PB-239 736
A STUDY OF FEDERAL SUBSIDIES TO
STIMULATE RESOURCE RECOVERY
Resource Planning Associates
Prepared for:
Environmental Protection Agency
1974
DISTRIBUTED BY:
National Technical Information Service
U. S. DEPARTMENT OF COMMERCE
J
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BIBLIOGRAPHIC DATA
MEET
1. Report No.
EPA/530/SW-
1.
PB 239 736
. Title and Subtitle
A Study of Federal subsidies to stimulate resource recovery
5. Report Date
1974
16.
Author(s)
Resource Planning Associates
8. Performing Organization Rept.
No.
Performing Organization Name and Address
Resource Planning Associates
44 Brattle Street
Cambridge, Massachusetts 02138
10. Project/Task/Uork Unit No.
11. Contract/Grant No.
EPA-68-03-0195
2. Sponsoring Organization Name and Address
U.S. Environmental Protection Agency
Office of Solid Waste Management Programs
Washington, D.C. 20460
13. Type of Report & Period
Covered
Final
14.
15. Supplementary Notes
16. Abstracts
This report summarizes a study of Federal subsidies to stimulate resource recovery.
It examines subsidies conceptually and in light of past Federal experience; it
discusses the characteristics of various subsidies and the manner in which they
affect the economics of secondary materials recovery and use; and, it presents
estimates of costs and effectiveness of specific subisides for stimulating recycling
of specific materials in municipal solid waste. The report describes separately
subsidies to stimulate secondary material use and those to stimulate construction
of resource recovery plants to remove secondary materials from mixed municipal
solid waste. The methodology used in making predictions of subsidy effectiveness
is presented as well as a description of the industry economic models to which
they were applied.
17. Key Words and Document Analysis. 17o. Descriptors
* Subsidies, * Incentives, * Resource Recovery, * Paper, * Glass, * Steel
I7b. Identifiers/Open-Ended Terms
I7e. COSATI FiehT'Group
18. Availability Statement
191 Security Class (This
Report)
UNCLASSIFIED
20. Security Class (This
Page
UNCLASSIFIED
21. No. of Pages
22. Price
FORM NTis-ss (REV. 10-731 ENDORSED BY ANSI AND UNESCO.
THIS FORM MAY HE- REPRODUCED
USCOMM-DC 826S-f»7«
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A STUDY OF FEDERAL SUBSIDIES
TO STIMULATE RESOURCE
RECOVERY
This final report (S'^~96c) describes Dork performed
for the Federal solid waste management programs under contract No. 68-03-0195
to RESOURCE PLANNING ASSOCIATES, INC.
and is reproduced as received from the contractor
U.S. ENVIRONMENTAL PROTECTION AGENCY
197-1
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This report as submitted by the grantee or contractor has not been
technically reviewed by the U.S. Environmental Protection Agency (EPA),
Publication does not signify that the contents necessarily reflect the
views and policies of EPA, nor does mention of commercial products
constitute endorsement or recommendation for use by the U.S. Governmer.?
An environmental protection publication (SW-00C ) in the solid waste
management series.
ii
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FOREWORD
The need for expanded markets for secondary materials, particularly
those found in municipal solid waste, has resulted in suggestions from
the private sector, from state and local governments, and from the Congress
that consideration be given to providing Federal subsidies to stimulate
these markets. Similarly, the possible need for subsidies to stimulate
the construction of plants to process mixed municipal refuse and recover
materials and energy from it has been widely speculated. The numerous
environmental and conservation benefits that such increased recycling
could produce suggest that Federal subsidies deserve careful analysis.
This report examines potential Federal subsidies from several key
standpoints. It looks at subsidies conceptually and in the light of
past Federal experience, it discusses the manner in which different
subsidies operate to achieve their purpose, and it makes specific esti-
mates of the cost and effectiveness of several measures for stimulating
markets for selected recycled materials and for accelerating the rate
of construction of municipal recovery plants.
The complexity of these issues can hardly be overstated, particularly
the making of specific estimates of subsidy effectiveness. Not only
is complete industry economic data not generally available, but in addi-
tion conditions change with changes in the overall economy and other
factors. Therefore, all specific estimates are necessarily subject to
these very significant constraints.
Nevertheless, the information in this report should add to our
understanding of the issue of Federal subsidies for stimulating resource
recovery. We consider this report to be a useful source of data in this
regard, though certainly not the only data which must be considered in
making decisions in this very complicated area. The report is by no
means a statement of EPA policy on resource recovery subsidies.
111
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TABLE OF CONTENTS
Page
Introduction 1
Section I Subsidy Design Considerations 2
Introduction 3
The Issue of Subsidy Design
and Evaluation 4
Subsidy Options 9
Section II Prediction of Subsidy Impact 17
Subsidies Examined 17
Subsidies to Industrial Users
of Post Consumer Wastes 17
Subsidies for Construction of
Municipal Resource Recovery Plants 47
Appendix A User Cost Models 68
Appendix B Example of the Application of
User Methodology 89
Appendix C Detailed Results of User
Subsidy Analysis 96
Appendix D Description of Resource Recovery Plants 111
Appendix E Detailed Results of Analysis of
Resource Recovery Plant Subsidies 123
iv
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TABLE OF EXHIBITS
Paqe
Exhibit 1-1
Exhibit II-l
Exhibit II-2
Exhibit H-3
Exhibit II-4
Exhibit H-5
Exhibit H-6
Exhibit II-7
Exhibit II-8
Exhibit H-9
Exhibit 11-10
Exhibit 11-11
Exhibit 11-12
Exhibit 11-13
Exhibit 11-14
Exhibit 11-15
Exhibit 11-16
TYPES AND FORMS OF SUBSIDIES 11
SUBSIDY RECIPIENTS/SUBSIDY TYPES 18
HYPOTHETICAL USER 20
APPLICATION OF SUBSIDIES TO HYPOTHETICAL
USER 22
EFFECTS OF SUBSIDIES ON INTERNAL RATES
OF RETURN 27
HYPOTHETICAL INDUSTRY MAXIMUM POTENTIAL
IMPACT 29
USER SUBSIDY EQUILIBRIUM SOLUTION
MECHANISM 37
SUMMARY RESULTS OF SUBSIDY IMPACTS 40
SUMMARY RESULTS OF SUBSIDIES TO
HASTE PAPER USERS 41
SUMMARY RESULTS OF SUBSIDY TO CAN USERS 42
SUMMARY RESULTS OF SUBSIDY TO WASTE
GLASS USERS 43
HYPOTHETICAL RESOURCE RECOVERY PLANT 49
HYPOTHETICAL RESOURCE RECOVERY PLANT
WITH APPLICATION OF SUBSIDIES 50
IMPACT OF SUBSIDIES ON THE ECONOMICS OF
MUNICIPALLY OWNED RESOURCE RECOVERY
PLANTS 56
IMPACT OF SELECTED SUBSIDIES ON THE
ECONOMICS OF PRIVATELY OWNED RESOURCE
RECOVERY PLANTS 57
MAXIMUM POTENTIAL IMPACT FOR SUBSIDIES
TO RESOURCE RECOVERY PLANTS 59
MUNICIPAL DECISION CURVE 61
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Table of Exhibits (continued)
Exhibit II-.17 RESULTS FROM DECISION CURVE
Exhibit 11-18 SUMMARY RESULTS OF SUBSIDY TO MUNICIPAL
RESOURCE RECOVERY PLANTS
63
65
APPENDIX EXHIBITS
Exhibit A-l
Exhibit A-2
Exhibit A-3
Exhibit A-4
Exhibit A-5
Exhibit A-6
Exhibit A-7
Exhibit A-8
Exhibit A-9
Exhibit A-10
Exhibit B-l
Exhibit B-2
Exhibit B-3
Exhibit B-4
Exhibit B-5
Exhibit C-l
Exhibit C-2
Exhibit C-3
PAPER, PAPERBOARD, CONSTRUCTION PAPER
AND BOARD AND WASTE PAPER FLOWS,
UNITED STATES - 1970 69
LINERBOARD MILL INCOME/COST MODEL 72
CORRUGATING MEDIUM INCOME/COST MODEL 74
FOLDING BOXBOARD INCOME/COST MODEL 76
NEWSPRINT INCOME/COST MODEL 78
PCW TISSUE MILL INCOME/COST MODEL 79
1970 IRON AND STEEL INDUSTRY 81
MINI-MILL INCOME/COST MODEL 83
DETINNING PLANT INCOME/COST MODEL 85
GLASS BOTTLE PLANT INCOME/COST MODEL 88
USER IMPACT ANALYSIS 90
NEWSPRINT GENERAL BUSINESS RISK CURVE 92
PRICE/SUPPLY RISK PROFILE 93
NEWSPRINT EXPERIENCE CURVE 9«
MAXIMUM POTENTIAL IMPACT CURVE-NEWSPRINT 9£
POST CONSUMER WASTE USE - 30 PERCENT OF
PURCHASE PRICE SUBSIDY 3€
INCREMENTAL INDUSTRIAL USAGE OF POST
CONSUMER WASTE $*
SUBSIDY COST AND EFFECTIVENESS - 30
PERCENT OF PURCHASE PRICE SUBSIDY '?*
