally requires an agency to
prepare a regulatory flexibility analysis of a rule unless the agency certifies that the rule will
not have a significant economic impact on a substantial number of small entities. Small
entities include small businesses, small organizations, and small governmental jurisdictions.

      For purposes of assessing the impacts of the final rule on small entities, a small
entity is defined as: (1) a small business that is a parent company according to Small
Business Administration (SBA) size standards for NAICS codes 336111 (automobile
manufacturing) and 336112 (light truck and utility vehicle manufacturing) with 1,000 or
fewer employees; (2) a small governmental jurisdiction that is a government of a city,
county, town, school district or special district with a population of less than 50,000; and (3)
a small organization that is any not-for-profit enterprise, which is independently owned and
operated and is not dominant in its field.

      Based on the above definition of small entities and data reported in Section 2 of this
report, the Agency has determined that there are no small businesses within this source
category that would be subject to this final rule. Therefore, because this final rule will not
impose any requirements on small entities, EPA certifies that this action will not have a
significant economic impact on a substantial number of small entities.

5.2   Unfunded Mandates

      Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4,
establishes requirements for federal agencies to assess the effects of their regulatory actions
on state, local, and tribal governments and on the private sector. Under Section 202 of the
UMRA, EPA generally must prepare a written statement, including a cost-benefit analysis,
                                       5-1

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for proposed and final rules that includes any federal mandate that may result in expenditures
to state, local, and tribal governments, in the aggregate, or to the private sector, of $100
million or more in any one year.  As indicated below, EPA is responsive to all required
provisions of UMRA.

       Section 202(a)(l) requires EPA to identify the relevant statutory authority. The final
standard to limit emissions of HAPs associated with the automobile and LTD coating process
is being developed under Section 112 of the CAA of 1990.

       Section 202(a)(2) requires a quantitative and qualitative assessment of the anticipated
costs and benefits of the regulation.  Section 3 of this report provides detailed estimates of
the costs incurred by the private sector to comply with the final NESHAP.  The estimated
effects of the regulation on the national economy are described in Section 4. Section 6 of
this report provides a qualitative  assessment of the benefits of reducing HAP emissions, as
well as the additional benefits of reducing VOC emissions due to HAP controls.

       Before EPA establishes any regulatory requirement that significantly or uniquely
affects small governments, including tribal  governments, it must develop a small government
agency plan under Section 203 of UMRA.  The final automobile and LOT coating NESHAP
does not impose an unfunded mandate on state, local, and tribal governments; the cost of the
regulation is borne by industry. Thus, Section 203 of UMRA does not apply to the current
rule.

       Section 205 of UMRA generally requires EPA  to identify and consider a reasonable
number of regulatory alternatives and adopt the least costly, most cost-effective, or least
burdensome alternative that achieves the objectives of the rule. For reasons discussed in the
preamble of the rule, EPA has determined that the current rule constitutes the least
burdensome alternative consistent with the  CAA.

5.3    Impact on New Sources

       There is a potential that new sources such as new paint shops at existing plants or
new plants will operate in the automobile industry in the future. The  final rule imposes
more stringent limits on emissions from these new sources.  If control costs for new sources
and facilities are sufficiently higher than that for current producers, new source performance
standards can raise the cost of entry in the automobile market. Thus,  EPA has analyzed the
relative effect of new source controls to determine whether they are likely to impose
significant entry barriers.
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       It is difficult to predict which of the 65 facilities that currently operate in the U.S.
automobile and LDT assembly industry will replace their existing paint shops in the future.
The engineering cost analysis presented in Section 3 of this report assumes that all existing
plants will keep their current paint shops and make the necessary material changes and
control equipment additions to meet the  final Maximum Achievable Control Technology
(MACT) rule.  This is a conservative (higher MACT-specific compliance cost) assumption
compared to assuming that only some of these paint shops will be replaced.

       The construction of greenfield facilities is also difficult to predict. EPA examined the
list of current facilities and determined that over the past 23 years there has been about one
new greenfield plant per year, on average. These were more frontloaded in the earlier years
for many reasons including the industry-wide change to basecoat/clearcoat from single
coating topcoats, "retooling" to take advantage of new production strategies  and
technologies, and the arrival of non-U.S. manufacturers such as Honda, Nissan, and Toyota.
Thus, the assumption of one new greenfield plant per year in the future would be an overly
generous one.  The engineering analysis does not explicitly include greenfield facilities
because they are difficult to predict, the number is both absolutely and relatively small
compared to the existing facility population, and the cost and economic impacts are likely to
be very small.
       Even though the number of affected entities cannot be predicted, the  impact of new
source controls can be estimated qualitatively. The additional MACT-specific compliance
costs for a new source (greenfield plant or new paint shop at an existing plant) would be very
low because these new sources will comply with existing VOC regulations and  already have
all of the control equipment needed to meet the final MACT rule.  The only incremental
costs for new sources would be the small cost of lower HAP coating materials and some
MACT-specific monitoring, reporting, and record keeping  costs that they would not have
incurred in the absence of the final rule.  However, these costs are in line with the costs
incurred by existing facilities and thus do not impose any barriers to entry into the industry.
Overall, given  the minimal impacts on price and production described in Section 4 of this
report, it is very unlikely that a substantial number of firms who may consider entering the
industry will be significantly affected.
                                        5-3

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                                    SECTION 6

                              BENEFITS ANALYSIS

       The emission reductions achieved by this environmental regulation will provide
benefits to society by improving environmental quality. This section provides information
on the types and levels of social benefits anticipated from the automobile and LDT
NESHAP. This section discusses the health and welfare effects associated with the HAPs  .
and other pollutants emitted by automobile and LDT coating operations.

       In general, the reduction of HAP emissions resulting from the regulation will reduce
human and environmental exposure to these pollutants and thereby reduce the likelihood of
potential adverse health and welfare effects. This section provides a general discussion of
the various components of total benefits that may be gained from reducing HAPs through
this NESHAP.  The rule will also achieve reductions of VOCs and hence may reduce
ground-level ozone and particulate matter (PM), the benefits of which are presented
separately from the benefits associated with reductions in HAPs. We do not present a
monetized benefits estimate for the HAP and other emission reductions associated with this
final rule for reasons discussed later in the section.  We do provide a qualitative treatment of
the benefits of this final rule in this section.
6.1    Identification of Potential Benefit Categories

       The benefit categories associated with the emission reductions predicted for this
regulation can be broadly categorized as those benefits that are attributable to reduced
exposure to HAPs and those attributable to reduced exposure to other pollutants. Benefit
categories include reduced incidence of neurological effects, respiratory irritation, and eye,
nose, and throat irritation associated with exposure to noncarcinogenic HAPs and VOCs. In
addition to health impacts occurring as a result of reductions in HAP and VOC emissions,
welfare impacts can also be identified. Each category is discussed separately below.
                                        6-1