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Table of Exhibits (continued)
Exhibit C-4
Exhibit C-5
Exhibit C-6
Exhibit C-7
Exhibit C-8
Exhibit C-9
Exhibit C-10
Exhibit C-ll
Exhibit C-12
Exhibit C-13
Exhibit C-14
Exhibit C-15
Exhibit D-l
Exhibit D-2
Exhibit D-3
Exhibit D-4
Page
POST CONSUMER WASTE USE - $6 PER TON
OF INPUT SUBSIDY 99
INCREMENTAL INDUSTRIAL USAGE OF POST
CONSUMER WASTE - $6/TON CASH SUBSIDY 100
SUBSIDY COST AND EFFECTIVENESS - $6 PER
TON OF INPUT 101
POST CONSUMER WASTE USE - 25 PERCENT
INVESTMENT TAX CREDIT SUBSIDY 102
INCREMENTAL INDUSTRIAL USAGE OF POST
CONSUMER WASTE - 25% INVESTMENT TAX
CREDIT 103
SUBSIDY COST AND EFFECTIVENESS - 25
PERCENT INVESTMEN TAX CREDIT SUBSIDY 104
POST CONSUMER WASTE USE - 75 PERCENT
CREDIT SUBSIDY 105
INCREMENTAL INDUSTRIAL USAGE OF POST
CONSUMER WASTE - 75% USER CREDIT
SUBSIDY 106
SUBSIDY COST AND EFFECTIVENESS - 75
PERCENT CREDIT SUBSIDY 107
POST CONSUMER WASTE USE - 5 YEAR
ACCELERATED DEPRECIATION SUBSIDY 108
INCREMENTAL INDUSTRIAL USAGE OF POST
CONSUMER WASTE - 5 YEAR ACCELERATED
DEPRECIATION 109
SUBSIDY COST AND EFFECTIVENESS - 5 YEAR
ACCELERATED DEPRECIATION SUBSIDY 110
MECHANICAL SEPARATION 112
INCINERATION WITH RESIDUE RECOVERY 114
RECOVERY FOR SUPPLEMENTAL FUEL 116
INCINERATION WITH STEAM RECOVERY 118
VI I
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Table of Exhibits (continued)
Exhibit D-4
Exhibit D-5
Exhibit D-6
Exhibit E-l
Exhibit E-2
Exhibit E-3
Exhibit E-4
Exhibit E-5
Exhibit E-6
Exhibit E-7
Page
INCINERATION WITH STEAM RECOVERY 118
INCINERATION WITH ELECTRIC GENERATION 120
PYROLYSIS 122
BASELINE RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS 123
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - 30% CASH 124
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - $6/TON CASH 125
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - 25%
CONSTRUCTION GRANT 126
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - 50%
CONSTRUCTION GRANT 127
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - 75%
CONSTRUCTION GRANT 128
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS - 75% CREDIT
SUBSIDY 129
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INTRODUCTION
This report presents the results of a study to pre-
dict the increase in recycling that would result from the
application of Federal subsidies to major users and supp-
liers of post consumer waste (PCW).* A companion Appendix
Volume report presents the details of the calculations
and the backup for the results presented here.
The effort was divided into two major activities:
- study of existing and previous Federal subsidy
programs to develop guidelines and criteria
for evaluating proposed resource recovery
subsidies.
- development and application of a methodology for
evaluating the impacts of a variety of economic
subsidies to users and suppliers of PCW.
The focus of the program was on evaluating subsidies
that provide a direct economic benefit to users and
suppliers of PCW. The program also focused on the three
major components of PCW: paper, ferrous metals
(predominantly cans), and glass (predominantly bottles).
Section I of this report presents a discussion of
subsidies in general and describes the operation of those
studied in this program. Section II describes the study
methodology and presents the results of the application
of subsidies to users and suppliers of PCW. The Appendices
present background on the users and processing systems and
an example of the application of the methodology to a
specific case.
The General Services Administration -of the Federal Govern-
ment defines post-consumer waste as "materials which have
passed through their intended use and been collected
from homes, offices, factories, or municipal solid waste.
Industrial waste would principally include waste generated
in the manufacturing process (cuttings, trimmings, convert-
ing waste, etc,), forest residues and related waste ob-
tained after manufacturing, harvesting, converting and
similar industrial processes. Under this term, paper
mill broke—that material generated in the paper-making
process up to and including the cutting and ttimming of
the paper machine reel into smaller rolls or rough Rheets—
is eliminated from qualifying toward recycled content.
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SECTION I
SUBSIDY DESIGN CONSIDERATIONS
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Introduction
A subsidy is defined by the Joint Economic Committee
of the Congress of the United States as "the provision of
Federal economic assistance to a producer or consumer of
a particular good, service or factor of production for
which the Government receives no equivalent compensation
in return but conditions the assistance on a particular
performance by the recipient that alters the price or
cost, so as to encourage or discourage the output, supply,
or use of these items and the related economic results."1
The assistance can take many forms including: direct
cash payment, reduction of taxes, low interest loans, pro-
vision of goods or services at below market value, pur-
chases of goods and services above market price and
regulatory actions that alter particular market prices.
Subsidies are used to correct market defects that
cause too much output of some goods or not enough output
of other goods. These market shortcomings, resulting in
an inefficient allocation of resources, are caused by
one or more of the following major factors:
. Lack of Mobility - Investment in production
process tends to be fixed in the short term
limiting the ability to invest in new
processes even after it becomes clear that
the nature of a market is changing.
. Imperfect Information - One of the more important
effects of a lack of knowledge or information is
the inability to assess the risk of certain
ventures. For example, the uncertainties of the
quality, volume and price of waste paper has, to
some extent, inhibited new investment in secondary
fiber based capacity.
. Cost Conditions - Conditions in segments of some
industries preclude any one firm from expanding
the segment by itself. A subsidy might allow all
firms to expand, lowering prices but also lower-
ing costs. The combination board segment of the
1
"The Economics of Federal Subsidy Programs", A Staff Study
Prepared for the Joint Economic Committee, Congress of the
United States (U.S. Gov't. Printing Office, Washington,
January 11, 1972).
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paperboard industry might be an example of
this "chicken and the egg" problem.
. Externalities - There are cases where all costs
and benefits are not accounted for in the
market. A good example would be the environ-
mental benefits and energy savings that would
result from an increase in recycling vis-a-vis
disposal and consumption of virgin resources.
. Factor Employment - Under-utilization or over-
utilization of raw materials can cause side
effects outside the economic system. A subsidy
might stimulate a "better" mix of raw materials,
for example, a higher proportion of secondary
materials, thereby conserving energy and virgin
materials.
. Price Instability - An unstable market can have
a negative effect on growth. Subsidies may be
effective in stabilizing widely fluctuating
secondary material prices.
Each of these factors has been used to justify sub-
sidies in the past. Each of these factors could be used
to justify subsidies for increasing resource recovery.
The Issue of Subsidy Design and Evaluation
Background
Recent studies within the United States Congress and
the Administration have found that Federal subsidies con-
stitute a widely diversified and pervasive system of
economic assistance. Lack of information on the various
forms of subsidies, coupled with a lack of comprehensive
reporting have generally masked the real costs of the
myriad of subsidy programs. Very little is understood
about the economic effects of subsidies: who really
benefits, versus who receives the subsidy; to what extent
the economy is distorted, wasting resources, aggravating
inflation or causing inequitable income distributions.
However, no tried and tested framework exists to
enable the policymaker to choose among available sub-
sidies. In many cases in the past the decision was
based on the current political pressures and a feeling thi.&
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a subsidy would seem to provide required aid. This sim-
plistic approach to such a complex issue has, in a number
of instances, led to failure-to accomplish the desired
objective and inefficient use of public resources.
Common Causes of Subsidy Ineffectiveness
An analysis of Federal subsidies indicates at least'
four underlying causes for their general lack of effect-
iveness or inefficiency.1
. Failure to identify and deal with the real market
defect. The functioning of the market system is
enormously complicated in practice and the task of
differentiating between cause and effect is at times
impossible. Yet an incorrect definition of the problem
can lead to the selection of an inappropriate subsidy or
point in the supply-demand cycle for its application.
A common mistake in this regard is that subsidies tend to
be used in situations involving inelasticity of supply
or demand. That is, a percentage increase (decrease) in
price results in less than a corresponding increase
(decrease) in output. This inelasticity can be caused by a
wide range of factors and if the subsidy program does not
correct the cause of the inelasticity, the inelastic
factor, rather than the direct recipient of the subsidy, will
determine who benefits. For example, if the problem is an
inelastic supply of a raw material caused by a lack of
information among suppliers, a subsidy that raises
the effective price may not be as effective as a federally
sponsored training or assistance program.
Failure to motivate actors directly to make best
use of the subsidy. The existence of a subsidy program
does not insure its use. Institutional and knowledge
constraints often require the active participation of
the concerned agency in the provision of services to
individual subsidy recipients, such as: planning and
allocative assistance, marketing studies, and general
business assistance.
1
"Economics of Federal Subsidy Programs", Joint Economic
Committee of the U.S. Congress (U.S. Government Printing
Office, Washington, D.C., January 11, 1972).
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Failure to differentiate between windfalls and
incremental benefits occurring because of the subsidy. For
the most part, subsidies reward incremental actions;
resulting 'from the subsidy on an equal basis with those
actions which would have been carried but whether or not
the subsidy existed.
Lack of organization, control and review. No one
federal agency is responsible for monitoring the operation
of all subsidy programs. As a result there is no
centralized mechanism for evaluating the compatibility
and effectiveness of the large number of widely diversi-
fied programs. A case in point is the apparent inconsistency
of depletion allowances with a recycling subsidy.
Design
The most important requirement in designing a subsidy
is that the problem be thoroughly understood. This under-
standing should extend beyond acknowledgement of the
symptoms/ to the underlying cause. Only then can it be
decided whether or not the subsidy will be effective.
Without this analysis the subsidy is in danger of becoming
little more than a transfer payment, resulting in sub-
stantial windfalls. For example, providing a subsidy
for use of a waste material when technological rather than
economic problems inhibit its extraction from the waste
stream or its use by manufacturers, will do little at
least in the short run to increase recycling and will simply
result in a windfall. This is closely related to the issue
of identifying inelastic factors.
• In designing a subsidy, consideration should be given
to how the subsidy program would end. At what point do
the marginal costs exceed marginal benefits? At what level
of activity can it be said that the subsidy has attained
its goals and is no longer useful? Finally, what is the
tradeoff between permanency of the subsidy (encouraging
decision-maker confidence) and the ability to adjust or
terminate the subsidy as market conditions change. This
is an important factor in comparing different subsidy
and will be discussed later.
Evaluation
The evaluation criteria presented in this section
indicate the hind of complete analysis which should be
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carried out prior to initiation of any subsidy. Many of
these criteria involve qualitative judgements which ulti-
mately must be made by the government decision-maker. The
analysis described in this report concentrated on evalu-
ating subsidy effectiveness and cost to the government/
the major elements of the benefit/cost criteria.
Benefit/Cost Analysis
The principal measure of a subsidy's benefit is out-
put. This output can be defined as the increase in the
level of a given activity which contributes to the sub-
sidy's goals. It is important to note that the increase
in activity alone may not be a benefit unless it moves
toward the goals. For example, a job training program for
the unemployed is ineffective unless net employment in-
creases as a result of the subsidy.
The costs of a subsidy, of course, are measured prin-
cipally in dollars.
Proper benefit/cost analysis also must include a con-
sideration of intangibles. For example, increased public
awareness of an issue may be considered an intangible bene-
fit. Similarly, temporary economic disruption may be con-
sidered an intangible cost.
Achievement of Legislative Intent
It is important to provide for detailed checking pro-
cedures and restrictions which would insure that the sub-
sidy recipients are complying with the intent of subsidy
legislation. For example, a subsidy to increase recycling
by encouraging purchase of equipment which uses waste pro-
ducts as a raw material would be subverted if the re-
cipient used virgin materials.
Net Income Transfer
In examining the net income transfer, all sources and
recipients of the subsidy should be reviewed. For resource
recovery subsidies, it may be deemed appropriate that
citizens, as producers of waste, pay for the subsidy through
tax dollars, while recyclers, as agents that help to alle-
viate the solid waste burden, receive the subsidy. Examin-
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ing only the direct recipient of the subsidy, however, is
not enough. One must also estimate whom the subsidy dol-
lars will ultimately benefit after resulting price in-
creases or decreases. Here again the importance of the
inelasticity in supply or demand is shown, since this
factor would dictate to a large degree the ultimate re-
cipient of the subsidy and the final net income transfer.
For example, if waste supply were inelastic, a^subsidy
given-to users to encourage demand would largely end up in
the hands of suppliers as the result of price increases.
Practical Problems
There are a number of practical problems which must
be addressed. These include how well the effects can be
predicted, the extent to which potential recipients can
understand the subsidy, and the lead time necessary to
implement the subsidy and see results. Predicting ef-
fects can be particularly troublesome since predicting any
market changes is often very difficult. Many well-inten-
tioned subsidy programs have produced results other than
those envisioned by the initiators.
Legislative and Political Problems
There are political problems which must^be addressed
in evaluating the potential subsidy. It is impossible to
list all of the potential issues. Certainly one problem
is which agency is appropriate to be responsible for re-
view and control. This is particularly important in com-
paring tax with cash subsidies, the former administered by
the Treasury Department and the latter by some other Fed-
eral agency. The nature of the legislative review proce-
dure both before and after subsidy initiation may also
significantly influence the choice of tax vs. cash subsi-
dies. The overall fiscal policy of a given administration
is highly important in swinging the balance for or against
a given subsidy measure.
Review
It is essential that any subsidy program undergo a
periodic review. Ideally this review should be conducted
by the Congressional Committee or Agency most knowledgeable
in the problems the subsidy is designed to correct. This
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review procedure has not been conscientiously carried out
for many of the subsidy programs now existing, particularly
those in the form of tax credits, for which annual budget-
ing is not required. The review process must contain at
least the following five considerations:
Goals
What was the original intent of the subsidy? Is this
still a realistic goal? Has the subsidy been instrumental
in moving toward the goal?
Benefits
What has been the output stimulated by the subsidy?
Have windfalls been substantial? What has been the distri-
bution of benefits? Are there any ancillary benefits
worthy of consideration?
Costs
What has been the cost of the subsidy? Have all costs
been included, including foregone or delayed tax revenues?
Have the social costs of economic disruption been considered?
Has the subsidy conflicted with other goals?
Compliance
Have there been incidences of recipients avoiding the
subsidy's intent but still reaping benefits? Is compliance
being slowed by complexity or lack of knowledge possessed
by potential recipients?
Change Mechanisms
Can the subsidy be redesigned to make it more effective
in light of the previous year's experience?
Though not an exhaustive discourse on subsidy design,
evaluation, and review, the considerations presented above
include the basic factors critical to prudent use of sub-
sidies.
Subsidy Options
There are a number of different mechanisms by which
subsidies can be delivered. They can most easily be
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classified by type and form.
Subsidies may be either capital or operating in type.
Capital subsidies tend to be tied to plant, equipment, or
ownership capital. In most cases, these appear to
involve a fixed payment to the recipient. Operating
subsidies/ on the other hand, tend to be process-oriented
and tied to input or output. Their levels tend to fluctu-
ate with details of the production process.
The forms of subsidies include direct cash payment,
reductions of taxes, low interest loans, benefit-in-kind,
i.e., provision of goods or services at below market value
or purchase of goods or services above market price, or
provision of research or information, and regulatory actions
that alter particular market prices. Exhibit 1-1 gives
examples of how the various types and forms of subsidies
may be applied. Analysis in the study was directed at only
cash, tax, and credit subsidies since these are the most
direct forms of purely fiscal incentives. It was felt
that these forms in general were the most applicable to
resource recovery. However, purchase subsidies involving
price supports, stockpiling or similar measures may well
deserve further consideration. Benefit-in-kind subsidies
are in essence being carried out now through provision of
Federal technical assistance, i.e., provision of information.