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   6.1.1  Benefits of Reducing HAP Emissions
          The HAP emissions reductions achieved by this rule are expected to reduce exposure
   to ambient concentrations of ethylbenzene, EGBE, methanol, methyl ethyl ketone (MEK),
   methyl isobutyl ketone (MIBK), toluene, and xylenes. According to baseline emission
   estimates, this source category in the absence of rulemaking will emit approximately 10,000
   tons per year of HAPs at affected sources in the fifth year following promulgation. The
   regulation will reduce total HAP emissions by approximately 6,000 tons of emissions per
   year. Human exposure to these HAPs is likely to occur primarily through inhalation, but
   people may also be exposed indirectly through ingesting contaminated food or water or
   through dermal contact.  These substances may also enter terrestrial and aquatic ecosystems
   through atmospheric deposition or may be deposited on vegetation and soil. These HAPs
   may also enter the aquatic environment from the atmosphere via gas exchange between
   surface water and the ambient air or by wet or dry deposition of particles to which they
   adsorb. This analysis is focused only on  the air quality benefits of HAP reduction.
   6.1.1.1 Health Benefits of Reduction in HAP Emissions
          The HAP emissions resulting from automobile and LDT coating operations are
   associated with a variety of adverse health effects.  Acute (short-term) exposure to relatively
   high levels of ethylbenzene in humans results in respiratory effects such as throat irritation
   and chest constriction, and irritation of the eyes. Chronic (long-term) exposure of humans to
   ethylbenzene may cause eye and lung irritation, with possible adverse effects on the blood.
   Animal studies have reported effects on the blood, liver, and kidneys from chronic inhalation
   exposure to ethylbenzene. No information is available on the developmental or reproductive
   effects of ethylbenzene in humans, but animal studies have reported developmental effects,
   including birth defects in  animals exposed via inhalation. EPA has established a reference
   concentration (RfC)1 of 1  mg/m3 to protect against adverse health effects other than cancer.
   The RfC is based on the critical effect2 of developmental toxicity observed in studies with
   rats and rabbits. EPA has characterized ethylbenzene as in Group  D, not being classifiable as
   to human carcinogenicity due to inadequate data.
'in general, the RfC is an estimate (with uncertainty spanning perhaps an order of magnitude) of a daily inhalation
   exposure of the human population (including sensitive subgroups) that is likely to be without an appreciable risk
   of deleterious effects during a lifetime.

2The critical effect is the first adverse effect, or its known precursor, that occurs to the most sensitive species as the
   dose rate of an agent increases.

                                            6-2

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       EGBE is a member of the glycol ethers HAP category, a large group of related
compounds. Acute exposure in humans to high levels of glycol ethers results in narcosis,
pulmonary edema, and liver and kidney damage.  Chronic exposure to glycol ethers may
result in neurological and blood effects, including fatigue, nausea, tremor, and anemia.  No
information is available on the reproductive or developmental effects of glycol ethers in
humans, but animal studies have reported such effects, including testicular damage, reduced
fertility, maternal toxicity, early embryonic death, birth defects, and delayed development.
EPA has established an RfC of 13 mg/m3 for EGBE to protect against adverse health effects
other than cancer based on the critical effect of decreases in red blood cell count observed in
studies with rats.
       No reliable human epidemiological studies are available that address the potential
carcinogenicity of EGBE, but a draft report of a 2-year rodent inhalation study reported
equivocal evidence of carcinogenic activity in female rats and male mice. Because of the
uncertain relevance of these tumor increases to humans, the fact that EGBE is generally
negative in genotoxic tests, and the lack of human data to support the findings in rodents, the
human carcinogenic potential of EGBE cannot be determined at this time.  In response to a
petition, EPA has proposed removing EGBE from the list of HAP, however, no final action
has yet been taken.
       Acute inhalation exposure to MEK in humans results in irritation to the eyes, nose,
and throat. Little information is available on the chronic effects of MEK in humans, but
inhalation studies in animals have reported slight neurological, liver, kidney, and respiratory
effects. No information is available on the developmental, reproductive, or carcinogenic
effects of MEK in humans.  Developmental effects, including decreased fetal weight and
fetal malformations, have been reported in mice and rats exposed to MEK via inhalation and
ingestion. EPA has established an RfC of 5 mg/m3 to protect against adverse health effects
other than cancer based on the critical effect of decreased birth weight observed in studies
with mice. With regard to cancer, EPA has determined that available data are inadequate to
assess the human carcinogenic potential for MEK. EPA has classified MEK in Group D,  not
classifiable as to human carcinogenicity. In response to a petition, EPA has proposed
removing MEK from the list of HAP, however, no final action has yet been taken.
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       Acute or chronic exposure of humans to high levels of methanol by inhalation or
ingestion may result in blurred vision, headache, dizziness, and nausea. No information is
available on the reproductive, developmental, or carcinogenic effects of methanol in humans.
Birth defects have been observed in the offspring of rats and mice exposed to methanol by
inhalation.  A methanol inhalation study using rhesus monkeys reported a decrease in the
length of pregnancy and limited evidence of impaired learning ability in offspring. EPA has
not established an RfC for methanol or classified methanol with respect to carcinogenicity.
The California Environmental Protection Agency has developed a reference exposure level
(similar in concept to an RfC) of 4 mg/m3 based on the critical effect of birth defects
observed in studies with mice.
       Acute exposure to high levels of MIBK may irritate the eyes and mucous membranes
and cause weakness, headache, and nausea. Chronic exposure to workers has been observed
to cause nausea, headache, burning eyes, insomnia, intestinal pain, and slight enlargement of
the liver. No information is available on reproductive or developmental effects of MIBK in
humans, but studies with rats and mice have reported neurological effects and increased liver
and kidney weights. EPA has not established an RfC for MIBK or classified it with respect
to carcinogenicity.  Animal studies are currently underway that are expected to provide the
foundation for an EPA assessment.
       Acute inhalation to high levels of toluene by humans may cause effects to the central
nervous system (CNS), such as fatigue, sleepiness, headache, and nausea, as well as irregular
heartbeat. Chronic inhalation exposure of humans to lower levels of toluene also causes
irritation of the upper respiratory tract, eye irritation, sore throat, nausea, dizziness,
headaches, and difficulty with sleep.  Studies of children whose mothers were exposed to
toluene by inhalation or mixed solvents during pregnancy have reported CNS problems,
facial and limb abnormalities, and delayed development. However, these effects may not be
attributable to toluene alone.  EPA has established an RfC of 0.4 mg/m3 to protect against
adverse health effects other than cancer. The RfC is based on the critical effect of decreased
neurological performance in workers exposed to toluene emitted from glue. EPA has
characterized toluene in Group D, as not classifiable as to human carcinogenicity.
       Acute inhalation to high levels of mixed xylenes (a mixture of three closely related
compounds) in humans may cause irritation of the nose and throat, nausea, vomiting, gastric