Characteristics of Capital and Operating Subsidies
Capital Subsidies
Theoretically, capital subsidies should be used where
capital poverty is a perceived problem. However, in the
past, they have been used primarily where it was,believed
that equipment cost was a barrier to a desired activity.
As would be expected, capital subsidies are more effective
where capital intensiveness is involved. For example, in
the case of resource recovery , capital subsidies would not
be appropriate for encouraging demand for waste glass
(cullet) since only minor equipment costs are incurred in
altering equipment to manufacture glass from cullet rather
than virgin raw materials.
Because of their effect on capital intensive systems,
capital subsidies can result in overcapitalized technology,
inadequate maintenance, and premature replacement. The
reason for this phenomenon is that, in the past, recipients;
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have not internalized the cost paid by the Federal govern-
ment. For example, in Cleveland and Chicago, it was dis-
covered that subsidizing part of the transportation system
reduced bus lifetime by one half because total costs were
not perceived, and the cost of replacement assets was re-
duced for the cities.
From the recipients's point of view, there is little
concern with subsidy continuance with capital subsi-
dies. Because commitments are usually of a fixed nature
for' a fixed period of time (with the amount paid or guaran-
teed at the time of commitment) discontinuation of the sub-
sidy to new recipients does not cause problems for those
who have made decisions based on its continuance.
Where capital subsidies are granted there is a need
to insure that the goals of a program are attained. All
subsidies involve a quid pro quo, that is, in return for
a subsidy, a desired action is taken. Capital subsidies
tend to make the commitment in advance of the action.
For this reason, it is essential that the recipients are
not forgotten, but that they are reviewed to determine com-
pliance, and that some recapture provision be included for
non-compliance.
Operating Subsidies
Operating subsidies are aimed at one or more of the
operating parameters (revenues, raw material costs, labor
costs, utility cost, etc.) and can take any of the forms
mentioned above. The subsidy then varies continually,
based on the level of these input or output parameters.
The granting of an operating subsidy must be seen as long-
run in nature in order to be effective in motivating eco-
nomic actors. Yet, the granting or appearance of a long-
run subsidy leads to an inability to end the subsidy with-
out substantial economic disruption. For example, if an
operating subsidy were granted for the use of waste paper,
then it is likely that waste paper using paper mills would
be built on the basis of the improved economics of waste
paper use. Discontinuation of the subsidy before the mill's
useful lifetime has ended would result in substantial eco-
nomic damage to the mill owner, who has acted in good
faith. Thus these subsidies develop a strong constituency
for continuance; to avoid conflicts, time frames for con-
tinuance can be established in advance.
-12-
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It is important to realize that in the
case of a subsidy's applicability to resource recovery,
the purpose and desired result of both capital and
operating subsidies is stimulation of capital investment
in facilities that use secondary rather than virgin
materials.
Characteristics of Forms of Subsidies
As stated previously, this discussion will concen-
trate on cash, tax, and credit forms of subsidies only.l
Cash Subsidies
A cash subsidy, whether based on capital equipment
or operating parameters, is a direct cash disbursement
to the recipient. From the recipient's point of view,
cash subsidies are straightforward and understandable.
They may be used regardless of tax status or credit
position.
The fact that this form of subsidy is a cash dis-
bursement make's it appropriate to be included in the
Federal budget as a separate item at its full cost... This
characteristic means that the subsidy will undergo a
thorough review process by a Congressional Committee
or Administrative Agency. However, it also makes the
subsidy seem less permanent to the recipient.
Typically., the Committee or Agency responsible for
the review has an accumulated expertise in the problems
which resulted in the subsidy's proposal. This implies
that it will Deceive a more effective review.
In the paist, cash subsidies have tended to provide
for the most appropriate level of administration. The
administrative procedures have tended to be complicated
to insure compliance with the subsidy. This is due to
'the detailed checking procedures involved in awarding
1
A more lengthy and detailed discussion of character-
istics of different subsidy forms may be found in:
Economics of Federal Subsidy Programs, Joint Economic
Committee of Congress(U.S.Government Printing Office,
Washington, D.C., January 11, 1972).
-13-
-------
subsidies and verifying performance. However/ this aspect
of cash subsidies should not-be considered detrimental,
since other types of subsidies have suffered from a lack
of administrative control.
Tax Subsidies
Recent controversy over the equitability of tax
subsidies, and proposals to reform so-called tax loop-
holes may change the characteristics of tax subsidies
significantly. The following discussion of character-
istics, based on an analysis of past tax subsidies,
does not reflect possible changes on tax subsidy
mechanisms that may occur.
Tax subsidies have, in the past, been easier to
get through Congress than equivalent cash subsidies.
The reason is that a tax subsidy does not usually involve
an expensive administering bureaucracy and does not
require budget allocations. This factor is itself a
cause of inefficiency and ineffectiveness in tax sub-
sidies. The lack of an administering agency means a
lack of control over the variables that insure the
subsidy's effectiveness. However, to the recipient it
indicates permanence and assurance that the subsidy will
continue, which leads to greater willingness to include
the subsidy as part of normal planning procedures.
Tax subsidies are examined by the House Ways and
Means and the Senate Finance Committees rather than by
the committee concerned with the subject at hand. This makes it
difficult for Congress properly to manage national
priorities.
Further, IRS agents enforce the subsidy. Because
they are usually not as informed about the purposes
behind the legislation as the initiating agency, they may
not audit as appropriately as would 'members of the
concerned agency. The administrative problem is further
compounded by the fact that the proper "cost" of a tax
subsidy is Federal revenue foregone, an item difficult to
locate in the budgetary process. This cost may not
receive the same type of scrutiny given to other items,
such as cash or credit subsidies.
Theoretically, the effectiveness of a tax subsidy
-14-
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could be diminished by corporate organizational structures.
Tax subsidies may be less of an incentive to the
middle management decision maker. As Holland points out,
as one moves down the hierarchy from corporate treasurer,
the more direct the subsidy, the more understandable
and predictable its effect.^ At the top management level,
tax or cash may be of equal understandability. If the
decision-maker is, for instance, at the plant level in
a decentralized organization stressing cost center
accounting, a tax credit could be significantly less
effective. A tax credit is reflected at the firm level,
and a middle manager undertaking a direct differential
loss for use of a subsidized product will be much less
inclined to fulfill the intent of the subsidy than he
would be were it a cash subsidy, because he may not
receive credit for it in his superiors' evaluation.
On the other hand, firms have had a good deal of
experience with tax credits and this problem may be
more theoretical than real. Also, most firms feel that
their receipt of a subsidy is less obvious if it involves
a tax credit rather than a cash payment.
Credit Subsidies
Credit subsidies may take the form of direct govern-
ment loans at a favorable rate, government guarantees of
interest and/or principal, government insurance of a
borrower, loans to creditors who could not otherwise
borrow, or direct payment of a percentage of the
creditors' interest.
The amount of review that a credit subsidy receives
is dependent op its form. For example, if the Federal
Government paid a percentage of a creditor's interest
payment, these payments would appear in full in the
Federal budget. On the other hand, government guarantees
of loans may npt include a specific dollar amount.
From the recipient's point of view, credit sub-
sidies, which are usually capital subsidies, tend to be
easy to evaluate. The terms, conditions, and time frame
of the credit subsidy are usually specified in advance,-
easing fears of subsidy termination.
^Daniel Holland. "An Evaluation of Tax Incentive for oh t
Job Training of the Disadvantaged," The Bell Journal ••: i
Economics ansl My.jgc?erc3nt Science, Volume II« Np, 1,
-------
From the administrative agencies' viewpoint, credit
subsidies are attractive in that there is usually a less
strong constituency advocating a credit subsidy's
continuance. That is, as long as obligations to previous
subsidy recipients are fulfilled, the subsidy program may
be terminated by granting no new credit subsidies and
allowing previous obligations to run their course.
-16-
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SECTION II
PREDICTION OF SUBSIDY IMPACT
-------
Subsidies Examined
This section represents the second phase of "A Study
of Federal Subsidies to Stimulate Resource Recovery."
Phase I, summarized in the previous section, was a
generic analysis of types and forms of subsidies.
The second phase is concerned with determining the
increase in recycling induced by a Federal subsidy,
assuming that it is properly designed, implemented,
and administered. Our analysis focuses on two specific
subsidy recipients: industrial users of post consumer
waste and municipally-owned resource recovery plants.
Exhibit II-1 summarizes the specific subsidies examined
and their recipients.
This section of the report summarizes the methodology
and logic that were used in developing predictions of
subsidy effectiveness and then presents the results of
the analysis. It was assumed that only post consumer
waste or equipment using post consumer waste would be
eligible for subsidies. Mill revert scrap and conversion
or fabrication scrap were excluded since economics already
favor recycling of this scrap.
Subsidies to Industrial Users of
Post Consumer Waste
Outline of Prediction Methodology
A subsidy to users of post consumer waste is intended
to make post consumer waste a more economically attractive
raw material compared with virgin raw materials.
The purpose of the methodology is to provide a means
of evaluating the economic impact of a variety of
subsidies and of predicting their effect on the level of
usage of PCW in the paper, steel, and glass industries.
A number of prediction techniques were considered:
surveys, the Delphi method, and computer simulations
based on economic models describing an industry. The
methodology employed is a composite of these techniques.
Essentially, it is an attempt to predict investment
decisions based on changes in return on investment.
-17-
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EXHIBIT II-l
SUBSIDY RECIPIENTS/SUBSIDY TYPES
oo
I
Municipally Owned
Resource Recovery Systems (Processors)
(See Appendix D)
. Mechanical Processing into saleable
raw materials (Black-Clawson model)
. Incineration with Residue Recovery
(Bureau of Mines model)
. Fuel recovery for Utility Boilers
(St. Louis model)
. Incineration with Waste Heat
Recovery
. Direct conversion of combustion
gases into electricity (CPU-400-Model)
. Pyrolysis
PCW PROCESSOR SUBSIDIES
Operating
- 30% of Selling Price
- $6 per ton sold
Capital
- 25%, 50%, 75% construction grants
- 75% Credit
Users of
Post Consumer.Wastes (Users)
(See Appendix A)
• Waste Paper Users
- Linerboard mills
- Corrugating medium mills
- Folding boxboard mills
- Newsprint mills
- Tissue mills.
. PCW Can Users
- Mini-mills
- Detinners
. PCW Bottle Users
- Bottle Making Plants
PCW USER SUBSIDIES
Operating
- 30% of purchase price
- $6 per ton pxirchased
Capital
- 25% investment tax credit
- 5-year accelerated depreciation
- 75% credit
-------
Data on the separate supply and demand functions of
waste materials is not available and would be difficult
to obtain. Thus, a methodology of applying price and cost
changes to supply and demand curves could not be developed.
Two types of macro-economic information were gathered
in order to predict the increased level of recycling that
would result from subsidy-induced changes. These are:
1) The actual economic impact of a subsidy on a
given industry or industry segment (i.e., the
extent to which the subsidy alters profits or
return on investment).
2) The maximum recycling possible, based on uses
of waste materials, total capacity, plant and
equipment obsolescence, market growth, techno-
logical constraints and other factors.
These data were used in conjunction with a decision model
which predicted investment based on changes in return
on investment. This procedure included:
1) Development of preference curves for each
industry segment, relating investment to
changes in return on investment.
2) Development of risk and learning curves to
modify the basic investment curves.
3) Calculation of an equilibrium increased recycling
estimate.
The above stages will be discussed followed by a des-
cription of bhe results of the predictions.
Impact of Subsidies on Plant Profitability
Description and Illustration o'f Subsidies Examined
Before presenting the results of the profitability
analysis we shall examine the impact of a subsidy on the
internal rate of return of a hypothetical user, and
illustrate the calculations necessary to show the impacts.
The income statement of a hypothetical user is presented
in Exhibit II-2. As the income statement shows, our
hypothetical user consumes both virgin materials and post-
consumer waste as raw materials.
Two factors need particular explanation in this
example and for all of the income statements shown in this
section: interest expense and cashflow. Most companies
in the United States do not finance their capital needs
-19-
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EXHIBIT II-2
HYPOTHETICAL USER
INVESTMENT REQUIRED $200, 20 year life
REVENUE $400
COST OF GOODS SOLD
Virgin raw materials $150
Post-consumer waste $150 (10 Tons)
GROSS MARGIN $100
SELLING, GENERAL, AND
ADMINISTRATION
Depreciation $10
Other 50
Interest* 18
Profit before tax 22
Tax 11
Profit after tax 11
Cashflow 21
*9% interest for 100% financing of investment
-20-
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by using 100% debt and no equity capital. In fact, the
proportion of debt to total capital varies widely among
industries and among companies within the same industry.
To insure comparability, the assumption is made that 100%
of the new investment for plant and equipment is financed
with debt at 9% interest rate.
The nature of cashflow must also be examined. Cash-
flow is the amount of cash that a specific project
generates during some period of time, and represents
both a return to capital (profits) and a return of
capital (depreciation). For an income statement, cash-
flow can be calculated by adding profit after tax plus
all non-cash expenses (primarily depreciation).
Exhibit II-3 shows how each of the five subsidies to
user industries would affect the income statement of the
hypothetical user. These subsidies were selected because
they encompass the range of practical alternatives.
Specific observations on each subsidy are presented
below.
Purchase Price Subsidy Equal to 30% of Input Cost. A
"percent of purchase price" subsidy to users of post
consumer waste consists of a taxable cash payment from the
Federal Government to the user companyf based on the total
market price paid for post-consumer waste. The specific
subsidy considered was a 30% of purchase price cash
subsidy.
Note that increases in both the profit after tax
and cashflow are less than the full amount of the sub-
sidy because some of the subsidy is returned to the
government in the form of taxes. The impact of the subsidy
is greater where a company uses a high percentage of
post consumer waste in the production process and where the
waste material used has a high valxje.
in order to stimulate industries to add PCW-based
.capacity, the subsidy must continue for a period roughly
comparable to equipment life. The calculations in
Exhibit I1-3 assume that the subsidy is paid over the entire
life of plant and equipment. If the subsidy continues
over a long period of time, industries may come to view
the profitability of PCW based production as relying
solely on the subsidy. This would tend to create a large
and vocal constituency whenever the continuance of the
-21-
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EXHIBIT II-3
i
o
.1
REVENUE
Sales
RAW MATERIAL INPUT
Virgin
10 tons PCW @ $15
SELLING, GENERAL, &
Administrative
Depreciation
Other
Interest
PROFIT BEFORE TAX
TAX
PROFIT AFTER TAX
CASHFLOW
APPLICATION OF SUBSIDIES TO
NO
Subsidy
400
150
150
10
50
18
22
11
11
21
30% of
Purchase
Price
Subsidy
400
150
105
14
50
18
67
33.5
33.5
43.5
$6 /ton
of
Input
Subsidy
400
150
90
10
50
18
82
41
41
51
HYPOTHETICAL USER
75%
Credit
Subsidy
400
150
150
10
50
11.25
28.75
14.38
14.37
24.57
25% Invest-
Credit
Yr.
1
400
150
150
10
50
18
22
-14
36
46
Yr.
2-20
400
150
150
10
50
18
22
11
11
21
5 Year
Accelerated
Depreciation
Yr. Yr.
1-5 6-20
400
150
150
25
50
18
7.5
3.75
3.75
28.75
400
150
150
5
50
18
27
13.
13.
18.
5
5
5
-------
subsidy was threatened.
The dollar outlays for the subsidy are difficult to
predict because the payments increase with both the
absolute amount of tons recycled and the market price.
The fact that the dollar value of the subsidy increases
as PCW market price increases has both positive and
negative implications. From the recipient's standpoint
it is positive, in that the subsidy reduces the risk
associated with waste material price increases. As the
price of PCW raw material goes up, as often happens in
scrap markets, part of the impact of that rise is borne
by the Federal Government. In fact, the price of PCW input
could rise by as much as 42% before the user is
in the same profit and cashflow position as he would
be without the subsidy. The negative implications are
that: 1) the subsidy may encourage price increases,
2) higher valued (inherently more recyclable) scrap is
subsidized more than lower valued (inherently less re-
cyclable) scrap, and 3} the cost of the subsidy is diffi-
cult to predict.
The major administrative problem is the need to
establish a comprehensive system to differentiate, at the
mill level, post consumer waste from prompt scrap or mill
broke.