                                        6-4

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irritation, mild transient eye irritation, and neurological effects. Chronic inhalation of
xylenes in humans may result in nervous system effects such as headache, dizziness, fatigue,
tremors, and incoordination.  Other reported effects include labored breathing, heart
palpitation, severe chest pain, abnormal electrocardiograms, and possible effects on the blood
and kidneys.  EPA has not developed an RfC for xylenes. The Agency for Toxic Substances
and Disease Registry has published a minimum risk level (similar to an RfC) for xylenes of
0.43 mg/m3 based on CNS effects in  rodents. EPA has characterized xylenes as in Category
D, not classifiable with respect to human carcinogenicity.
       For the HAPs covered by the automobile and LDT NESHAP, evidence on the
potential toxicity of the pollutants varies. However, given sufficient exposure conditions,
each of these HAPs has the potential to elicit adverse health or environmental effects in the
exposed populations.
       EPA prepared a relative ranking evaluation for all HAPs for the purpose of selecting
30 HAPs posing the greatest health risk in urban areas (Smith et al., 1999).  This evaluation
combined all available data on toxic potential with nationwide emission and ambient
concentration information (i.e., not.just urban) for ail 188 HAPs, considering both cancer and
noncancer end points and both inhalation and ingestion exposures. The available database
supported quantitative ranks for more than 150 HAPs, including the seven HAPs most
commonly used in (or emitted by) this source category. None of these seven HAPs were
found to present a hazard sufficient to justify including them on the list of urban air toxics.
       EPA prepared a draft national-scale assessment as part of its National Air Toxics
Assessment activities (EPA, 2001). This draft assessment estimates human inhalation
exposures to the urban HAPs selected based on the ranking study described above.  To the
extent that EPA's ranking analysis was effective, the 30 HAPs included in the urban list were
likely to present greater health risks than those that were not listed.  Less than one-third of
the noncarcinogens evaluated by the national-scale assessment were judged likely to have
human exposure exceeding the RfC anywhere in the U.S.
       It is important to note that the national-scale assessment did not include ingestion
exposures or acute time-scales and used simplified models that were not efficient at

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estimating hot spots or maximum individual exposures.  However, the results suggest that
most of the noncarcinogens included in this assessment do not present national concerns.
Because the HAPs in the national-scale assessment arguably present greater potential hazards
than the seven HAPs most commonly used in (or emitted by) this source category, EPA has
no information that suggests there is presently any widespread overexposure to these seven
HAPs. Nevertheless, given the limitations of the national-scale assessment, this may not be
true in all areas or for all receptors.
6.1.1.2 Welfare Benefits of Reducing HAP Emissions

       The welfare effects of exposure to HAPs have received less attention from analysts
than the health effects. However, this situation is gradually changing, as over the past 10
years, ecotoxicologists have started to build models of ecological systems that focus on
interrelationships in function, the dynamics of stress, and the adaptive potential for recovery.
This perspective is reflected in Table 6-1 where the end points associated with ecosystem
functions describe structural attributes rather than species-specific responses to HAP
exposure.  This development is consistent with the observation that chronic sublethal
exposures may affect the normal functioning of individual species in ways that make them
less than competitive and therefore more susceptible to a variety of factors including disease,
insect attack, and decreases in habitat quality (EPA, 1991). All of these factors may
contribute to an overall change in the structure (i.e., composition) and function of the
ecosystem.
       The overall environmental behavior of these HAPs can be evaluated using fugacity
models. Fugacity is a thermodynamic property and is equal to the partial pressure of a
substance in compartment. Thus the fugacity of a substance in an environmental medium
(e.g., air, water, soil, or sediment) is a measure of the substance's tendency to escape that
medium and enter another medium.  The Mackay Level III model is a relatively rigorous
representation of multiple environmental compartments and the fate and transport process
through which chemicals are moved through them (Mackay, 1991).
       The Level III model indicates that the HAPs released from automobile and LDT
coating operations once emitted to the ambient air as vapors are likely to remain in the vapor
phase as VOCs. Model estimates of HAPs remaining in the air compartment range from
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greater than 99 percent of the ethyl benzene, xylenes, and toluene to approximately 85
percent of methanol emissions.
       The median half-lives for these HAPs in the vapor phase range from 23 hours for
xylenes to 57 hours for toluene. As VOCs, they under go various chemical reactions that
contribute to the formation of other atmospheric pollutants that can affect welfare. For
example, these VOCs can contribute to ozone in the environment. EPA has previously stated
(59 FR 1788, January 12, 1994) that ozone's effects on green plants include injury to foliage,
reductions in growth, losses in yield, alterations in reproductive capacity, and alterations in
susceptibility to pests and pathogens. Based on known interrelationships of different
components of ecosystems, such effects, if of sufficient magnitude, may potentially lead to
irreversible changes of a sweeping nature to ecosystems.
       In addition to directly contributing to ozone formation, the reaction of methanol with
nitrogen dioxide in a smog chamber has been shown to yield methyl nitrite and nitric acid.
The reaction of methanol with nitrogen dioxide may be the major source of methyl nitrite
that has the potential to cause allergic responses in polluted atmospheres. However, methyl
nitrite is short lived in the atmosphere. It is rapidly photolyzed by sunlight, with a mean
lifetime of about 10 to  15 minutes. The result is the production of NOX, which contributes to
an increase in ozone.
       Beyond photochemical removal processes, a relatively small portion of these vapor-
phase HAPs, as well as some of the particulates, leave the ambient air via removal processes
such as wet or dry deposition.  Compounds such as methanol, EGBE, and MIBK are slightly
miscible in water and can therefore be physically removed from the air by rain.  The other
HAPs (i.e, toluene, xylenes, ethyl benzene) are less soluble but can be deposited on surfaces
via processes such as dry deposition or impaction.
       In water, the HAPs released from automobile and LDT coating operations exhibit low
to moderate acute aquatic toxicity. Methanol, EGBE, and MIBK represent the low side and
MEK, xylenes, toluene, and ethyl benzene are considered to present moderate acute toxicity.
All of these HAPs exhibit low persistence and low bio-accumulation potential. The
persistence, as indicated by median half-lives in water, range from a low of 96 hours for

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methanol to a maximum of 312 hours for toluene. The bio-accumulation factor (BAF) is
defined as the concentration of a substance in an organism divided by the concentration of
the chemical in the surrounding medium measured in an intact ecosystem. As such, the BAF
takes into account accumulation through ingested food, as well as the concentration from the
surrounding medium.
       A low bio-accumulation potential indicates that they are not likely to bio-concentrate
through the food chain. However, substances that do not tend to readily bio-accumulate or
bio-concentrate may be taken up by biota and still exert a deleterious effect.  These effects
could potentially include such impacts as lethality or reproductive impairment to vulnerable
species resulting in impacts to recreational or commercial fishers, as well as the ecosystems
supporting these fisheries. This not only has potential adverse implications for individual
wildlife species, (including threatened or endanger species) and ecosystems as a whole, but
also to humans who may depend on contaminated fish and waterfowl.
       Once deposited on soil or sediments these HAPs are subject to a variety of competing
removal mechanisms including evaporation, mobility, bio-transformation, and chemical
reactions.  Xylenes deposited on soil can vaporize or, if contained on sediment, be buried.
Methanol and ethyl benzene demonstrate high mobility in soil and can end up in ground
water, and EGBE and MIBK are readily subject to aerobic and anaerobic bio-transformation.
The estimated median half-lives for these HAPs in soil ranges from 96 hours for MIBK and
methanol to 420 hours for xylenes. In sediment, the estimated median half-lives are 384
hours for MIBK and methanol to 1,248 hours for toluene. Once deposited on soil or in
sediments, these HAPs can enter into terrestrial biota through diet or directly from the
surrounding media. The potential for this uptake of HAPs to adversely affect individual
wildlife species (including threatened or endangered species) as well as ecosystems as a
whole is not understood.
       In summary, the potential for adverse effects of these HAPs on individual wildlife
species or aquatic terrestrial ecosystems have not been characterized.  However, HAP
emission reductions achieved through the automobile and LDT NESHAP should reduce the
associated potential for adverse environmental impacts.
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6.1.2  Benefits of Reducing VOC Emissions due to HAP Controls

       VOCs are a precursor to tropospheric (ground-level) ozone, and exposure to ground-
level ozone has been linked to acute and chronic effects on human health and welfare.  This
section addresses these effects.