$6 Per Ton Subsidy. A per-ton subsidy is a taxable
payment from the Federal Government to the user of post
consumer waste. The subsidy selected for analysis was
$6 per ton.
The effects of a $6 per PCW ton subsidy on our hypo-
thetical user are illustrated in Exhibit II-3. Both the
profit after tax and cashflow increase by less than the
full amount of the subsidy due to the impact of taxes.
As long as PCW market prices remain below $20 per ton, the
$6 per ton subsidy delivers less dollars to the PCW user
than the 30% of purchase price subsidy. The probable
.impact is that $6 per ton will tend to stimulate primarily
lower grade (and lower valued) post consumer waste con-
sumption, while the 30% subsidy will have its greatest
impact on the consumption of higher grades. Thus, the
per-ton subsidy insures that more of the least economically
attractive grades of PCW are recycled. Because it does not
fluctuate with price, cost of this subsidy is more easily
predicted. It does not provide a hedge against the risk
-23-
-------
of price increases.
As with the 30% subsidy, the $6 per ton subsidy will
be of more benefit in situations where a high percentage
of post consumer waste can be used in the process. The
need to differentiate post consumer waste from scrap is
present with this subsidy as with the previous one.
75% Credit Subsidy to Users. This subsidy is designed
to reduce the effective interest rate on qualified invest-
ment in PCW equipment. Qualified investment is defined here
as the facility's total investment cost, times PCW input as
a percent of all raw materials inputs. The subsidy
evaluated here takes the form of a taxable cash payment
equal to 75% of the interest cost on qualified invest-
ment. A direct Federal loan at 25% of the market rate
would have virtually the same effect. Unlike most equip-
ment subsidies or a direct loan, this subsidy's yearly
payment could be made contingent on compliance with the
goals of the program.
The effect of the subsidy on our hypothetical user's
income statement is presented in Exhibit II-3. In this
case, the credit subsidy is only applicable to one half
the investment because only half of the raw material
input is post consumer waste. The net effect of the
subsidy on profit after tax and cashflow are less than
the full amount of the subsidy due to the impact of
taxes. As could be expected, the credit subsidy will
have its highest impact on capital intensive systems with
a high degree of post-consumer waste usage.
The major administrative problem with this and the
other equipment-related subsidies which follow is defini-
tion of eligible plant and equipment.
25% Investment Tax Credit. This subsidy is a reduc-
tion in income tax liability, taken in the year an
investment is made, equal to 25% of the qualified PCW
investment. The income tax reduction is taken in addi-
tion to regular depreciation allowances. Qualified
investment is taken as the percent of PCW material to
all material used as production inputs, times the total
investment.
-24-
-------
For an example of how this subsidy would affect the
income statement of our hypothetical user of post con-
sumer waste, see Exhibit II-3. The profits and cashflow
increase in the first year only and remain the same as
in the base (pre-subsidy case)in the remaining years.
The excess cash that is freed in the first year can be
used for other investment, so that its net impact on a
company extends far into the future. The fact that the
subsidy is all delivered in the first year provides good
leverage of Federal dollars since the cost of Federal
borrowing is less than the cost of corporate borrowing.
In calculating the impact on profitability of this
subsidy in the following sections, the "no subsidy" case
was assumed to have no investment tax credit allowances.
However, a 7 percent investment tax credit exists
at present for virtually all types of equipment invest-
ment.
Five Year Accelerated Depreciation. This subsidy
allows users of post consumer'waste to depreciate their
qualified investment on a straight line basis over 5
years. The net effect is to decrease income tax liabil-
ity (and increase cash flow) over the first five years
of the investment, and increase tax liability (and
decrease cash flow) over the remaining useful life of the
equipment.*
For an illustration of how this subsidy would be
calculated, see its effect on our hypothetical user in
Exhibit II-3. Cashflow increases in years 1-5 because
of decreased tax liability, while it decreases in years
6-20. The total cashflow over the life of the plant, and
the total taxes paid remain the same. Because the extra
cash generated in early years can be invested elsewhere,
accelerated depreciation is clearly preferable to
ordinary depreciation. Corporations may be reluctant to
use accelerated depreciation because it lowers reported
earnings figures. However, the majority of corporations
keep two sets of books — financial accounting for
reporting to stockholders uses "fair" value for depre-
ciation based on economic lives; and a tax accounting
system for reporting to the IRS. This practice,
Users currently have the option of using other forms of
accelerated depreciation (sum of year's digits, declining
balance).
-25-
-------
allowed by the IRS, is designed to take advantage of
accelerated depreciation and other tax incentives to
minimize the current year's tax payment.
It should also be noted that while our analysis
assumed straight line depreciation for the "no subsidy"
case most firms already use presently allowed forms
of accelerated depreciation such as double declining
balance. However, the impact of double declining
balance is less, than that of 5-year accelerated depre-
ciation.
Impact of Subsidies on Investment Models
In order to assess the subsidies' effects on profit-
ability of the waste-using segments of the paper, steel,
and glass industries, investment/income models were
developed. The segments of each industry for which
models were developed are shown below.
Paper Steel Glass
Linerboard Mills Mini-Mills Bottle Making
Plants
Corrugating medium Detinning
mills Plants
Folding Boxboard
mills
Newsprint mills
Tissue mills
In each instance the mills or plants defined are waste-
using facilities in those segments of the industry where
waste materials are most likely to be used. In the
Appendix A, investment/income models are presented with
a discussion of waste use in the industry. The effects
of the various subsidies on the users' internal rates
of return* are presented below in Exhibit II-4.
*Internal rate- of return is the rate of return on investment
at which the cash flows over the life of the project dis-
counted at this rate will equal zero.
-26-
-------
EXHIBIT II-4
EFFECTS OF SUBSIDIES ON INTERNAL RATES OF RETURN
No Subsidy
$6 /Ton Input
30% of Purchase
Price
75% Credit Subsidy
25% Investment
Tax Credit
5-Year Accelerated
Depreciation
1
0)
2
tr>
C
•H
-P
«f
3
M
M
O
U
9%
11%
12%
12%
12%
11%
•O
o
s
•H
C
O
•H
-P
(0
C
•H
"I
0
u
4%
8%
10%
9%
8%
5%
VI
V
3%
5%
7%
8%
6%
4%
QJ
3
10
u
•H
H
NEG*
NEG
13%
NEG
NEG
NEG
rH
!— I
•H
s
1
•H
c
•H
2
8%
9%
8%
9%
8%
8%
tJ^
c
•H
C
c
•H
*>
d>
Q
9%
17%
17%
14%
14%
11%
(0
10
rH
U
12%
16%
16%
15%
19%
14%
* NEG = negative return on investment
-27-
-------
Maximum Potential for Increased Waste Use
This .segment of the analysis sets upper and lower
limits to the potential subsidy impact establishing the
users' total capacity to use waste as a raw material
and the expected waste use without a subsidy. The steps
in this determination are described below. Appendix A
provides some of the background information which went
into this analysis. A hypothetical industry "Maximum
Potential Impact" graph is shown in Exhibit II-5. The
elements of the; graph are described below.
The first step is to determine future anticipated
production in the three industries under consideration -
paper, steel, and glass. Industry representatives were
the principal sources consulted to develop this data.
Since the industries considered are well established/ their
output-is closely tied to population growth, and is
relatively predictable. No major departures from
historical trends over the next 13 years in any of the
industries are predicted.
The second step involves estimating the rate of new
equipment additions in the industries. The industries
analyzed are all high fixed cost, capital intensive
industries, and it is assumed that the decision to use
PCW is made when new capacity must be added because of
equipment obsolescence or increased demand. Other
factors such as location can play a major role in the
choide between using PCW and virgin raw materials. For
example, in the paper industry, a location near forest
but away from population centers may severely limit the
use of PCW because of the high cost of shipping PCW raw
materials.
The short, dashed line in the Hypothetical "Industry
Maximum Potential Impact" graph illustrates the current
production capacity. This was calculated by dividing the
industry's capacity by the average economic life of equip-
ment to establish a rate of obsolescence. The difference
between a point on this curve and a point on the production
curve in any year yields the total capacity that could
theoretically switch to PCW.
The thirdi step is to estimate the degree to which the
industry already intends to use recycled materials. The
objective of this study is to determine the incremental
impact of a subsidy and therefore it was necessary to
-2.8-
-------
HYPOTHETICAL INDUSTRY MAXIMUM POTENTIAL IMPACT
tn
§
w
c
o
-H
tH
•H
•H
NEW MILL
CAPACITY
\
;-v ;
V
V
\
""V
X
\
—CURRENT
CAPACITY
. MAXIMUM POTENTIAL
'SUBSIDY IMPACT IN
1980
3.53 MM TONS
,^\
V
1970
1975
1980
1935
-29-
-------
develop a level of recycling to act as a base for
estimating increments. Industry forecasts, and discussions
with industry representatives were used to develop this
data for each industry. In the Hypothetical "Industry
Maximum Potential Impact" graph, Exhibit II-5, the anti-
cipated use of PCW without a subsidy is illustrated by
a dot-dash line. The baseline recycling estimates for
paper, steel, and glass are presented with the subsidy
impact estimates in Appendix C.
The next step is to determine the technological
limits to recycling. Attempts to increase recycling above
the technical limit can only result in inefficient use of
the subsidy. Technical reports and discussions with
industry representatives were used to develop this data
for each industry segment. In some cases, the technical
limits to recycling are unknown; and in others technical
advances are in the form of proprietary processes which
are not available to the general public.
The maximum potential impact of a subsidy is the
vertical distance between the lower of the production
line or technological limit line and the higher of the
obsolescence line or the planned recycling line as
shown on the graph. For our hypothetical industry, the
maximum potential impacts in the years 1975, 1980, and
1985 are approximately 1.2 million tons, 3.5 million
tons, and 5.2 million tons respectively.
Predicting Subsidy Impact
The methodology developed by RPA to estimate the
effectiveness of subsidies to users of post-consumer
waste is a mathematical simulation technique that gives
point estimates of the impact of given subsidies in the
years 1975, 1980, and 1985; the predictions obtained
assume that the subsidy was initiated in late 1972, and
that the subsidy was administered in'such a way as to be
understood and used for the intended purpose.
So far in the analysis, determination has been
made of the impact of the subsidies on plant profitability
and of the upper and lower bounds of potential subsidy
impact on investment. Both of these factors could be
fairly straightforwardly quantified given reasonable
data. This part of the analysis provides a model for
combining the impact on plant profitability with the
-30-
-------
potential investment impact to determine a "best estimate"
of actual influence on industry investment and thus of
increased recycling. The question asked here is: "As
return on investment changes on facilities using waste
materials, how will the investment in waste-using capacity
change relative to investment in other (virgin materials
using) capacity?"
The following steps were used to make this determina-
tion:
1) Investment profile; An industry's investment pro-
file is the percent of an industry segment's capacity
replacements and additions that would be waste-using
facilities at any given return on investment.
2) Risk profile: The extent to which the investments
suggested by this investment profile would be altered by
the business risk associated with the unusual fluctuation
in and uncertainty of secondary material price/ i.e., an
adjustment based on the probability that the return on
investment will be other than that expected because of
a change in secondary material price.
3) Learning curve; The extent to which the investment
suggested by the two above steps would change over time
as more experience with use of post consumer waste is
gained.
4) Equilibrium position; The above three steps assume
perfectly elastic supply, i.e., no price increases in post
consumer waste despite the increased demand brought about
by the subsidy. Based on estimates of supply inelasticity
and the above demand estimates a market equilibrium is
established.
Appendix B provides an example of the application of
the prediction methodology to the newsprint segment of
the paper industry.
Investment Profile
The methodology was based on the hypothesis that, in
the absence of outside forces, the industries in question
will continue to act as they have acted in the past. A
Federal subsidy to stimulate resource recovery would be an
-31-
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outside force acting, through economics, to stimulate
greater use of post consumer waste. The first step in
assessing the shift in preference was to calculate the
economic effects of specific subsidies on the profitability
of plants using post consumer waste. The second step was
the construction of the investment profile.
If a subsidy is granted, the economics of a PCW-based
plant will change, and the internal rate of return will be
raised. The question then becomes whether the increase in
the IRR is a sufficient incentive to switch from virgin
to PCW uses.
The percent of capacity decisions that would be
made in favor pf PCW use can be expressed as a mono-
tomically increasing function of the internal rate of re-
turn. Decision makers who are now using virgin input
tend to view the use of post consumer waste in light of
various business factors. These factors involve the
marketing and production structure in the industry,
historical biases toward virgin materials, and customer
requirements which foster an attitude favorable to virgin
raw materials. Generally, a higher potential rate of
return is necessary to persuade an investor to change his
and his customer's attitude and compensate him for
performing R & D to overcome production problems.
An example of an investment profile is shown in
Appendix B. This investment profile is an assessment of
the percent of. new capacity which will use post consumer
waste at each IRR, considering all business factors except
risk associated with PCW price and supply.
An original investment profile curve was generated
by assessing the investment decision process of firms in
the industry by analysis of the. internal rates of
return necessary (i.e., hurdle rate's) to sway a capacity
decision in favor of PCW use. It is assumed here mat
none will invest in PCW-based mills at internal rates of
return less than the stated required corporate internal
rates of return for new investment. Most of our industry
sources indicate that this minimum IRR is 15 percent,
while for the glass manufacturing industry it is 20 percent,
The curves were adjusted following the same logic as
in the original to reflect the rates of return that that
-32-
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industry has historically experienced rather than the
stated hurdle rates. The adjusted curves were used in
the final predictions of subsidy effectiveness. The
following factors are some of those iwhich were considered
in the final development of the curves.
. The quality requirements and reliability of supply
of virgin raw materials.
. The consumer's sensitivity to the product's raw
material makeup.
. The economies of scale at the plant level.
. The decision makers' experience with'PCW.
. The projected long-run strength of the industry
or sub-industry.
The shape of the curves for each industry segment
followed the traditional "s" shape though therq was
considerable variation among industries.
Risk Profile
The risk profile takes into account the factors of
PCW price and supply not covered in the investment pro-
file. In order to assess the attitude of different
industries toward PCW input price and supply risk, we
have developed a measure which illustrates our judgment
of this sensitivity. This is a means of quantifying
the extent to which investments are discouraged by the
uncertainty resulting from the historical price fluc-
tuations in secondary materials.
A maximum risk potential was calculated as the per-
centage change in IRR that would result from a 25%
increase in PCW price. It was calculated by subtracting
the expected IRR from the IRR when the price of PCW
rises to 125% of its present level, divided by the
expected IRR. The results, expressed as a percent,
constitute a maximum downside risk factor as viewed by
the industry.
The shape of the risk profile curves were generally
similar to the newsprint curve shown in Appendix B.
-33-
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The following are some of the considerations which went
into the formation of these curves.
1. The historical variance of an industry's return on
investment (essentially, decision maker.1 s ability
to live with risk). The lower]the variance of
return on investment, the greater number of
decision makers there will be who would be risk
averse.
2. Familiarity with PCW in the production process.
The more familiar the decision makers are with
the price and supply problems of PCW, the greater
would be the acceptance of PCW in the future.
Conversely, an industry used to steady, reliable
supply from integrated sources would be risk
averse.
3. Present state of development of PCW supply sources.
This factor includes an assessment of the nattre
of supply. A supply based almost exclusively on
proper home separation (glass bottles, for
example) is less attractive than one based on
simple technology (magnetic separation of ferrous
cans) because of the uncertainty of supply in-
volved in home separation programs.
4. Susceptibility to economic business cycles.
These factors include the historical price and
supply behavior of the PCW materials considered.
Wild price and supply changes lead to more risk
aversion than to historically steady performance.
5. Perceived industry bargaining strength versus PCW
supply sources. It is important to remember that
to a large extent, the user industries will be
dealing with a new supply source, the municipal-
ities. Total reliance on this supply source is
more risky than cases in which alternative sources
of supply can be utilized in the event of a
breakdown in the new supply source - user industry
relationships.
Learning Curve
The learning curve is nothing more than an assertion
that as experience is gained with use of post consumer
-34-
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waste and risks associated with its use are lowered the
"Investment" and "Risk" profiles would be slightly more
positive. Rather than reconstruct these curves for future
years a positive multiplier was established through the
application of the learning curve factor.
Equilibrium Solution
The methodology up to this point predicts what would
happen if all decision makers acted in isolation, i.e.,
if supply were perfectly elastic. However, competition
and economics would play a role, and as demand increased,
the price of scrap would increase.