       Human exposure to elevated concentrations of ozone primarily results in respiratory-
related impacts such as coughing and difficulty in breathing. Eye irritation is another
frequently observed effect. These  acute effects are generally short-term and reversible.
Nevertheless, a reduction in the severity or scope of such impacts may have significant
economic value.

       Recent studies have found that repeated exposure to elevated concentrations of ozone
over long periods of time may also lead to chronic, structural damage to the lungs (EPA,
1995b). To the extent that these findings are verified, the potential scope of benefits related
to reductions in ozone concentrations could be expanded significantly.

       Major ozone adverse health effects are alterations in lung capacity and breathing
frequency; eye, nose and throat irritation; reduced exercise performance; malaise and nausea;
increased sensitivity of airways; aggravation of existing respiratory disease; decreased
sensitivity to respiratory infection; and extra pulmonary effects (CNS, liver, cardiovascular,
and reproductive effects). It is expected that VOC reductions through the automobile and
LDT coatings rule will lead to a reduction in ambient ozone concentrations and, in turn,
reduce the incidence of the adverse health effects of ozone exposure.

       Major ozone adverse welfare effects are reduction in the economic value of certain
agricultural crops and ornamental plants and materials damage. Over the last decade, a series
of field experiments has  demonstrated a positive statistical association between ozone
exposure and yield reductions as well as visible injury to several economically valuable cash
crops, including soybeans and cotton. Damage to selected timber species has also been
associated with exposure to ozone. The observed impacts range from foliar injury to reduced
growth rates and premature death.  Benefits of reduced ozone concentrations include the
value of avoided losses in commercially valuable timber and aesthetic losses suffered by
nonconsumptive users (EPA, 1995b).
       There are some benefits from reduced VOC emissions beyond merely a reduction in
ozone concentration. Approximately 1 to 2 percent of VOCs precipitate in the atmosphere to
form particulate matter (PM) with an aerodynamic diameter at or below 10 micrometers
(called PM-10). There are a number of benefits from reduced PM concentration, including
reduced soiling and materials damage, increased visibility, and reductions in excess deaths

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and morbidity. However, the focus of this part of the benefits section is on the benefits from
reduced ozone concentrations because they are greater than those from reduced PM-10
concentrations. PM-10 control is already prescribed by primary and secondary National
Ambient Air Quality Standards (NAAQS) promulgated by EPA, which are now under
review.  For more information on ozone health and welfare effects, refer to the 1996 Ozone
NAAQS Staff Paper developed by the Agency.

       Sizable uncertainties exist in any risk estimates, including these. Emissions estimates
can be off by a factor of two or more one time out of three, and air dispersion models can
have a similar uncertainty.  Consideration of actual exposures also adds uncertainty.
Estimates of the total burden of disease associated with air pollution and air toxics are rough.
Cancer potency factors contribute additional uncertainty of often greater magnitude.
Although we did  not formally estimate the combined uncertainties for these risk estimates, it
is very likely that the uncertainty around these estimates is at least a factor of 10 above or
below the stated values.

       We did not quantify the benefits from VOC reductions for this rule because available
methods are not consistent with guidance from the Science Advisory Board (SAB) and
National Academy of Sciences (NAS) on the estimation of health benefits for air pollution
regulations.  In other benefits analyses for MACT standards (e.g., industrial boilers and
process heaters MACT), we have generated benefits estimates for precursor emissions of
ozone and PM by scaling results for similar scenarios with supporting air quality modeling.
For this final rule, we were unable to identify existing air quality modeling runs that covered
similar source categories and emissions  types. As such, we were not confident in the transfer
of benefit per ton of VOC based on dissimilar scenarios to auto and light duty MACT.  EPA
is working with the SAB to develop better methods for analyzing the benefits of reductions
in VOCs.
6.2    Lack Of Approved Methods To Quantify HAP Benefits

       There are both cancer and non-cancer health effects associated with the HAPs that are
controlled under this rule. In previous analyses of the benefits of reductions in HAPs, EPA
has quantified and monetized the benefits of reduced incidences of cancer. (EPA, 1995b). In
some cases, EPA has also quantified (but not monetized) reductions in the number of people
exposed to non-cancer HAP risks above no-effect levels. (EPA, 1996).
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       Monetization of the benefits of reductions in cancer incidences requires several
important inputs, including central estimates of cancer risks, estimates of exposure to
carcinogenic HAPs, and estimates of the value of an avoided case of cancer (fatal and non-
fatal).  In the above referenced analyses, EPA relied on unit risk factors (URF) developed
through risk assessment procedures. The unit risk factor is a quantitative estimate of the
carcinogenic potency of a pollutant, often expressed as the probability of contracting cancer
from a 70 year lifetime continuous exposure to a concentration of one p.g/m3 of a pollutant.
These URFs are designed to be conservative, and as such, are more likely to represent the
high end of the distribution of risk rather than a best or most likely estimate of risk.

       In a typical analysis of the expected health benefits of a regulation (see for example,
"Regulatory Impact Analysis: Heavy-Duty Engine and Highway Diesel Fuel Sulfur Control
Requirements", December 2000, EPA 420-R-00-026), health effects are estimated by
applying changes in pollutant concentrations to best estimates of risk obtained from
epidemiological studies.  As the purpose of a benefit analysis is to describe the benefits most
likely to occur from a reduction in pollution, use of high-end, conservative risk estimates will
lead to a biased estimate of the expected benefits of the regulation.

       However the methods to conduct a risk analysis of HAP reductions produces high-
end estimates of benefits due to assumptions required in such analyses. While we used high-
end risk estimates in past analyses, recent advice from the EPA SAB and internal methods
reviews have suggested that we avoid using high-end estimates in current analyses. This
advice, as taken from the Workshop on the Benefits of Reductions in Exposure to Hazardous
Air Pollutants (EPA, 2002), has been to prefer central estimates to upper bound risk
estimates because cost-benefit analysis is focused on the expected values of costs and
benefits. In addition, the SAB stated (EPA, 2000b) to conduct an accurate benefit-cost
analysis of a regulation that alters cancer and/or noncancer health risks requires risk
assessment information of the following form: (1) the proposed regulation and associated
standard need to be clearly identified; (2) the most accurate and realistic estimates of the
expected change in exposure resulting from the standard, including any potential behavioral
adjustments (which can increase or decrease exposure) need to be determined; and (3) the
most accurate and realistic estimate of the expected cancer-related consequences resulting
from the change in exposure need to be provided. Again, the estimates of exposure and
resulting cancer cases avoided need to be as realistic as possible, employing neither
particularly conservative nor optimistic assumptions.

       In order to develop unit risks, EPA has generally made a conservative  assumption of
no threshold and used a linear extrapolation approach. In order to protect public health with
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a substantial margin of safety, EPA has extrapolated the upper 95th percent confidence band
of the dose-response data rather than its central tendency. While this conservative approach
may be required for regulatory purposes, it does not necessarily provide realistic, best
estimates for the purposes of benefit-cost analysis.

       Also, limited input data on non-cancer effects associated with exposure to these
HAPs does not allow us to quantify the benefits from risk reductions of these effects. The
input data is limited in the sense that we do not have sufficient data to produce a dose-
response relationship. The RfC does not say anything about the effects of changes in
concentrations of toxics on changes in different non-cancer health effects.  All it provides is a
reference concentration where a particular sensitive non-cancer health effect is unlikely to
occur.  Therefore, the RfC is not generally useful for benefits  analyses which require changes
in incidence of the full suite of effects. For these reasons, we  will not attempt to quantify the
health benefits of reductions in HAPs unless best estimates  of risks are available.  EPA is
working with the SAB to develop better methods for analyzing the benefits of reductions in
HAPs. While not appropriate as part of a primary estimate  of benefits to estimate the
potential baseline risks posed by the Auto and Light-Duty Truck source category, EPA
performed a "rough" risk assessment, described below.  There are large uncertainties
regarding all components of the risk quantification step, including location of emission
reductions, emission estimates, air concentrations, exposure levels and dose-response
relationships. However, if these uncertainties are properly identified and characterized, it is
possible to provide estimates of the reduction in inhalation cancer incidence associated with
this rule. Also, since conservative assumptions were generally made where site-specific data
were unavailable, overall risk estimates from the rough assessment can be characterized as
health protective; that is, actual risks in the population are likely to be lower.  This rough
analysis considered what is likely to be the predominant pathway for the HAPs emitted by
these facilities.  Other routes of exposure could add to overall exposures.
6.2.1   Characterization of Industry Emissions and Potential Baseline Health Effects
       For the automobile and light-duty truck surface coating source category, seven HAP
account for over 95 percent of the total HAP emitted. Those seven HAP are toluene, xylene,
glycol ethers (including ethylene glycol monobutyl ether (EGBE)), MEK, MIBK,
ethylbenzene, and methanol.  Additional HAP which may be emitted by some automobile
and light-duty truck surface coating operations are: ethylene glycol, hexane, formaldehyde,
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chromium compounds, diisocyanates, manganese compounds, methyl methacrylate,
methylene chloride, and nickel compounds.

       Of the seven HAP emitted in the largest quantities by this source category, all can
cause toxic effects following sufficient exposure. The potential toxic effects for high doses
of these seven HAP include effects to the central nervous system, such as fatigue, nausea,
and mild tremors; adverse effects on the liver, kidneys, and blood; respiratory effects; and,
developmental effects.

       In accordance with section 112(k), EPA developed a list of 33 HAP which present the
greatest threat to public health in the largest number of urban areas.  None of the
predominant seven HAP that represent 95% of the emissions of HAP for this category is
included on this list for the  EPA's Urban Air Toxics Program, although three of the other
emitted HAP (formaldehyde, manganese compounds, and nickel compounds) appear on the
list. In November 1998, EPA published "A Multimedia Strategy for Priority Persistent,
Bioaccumulative, and Toxic (PBT) Pollutants." None of the predominant seven HAP
emitted by automobile and  light-duty truck surface coating operations appears on the
published list of compounds referred to in the EPA's PBT strategy.

       To estimate the potential baseline risks posed by the source category , EPA
performed a "rough" risk assessment for 56 of the approximately 60 facilities in the source
category by using a model plant placed at the actual  location of each plant and simulating
impacts using air emissions data from the 1999 EPA Toxics Release Inventory (TRI). In
addition to the seven predominant HAP, the following additional HAP were included in this
rough risk assessment because they were reported in TRI as being emitted by facilities in the
source  category: ethylene glycol, hexane, formaldehyde, diisocyanates, manganese
compounds, nickel compounds and benzene. The benzene emissions and some of the nickel
emissions are from non-surface coating activities which are not part of the source category.
Of the HAP reported in TRI which are emitted from automobile and light-duty truck surface
coating operations, three (formaldehyde, nickel compounds, and EGBE) are carcinogens that,
at present, are not considered to have thresholds for cancer effects. Most facilities in this
source  category emit some  small quantity of formaldehyde.  In the 1999 TRI, however, only
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two facilities in this source category reported formaldehyde emissions. No other facilities
exceeded the TRI reporting threshold for formaldehyde in 1999.
6.2.2  Results of Rough Risk Assessments of Alternative Control Options Under CAA
      Sections 112 (d)4 and 112(c)(9)

      The results of the human health risk assessments described below are based on
approaches for quantifying exposure, risk, and cancer incidence that carry significant
assumptions, uncertainties, and limitations. For example, in conducting these types of
analyses, there are typically many uncertainties regarding dose-response functions, levels of
exposure, exposed populations, air quality modeling applications, emission levels, and
control effectiveness. The risk estimates from this rough assessment are also based on
typical facility configurations (i.e., model plants). As such, they are subject to significant
uncertainties. The actual risks at any one facility could be significantly higher or lower.
Because the estimates derived from the various scoping approaches are necessarily rough, we
are concerned that they not convey a false sense of precision. Any point estimates of risk
reduction or benefits generated by these approaches should be considered as  falling within
the upper range of potential estimates.

      If this final rule is implemented at all automobile and light-duty truck surface coating
facilities, the number of people exposed to hazard index (HI) values equal to, or greater than,
1 was estimated to be reduced from about 100 to about 10. The emissions of manganese,
MIBK, and xylenes contributed most to non-cancer risk estimates. (Details of these analyses
are available in the docket.)

      The baseline cancer risk and .subsequent cancer risk reductions were estimated to be
minimal for this source category. The rough risk assessment indicated that currently no one
would be exposed to a lifetime cancer risk above 10 in a million and perhaps 6,000 people
would be exposed to a lifetime cancer risk above 1 in a million as a result of emissions from
these facilities.  Of the three carcinogens included in the assessment, emission reductions
attributable to the final rule could be estimated for only EGBE.  The cancer risk for EGBE,
however, cannot currently be quantified. As a result, we were not able to estimate whether
or not this rule would have any significant effect on cancer risks.
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               Appendix A
Economic Model for Automobile and LOT Market
          Under Imperfect Competition

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       The final regulation will increase the cost of production for existing vehicle
       assembly plants.  The regulated facilities may alter their current levels of production
       or even close the facility in response to the increased costs.  These responses will in
       turn determine the impact of the regulation on total market supply and ultimately on
       the equilibrium price and quantity.  The economic analysis described below employs
       standard concepts of microeconomics to model these impacts.

A.1    U.S. Demand for Domestic Vehicles

       The Agency has modeled separate markets for eight domestic vehicle categories:
       subcompacts, compacts, intermediate/standard, luxury, sports, pickups, vans, and
       other. Domestic demand for each vehicle category i can be expressed by the
       following constant elasticity demand function:
where PJ is the average price of vehicle category i, e/1 is the own-price demand elasticity for
       vehicle category i, and A; is a multiplicative demand parameter that calibrates the
       demand equation given data on price and the demand elasticity to replicate the
       observed baseline year (1999) level of domestic consumption of vehicles of class i.

       Estimates of average retail prices and own-price elasticities by vehicle class are
       presented in Table A-l .  The average  retail price for each of the eight vehicle classes
       is derived from the Automotive New Market Data Book, as described previously in
       Section 2.4.3. The own-price elasticity of demand for each vehicle class is taken
       from Goldberg (1995) who estimates them using micro data on transaction prices and
       make/models from the Consumer Expenditure Survey and the Automotive News
       Market Data Book. Note that these demand elasticity estimates are all greater than
       one in absolute value but vary across vehicle classes in an intuitive manner. For
       example, the demand for intermediate and standard automobiles is highly elastic,
       while that for sports and luxury cars is the least price  elastic.

A.2    U.S. Supply of Domestic Vehicles

       Given the capital in place, each facility is assumed to face an upward sloping curve
       for a particular vehicle class. The Generalized Leontief profit function is used to
                                        A-l

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Table A-l. Retail Prices and
Vehicle Class
Subcompact
Compact
Intermediate
Standard
Luxury
Sports
Pick-up
SUV
Van
Other
Own-Price Elasticities of Demand
Average Retail Price8
$15,522
$16,487
$21,155

$33,587
$25,797
$22,126
$27,694
$22,910

by Vehicle Class
Elasticity11
-3.286
-3.419
^.179
^1.712
-1.912
-1.065
-3.526

-4.363
^.088
a Includes the MSRP and destination price reported by the Automotive News Market Data Book (Grain, 2000;
  p: 75). Prices current as of April 2000 and were considered representative of 1999 prices.

b Goldberg, Pinelopi K.  1995. "Product Differentiation and Oligopoly in International Markets: The Case of
  the U.S. Automobile Industry." Econometrica 63(4):891-951, Table II.
       characterize the facility supply function under perfect competition.  Under this
       assumption, the supply function for facility j for producing vehicles of class i would
       take the form:
                                               1  *                               (A.2)
                                               Pi
where p; is the average price for vehicle class i, and Yy and Py are model parameters. The
       theoretical restrictions on the model parameters that ensure upward-sloping supply
       curves are Yy ^ 0 and Py< 0.  Figure A-l illustrates the theoretical supply function
       represented by Eq. (A.2). As shown, the upward-sloping supply curve is specified
       over a productive range with a lower bound of zero that corresponds with a shutdown
                      P"
       price equal to —— and an upper bound given by the production capacity of qjM that is
                     4v2.
                     ^Tij
       approximated by the supply parameter Yy. The curvature of the supply function is
       determined by the Py parameter.
                                          A-2

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                p
              4Yj2
                                                                    M
Figure A-l.  Facility-Level Marginal Cost Function

       The p parameter is related to the facility's supply elasticity which can be expressed
       as:
                                                                                (A.3)
Taking the derivative of the facility supply function (equation A-2) with respect to price and
       multiplying this expression by p/qy results in the following expression for the supply
       elasticity:
                                        ft.
                                       4qij
                                                                                (A.4)
By rearranging terms, p can be expressed as follows:
                                         A-3

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                                                                                     (A.5)
   Under perfect competition,3 EPA estimated the p parameter by substituting an assumed
          supply elasticity for the vehicle class (1^), the baseline production level by facility j of
          vehicle class i (q^), and the average market price for the vehicle class (p;). EPA
          assumed that a facility's ability to respond to small price changes depends on its
          current capacity utilization rate, as outlined in Table A-2. The remaining supply
          function parameter, Yy-, does not influence the facility's production responsiveness to
          price changes as does the p parameter. Thus, the parameter YJ is used to calibrate the
          model so that each facility's supply equation replicates the baseline production data.

   Table A-2.  Supply Elasticity Assumptions	
     Capacity Utilization Rate (R)	Supply Elasticity (g)	
     R>1                                                         0.10
     0.9
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       avoids additional losses from operations.  The sufficient condition for production at
       facility j is non-negative profits (IIj):

                                                     0                          (A. 7)
where TR, is the total revenue earned from the sale of all vehicles assembled at facility j and
       TCj is the sum of the variable production costs (production and compliance) and total
       avoidable fixed costs (annualized expenditure for compliance capital) incurred by
       facility j for all vehicles that it produces. The underlying assumption is that if a
       facility produces multiple models, these models share some fixed costs that cannot be
       separated.  Thus the facility need not shut down if one product line is unprofitable. It
       will only shut down if the aggregate profits from all models are negative on balance.

       To model each vehicle category as a concentrated market, we have used a Cournot
       model in which facilities exercise some control over the wholesale price of the
       vehicle.  In these noncompetitive models, each supplier recognizes its influence over
       the market price and chooses a level of output that maximizes its profits, given the
       output decisions of the others.  Employing  a Cournot model assumes that suppliers do
       not cooperate.  Instead, each supplier evaluates the effect of its output choice on price
       and does the best it can given the output decision of its competitors.  Thus, given any
       output level chosen by other suppliers  there will be a unique optimal output choice
       for a particular supplier.

       The basic oligopoly model  we consider is the "Many Firm Cournot Equilibrium"
       described in Varian (1993,  page 290).  As is the case in all imperfectly competitive
       models of profit-maximizing behavior, each oligopolist chooses an output level where
       marginal revenue equals marginal cost. In the Cournot model, marginal revenue is a.
       fraction, Zjj; of the market price: Zy = (1 + Sy/Ej), where si5j = q^/Qj. If we optimize
       Eq. (A.7)with respect to qy we can derive the following first-order condition:

                                   P(Qi)-(l+si/ei) = MCij.                       (A.8)

If facility j's market share of vehicle category i (s;j) is 1, the demand curve facing it is the
       market demand curve. In that case, Eq. (A.8) reduces to the profit maximization
       condition facing a monopolist where marginal revenue equals marginal cost, and the
       marginal revenue is only a  function of the demand elasticity.  On the other extreme,  if
       the producer is a very small part of a large  market, its market share is near zero, and
       Eq. (A.8) reduces to the profit maximization condition under perfect competition:
       price equals marginal cost.
                                        A-5

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       Using data on the approximated market price of vehicle by type (P(Qj)), total quantity
       produced for the domestic market (Qj), the amount produced by each affected facility
       (q;j), and the price elasticity of demand (e{) for vehicle class i, the baseline
       equilibrium can be established as depicted in Figure A-2. For each of the affected
       facilities, the baseline automobile production quantities are provided in Tables 2-11
       and 2-12 of Section 2.  Some facilities produce vehicles in more than one market
       segment. In these cases, the Agency treated each market segment for a facility as a
       separate product line thus, a facility may have multiple product lines for the purposes
       of the economic impacts model.
                                                   MCo
                                                               D
                                                           MR
                              Qn
Figure A-2. Baseline Equilibrium
                                        A-6

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    A.4   With-Regulation Market Equilibrium

          The production decision at assembly facility j is affected by the variable compliance
          costs, Cy, which are expressed in dollars per vehicle.4 Each marginal cost equation is
          directly affected by the regulatory control costs. Dropping subscripts henceforth for
          convenience, the profit maximizing solution for each existing facility becomes:
                               4'(q-Y)
                                         +  c =  p-
1+1
                               (A.9)
          Incorporating the regulatory control costs (c) will involve shifting the marginal cost
          curve upward for each regulated facility by the per-unit variable compliance cost, as
          shown in Figure A-3. The marginal cost of the affected facilities shifts upward,
          causing the market cost curve to shift upward to MC,. At the new with-regulation
          equilibrium, the market price increases from P0 to P, and market output (as
          determined from the market demand curve, DM) declines from Q0 to Q,.

          Facility responses and market adjustments can be conceptualized as an interactive
          feedback process. Facilities face increased production costs due to compliance,
          which causes facility-specific production responses (i.e., output reduction). The
          cumulative effect of these responses  leads to an increase in the market price that all
          producers and consumers face.  This increase leads to further responses by all
          producers and consumers and, thus, new market prices. The new with-regulation
          equilibrium is the result of a series of these iterations between producer and consumer
          responses and market adjustments until a stable market price equilibrium is reached
          where total market supply equals total market demand. A spreadsheet nonlinear
          solution algorithm was used to compute the with-regulation equilibrium price and
          quantities in each market.

   A.5   Impact on Foreign Trade

          The final coating regulation will only be binding on facilities that assemble vehicles
          in the United States. The consequent change in relative prices of domestic versus
          foreign vehicles has two impacts on foreign trade. Foreign imports become more
4The variable compliance costs per vehicle were calculated given the annual production per facility and the variable
    cost component of the total compliance cost estimate for each facility. These latter cost estimates were provided
    by the engineering analysis and include annual operating and maintenance costs and monitoring and record
    keeping costs.

                                            A-7

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                   PT
                   PO
                                           MC1
                                                      MCr
                                                              MR
   Figure A-3. With-Regulation Equilibrium

          attractive to U.S. consumers and U.S. exports become less attractive to foreign
          consumers.  The Agency has used available data to estimate the magnitude of these
          impacts as described below.

   A. 5.1  U.S. Imports
          The final regulation may lead to an increase in the price of domestic vehicles, which,
          in turn, could potentially trigger an increase in demand by U.S. consumers for
          substitutes such as unregulated, imported vehicles. To estimate this spillover effect,
          EPA assumed domestic and foreign vehicles are imperfect substitutes that are
          differentiated by their country of origin (commonly referred to as the Armington
          assumption). The conceptual approach for estimating spillover effects using
          Armington elasticities is described in Gallaway, McDaniel, and Rivera (2000). From
          an economy-wide perspective, a representative consumer maximizes his utility for
          "composite" vehicles (V) by allocating expenditures between domestic (D) and
          imported vehicles (M), taking relative prices as given.5 The Armington specification
          assumes a constant elasticity of substitution (CES) utility function of the form:
                                V = a [6 M (°-1)/0 + (1-6) D(°-1)/0] 0/(°-1)
(A.10)
5 Vehicle classes are aggregated in the foreign trade section because of data limitations.

                                           A-8

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where o is the Armington elasticity of substitution between domestic and imported vehicles,
       and a and 6 are calibrated parameters of the demand function. Utility maximization
       subject to the budget constraint leads to the following first order condition:
                                 M/D = [(8/(l-6)) "(PD/P,,)]"                     (A. 11)

Thus, the ratio between imported and domestic vehicles is a function of their relative prices
       and the elasticity of substitution. Gallaway, McDaniel, and Rivera (2000) use
       monthly data from 1989 through 1997 to estimate Armington elasticities for several
       manufacturing industries. For SIC 3714, motor vehicle parts and accessories, they
       estimate a value of 2.07. Additional substitution elasticity estimates for motor
       vehicles are reported in Ho and Jorgenson (1998) and range from  1.52 to 3.59.  The
       Agency has used all three estimates to compute low and high end estimates of the
       change in import-to-domestic vehicles ratio for a given change in the price of
       domestic cars.

A.5.2  U.S. Exports
       Exports of U.S.-made vehicles can also fall if their own-price increases due to the
       final regulation. While U.S. exports of passenger cars in this industry are only one-
       fourth the level of imports, they still represent about 18 percent of domestic
       production in 1997 and are growing (AAMA, 1998). Unfortunately, data were
       lacking connecting specific facilities to specific markets. Thus, foreign demand for
       U.S.-made vehicles is modeled by one representative foreign consumer using the
       following constant elasticity demand function:

                                         qx = Bx[p]£<                             (A. 12)
where p is the average price of exported U.S. vehicles, ex is the export demand elasticity, and
       Bx is a multiplicative demand parameter that calibrates the foreign demand equation,
       given data on price and foreign demand elasticity to replicate the observed baseline
       year 1999 level of exports.  Ho and Jorgenson (1998) report export demand
       elasticities for motor vehicles.  These estimates range from -0.9 to -1.55. These
       export demand elasticity estimates are used along with our estimates of change  in the
       average price of U.S. vehicles to forecast the corresponding change in quantity
       demanded by foreign consumers.
                                         A-9

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            Appendix B
Estimating Social Costs Under Imperfect
              Competition

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    B.I   Social Cost Effects Under Imperfect Competition6

          The conceptual framework for evaluating social costs and distributive impacts in an
          imperfectly competitive market model is illustrated in Figure B-l. The baseline
          equilibrium is given by the price, P0, and the quantity, Q0. In a pure monopoly
          situation, the baseline equilibrium is determined by the intersection of the marginal
          revenue curve (MR) and the MC curve. In imperfect competition, such as in the
          Coumot model used in this analysis, the baseline equilibrium is determined by the
          intersection of MC with some fraction of MR. Without the regulation, the total
          benefits of consuming automobiles is given by the area under the demand curve up to
          Q0.  This equals the area filled by the letters ABCDEFGHIJ. The total variable cost
          to society of producing Q0 equals the area under the original MC function, given by
          IJ.  Thus, the total social surplus to society from the production and consumption of
          output level Q0 equals the total benefits minus the total costs, or the area filled by the
          letters ABCDEFGH.

          The total social surplus value can be divided into producer surplus and consumer
          surplus. Producer surplus accrues to the suppliers of the product and reflects the
          value they receive in the market for the Q0 units of output less what it costs to
          produce this amount.  The market value of the product is  given by the area DEFGHIJ
          in Figure B-l. Since production costs IJ, producer surplus is given by area DEFGH.
          Consumer surplus accrues to the consumers of the  product and reflects the value they
          place on consumption (the total benefits of consumption) less what they must pay on
          the market.  Consumer surplus is thereby given by the area ABC.

          The with-regulation equilibrium is P,, Q,. Total benefits  of consumption are ABDFI
          and the total variable costs of production are FI, yielding  a with-regulation social
          surplus of ABD.7 Area BD represents the new producer surplus and A is the new
          consumer surplus. The social cost of the regulation equals the total change in social
          surplus caused by the regulation. Thus, the social cost is  represented by the area
          FGHEC in Figure B-l.
6The Agency has developed this conceptual approach in a previous economic analysis of regulations affecting the
    pharmaceutical industry (EPA, 1996). For simplicity, this appendix assumes constant marginal cofcts. The
    marginal cost curves developed for the economic model are upward sloping curves  	 > 0 |
                                                                   I   dq
7Fixed control costs are ignored in this example but are included in the analysis.

                                            B-l
inwi
aits.

T

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            p c
            ro
    MC + Control Costs

              MC
                            Qi   Qo
Output
Figure B-l.  Economic Welfare Changes with Regulation: Imperfect Competition
      The distributive effects are estimated by separating the social cost into producer
      surplus and consumer surplus losses. First, the change in producer surplus is given
      by
                                 APS = B-F-(G+H+E)
                            (B.I)
Producers gain B from the increase in price, but lose F from the increase in production costs
       due to regulatory control costs. Furthermore, the contraction of output leads to
       foregone baseline profits of G+H+E.
      The change in consumer surplus is
                                    ACS = -
                            (B.2)
This reflects the fact that consumer surplus shrinks from the without-regulation value of
      ABC to the with-regulation value of A.

      The social cost or total change in social surplus shown earlier can then be derived
      simply by adding the changes in producer and consumer surplus together

                                       B-2

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                          ASC = APS + ACS = -(F+G + H + E + C)               (B.3)

B.3    Comparison of Social Cost with Control Cost

       It is important to compare this estimate of social costs to the initial estimate of
       baseline control costs and explain the difference between the two numbers. The
       baseline control cost estimate is given by the area FGH, which is simply the constant
       cost per unit times the baseline output level. In the case of imperfect competition, the
       social cost estimate exceeds the baseline control cost estimate by the area EC. In
       other words, the baseline control cost estimate understates the social costs of the
       regulation.  A comparison with the outcome under perfect competition helps illustrate
       the relationship between control cost and total social cost.

       Suppose that the MR curve in Figure B-l were the demand function for a competitive
       market, rather than the marginal revenue function for a monopolistic producer.
       Similarly, let the MC function be the aggregate supply function for all producers in
       the market. The market equilibrium is still determined at the intersection of MC and
       MR, but given our revised interpretation of MR as the competitive demand function,
       the without-regulation (competitive) market price, P0C, equals MC and Q0 is now
       interpreted as the competitive level of product demand. In this type of market
       structure, all social surplus goes to the consumer. This is because producers receive a
       price that just covers their costs of production.

       In the with-regulation perfectly competitive equilibrium, price would rise by the per-
       unit control cost amount to P^. Now the social cost of the regulation is given entirely
       by the loss in consumer surplus, area FG. As this is compared to the initial estimate
       of regulatory control costs, FGH, the control cost estimate overstates the social cost
       of the regulation. The overstatement is due to the fact that the baseline control cost
       estimates are calibrated to baseline output levels. With regulation, output is projected
       at Q,, so that control costs are given by area F. Area G represents a monetary value
       from lost consumer utility due to the reduced consumption, also referred to as
       deadweight loss (analogous to area C under the monopolistic competition scenario).

       Social cost effects are larger with monopolistic market structures because the
       regulation already exacerbates a social inefficiency (Baumol and Gates, 1988).  The
       inefficiency relates to the fact that the market produces too little output from a social
       welfare perspective. In the monopolistic equilibrium, the marginal value society
       (consumers) places on the product, the market price, exceeds the marginal cost to

                                        B-3

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society (producers) of producing the product. Thus, social welfare would be
improved by increasing the quantity of the good provided. However, the producer
has no incentive to do this because the marginal revenue effects of lowering the price
and increasing quantity demanded is lower than the marginal cost of the extra units.
OMB explicitly mentions the need to consider these market power-related welfare
costs in evaluating regulations under Executive Order 12866 (OMB, 1996).
                                 B-4

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'
1. REPORT NO.
EPA-452/R-04-007
TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
2.
4. TITLE AND SUBTITLE
Regulatory Impact Analysis for the Final Automobile and Light-
Duty Truck Surface Coating NESHAP
7. AUTHOR(S)
9. PERFORMING ORGANIZATION NAME AND ADDRESS
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Research Triangle Park, NC 2771 1
12. SPONSORING AGENCY NAME AND ADDRESS
Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 2771 1
3. RECIPIENTS ACCESSION NO.
5. REPORT DATE
February 2004
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
10. PROGRAM ELEMENT NO.
1 1 . CONTRACT/GRANT NO.
None
13. TYPE OF REPORT AND PERIOD COVERED
Economic Impact Analysis
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
\
16. ABSTRACT
Pursuant to Section 112 of the Clean Air Act, the U.S. Environmental Protection Agency (EPA) has developed National Emissions
Standards for Hazardous Air Pollutants (NESHAP) to control emissions released from the coating of automobiles and light-duty
trucks (LDT). The purpose of this rule is to reduce the flow of HAPs from potential emission points within auto and LOT
facilities. Eighty percent of the HAPs released are xylene, glycol ethers (EGBE), MIBK, and toluene. The other HAPs include
methanol, glycol ethers, MEK, formaldehyde, and ethyl benzene. The facilities in the auto and LDT source category are
controlling HAP emissions from their coatings operations, as required, to meet maximum achievable control technology
(MACT) standards. As of 1999, there were 65 auto and LDT assembly facilities owned by 14 companies. The estimated total
annual cost for these facilities to comply with the final MACT standard is approximately $154 million. Due to the total annual
cost of compliance, an economic impact model estimates that production of autos and LDT declines by 0 to 0.02 percent across
various vehicle classes. The estimated price increase due to the regulation is less than 0.01 percent. Pre-tax earnings for the
companies owning the facilities in this source category decline by about 1.08 percent according to the economic model
developed in the regulatory impact analysis. According to the Small Business Administration size standards, none of these
businesses are considered small. Based on the economic impact analysis, impacts of the NESHAP on companies owning auto
and LDT assembly facilities are anticipated to be negligible.
17.
KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS b. IDENTIFIERS/OPEN ENDED TERMS
air pollution control, environmental
regulation, economic impact
analysis,, automobile and light
duty truck
18. DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
20. SECURITY CLASS (Page)
Unclassified

c. COSATI Field/Group

21. NO. OF PAGES
131
22. PRICE
EPA Form 2220-1 (Rev. 4-77)
                           PREVIOUS EDITION IS OBSOLETE

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