To correct this, we sought to judge what would be
the "economic equilibrium". Some of the subsidy must be
passed back to suppliers in higher priced industries to
stimulate more supply. This action in turn lowers the
amount of subsidy that the user industry keeps, dampening
his demand, and so on until all demand is satisfied at a
somewhat higher price.
The problem of determining the equilibrium position
can theoretically be solved using supply and demand
curves. Although the data generated by the models and
analysis appear to lead logically to the construction of
supply and demand curves for the recovered materials,
this would yield elaborate but incorrect results. The
supply curves for the recovered materials are inter-
dependent. A resource recovery plant produces more than
one type of recyclable material. Thus, it would be in-
appropriate, as"theory for independent commodities in free
market says, to shift the supply surve of a particular
recycled material by the amount of the subsidy.
To estimate an equilibrium solution, bounds were set
representing estimates of both supply and demand. This
requires the compilation of supply elasticity data for
each of the PCW commodities considered. To our knowledge,
such data does not exist and developing it was well
beyond the scope of this study. Therefore, estimates were
made as to what these elasticities would be, based on
knowledge of secondary materials supply mechanisms.
A simple linear equation was used to estimate the
equilibrium price and quantity of increased consumption.
While the equation and the equilibrium methodology as a
-35-
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whole are oversimplifications and approximations, they
are a reasonable approach short of a detailed economic
study.
The equilibrium equation used varied by subsidy. An ex-
ample is shown in Exhibit II-6.
Results of Subsidy Analysis
The objective of the study was to develop predictions of
the effect of a variety of subsidies on the use of PCW
paper, cans and glass by segments of the paper, steel, and
glass industry. These predictions should provide policy
makers with the quantitative data base to which could be
added the more subjective evaluations. The time frame
chosen for evaluation was 1976 to 1985.
The results are presented in the Exhibits II-7 through
11-10. Each chart is relatively self-expanatory. The
notes refer to descriptions of each element on the charts.
Appendix C presents a more detailed breakdown of the re-
sults, including year by year data by material on base-
line recycling and incremental recycling.
The conclusions that could be drawn from the following
exhibits are by no means obvious, and there are some
observations which should be made.
Windfall, or subsidization of recycling which would have
occurred anyway, is about 60 percent in all cases, which
makes all of the subsidies appear inefficient. The wind-
fall for the subsidies depends on the amount of incre-
mental recycling induced as well as the extent to which
existing (baseline) recycling is subsidized. For the
30% operating subsidy a relatively large incremental re-
cycling is induced but subsidy is paid for all of the
baseline recycling as well. The capital subsidies
induce less new recycling but also subsidize much less of
existing recycling since they are based on equipment
purchase, and baseline recycling uses primarily existing
equipment. There is not complete agreement, however, on
how "bad" windfall is in any case. Some industry repre-
sentatives argue that any subsidy which does not allow
payments for existing recycling could be counter-productive
-36-
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EXHIBIT II-6
USER SUBSIDY EUQILIBRIUM SOLUTION MECHANISM
B
/resource re- \
/ covery plant \
I supply per 1
I dollar of I
\ price increase/
Notes
/unknown \ /skimming A
I equilibrium! I supply pen
I price J_L.| dollar of I
I increase / I price /
V=X I \increase /
\
/
/demand if \
/ users re- I
I tained all I
Vof subsidy /
/decline in \
/ user demand j
I per dollar /
I price /
V increase /
A. Derivation: A = incremental supply over baseline if processors retained the $6/ton subsidy 4 $6.
B. Term B is the unknown price change for which we are solving.
C. Term C is Term A multiplied by the ratio of skimming elasticity of supply to resource recovery
plant elasticity of supply. The ratio is an estimate.
E. Term E is the incremental user demand over baseline skimming plus resource recovery plant output
given perfectly elastic supply and the $6/ton subsidy.
F. Term F derived as follows:
effective price decrease necessary to
T induce demand E; i.e., dollar amount of
the subsidy with perfectly elastic supply, $6/ton.
Solution
x = price increase to reach equilibrium
(A) • (X) = incremental output of resource recovery plants above baseline
(C) • (X) = incremental skimming above baseline
(A+C) • (X) = total incremental recycling above baseline
Equation assumes that the ratio of skimming supply elasticity to R.R. plant supply elasticity
remains constant over the relevant range.
Specific values of equation terms are year-determined.
-------
because existing firms could be put in a disadvantageous
competitive position by new .firms. In this analysis sub-
sidy for existing recycling was assumed to provide no
additional benefits, but in reality it would have to im-
prove the competitive position of waste material users
and might have some positive effects on recycling. Never-
theless, high windfall generally indicates that a large
portion of subsidy dollars are not going toward achieve-
ment of the legislative intent.
Comparing the subsidies is complicated by the fact that
the levels of the subsidies examined are not equivalent.
A 30 percent operating subsidy delivers more dollars to
the recipient than the other subsidies. The five-year
amortization delivers less subsidy than any of the others.
The cost per ton of incremental recycling would seem to be
a reasonable comparison index for the subsidies, but by
itself is far too simplistic. Practical factors would have
to be taken into account. For example, it may be that
defining equipment which uses post-consumer waste would be
extremely complex, and that in the end the subsidy would
not be for the exact equipment assumed here, making the
cost of the subsidy higher or lower. Defining post con-
sumer waste for the operating subsidies is generally
thought by industry to be easier than defining eligible
equipment, but a similar problem could arise.
Looking at the subsidies by material it is obvious that
paper would be by far the major component of new recycling.
This stems in part from the fact that paper comprises a
larger fraction of the waste stream, but also the supply
system for waste paper is much more developed than the
supply systems for glass and cans, both of which depend
to a significant degree on existence of resource recovery
plants to process mixed waste. Also, the relative impact
of different subsidies differs for the different materials
because of the industry characteristics. None of the sub-
sidies was particularly effective for glass recycling be-
cause supply, not demand, seems to be the primary inhibitor
of recycling.
The results indicate that to get a significant increase in
recycling a relatively large subsidy is required. A
5 year amortization, for example, would increase recycling
by only an estimated 12 percent because its subsidy bene-
fit is not large. It may well be, however, that at measure
such as this,, which has a very low cost per ton of new re-
cycling, is a far more prudent measure than the other
-38-
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subsidies.
Limitations of the study predictions should certainly be
considered in interpreting the results.
One important factor impacting on the results is data
validity. Data on production costs is not readily
obtainable from industry in any detail and varies from
situation to situation. It also varies over time as
economic conditions change. The economic conditions re-
flected in the user cost models in this study are the
conditions of 1 to 2 years ago. A number of economic
events have occurred since that time: various prices
have been frozen and released; a Canadian mill strike
has placed a premium on waste news as a raw material,
substantially increasing prices; prices of all waste
paper have more than doubled; paper companies using vir-
gin materials have been hit by raw material shortages
and have found ways to increase mill capacity by using
waste paper; an export control system on scrap steel may
have set limits to that industry's short term plans;
concern for recycling has increased, witnessed by the
fact that about 70 home separation systems have been im-
plemented since September, 1972. Most of the above
trends, if found to be long term in nature, will act to
change our predictions of recycling, both the baseline
predictions and the estimates of subsidy effectiveness.
A second major factor is the validity of the prediction
methodology. In the absence of data on price elasticity
of supply and demand it was necessary to try to model
the investment decision process of industry. Obviously
decision criteria vary from company to company as do
aversion to risk, investment hurdle rates, and other
factors. The methodology used was based on careful in-
dustry analysis but must be considered a rather crude
approximation of the real world. We do believe that it
gives reasonable estimates bounded by maximums and mini-
mums which give the decision maker a good feel for what
the effect of the subsidies would be. To read a greater
degree of accuracy into the data would be a mistake.
-39-
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EXHIBIT II-7
SUMMARY RESULTS OF SUBSIDY IMPACTS
TOTAL
1976-1985
Note 1
Note 2
N'ote 3
Note 4
Incremental Recycling
(000,000 tons)
Total Cost to Federal
Government (000,000$)
Cost per Incremental
Ton
Incremental Increase
in Recycling {%)
30% of
Purchase
Price
50.9
1,378
27.00
48
$6 Per
Ton of
Input
32.3
843
26.10
30
25%
Investment
Tax Credit
32.0
347
10.84
30
5-Year
Accelerated
Depreciation
15.5
102
6.58
15
•
75%
Credit
37
810
21.90
35
O
I
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EXHIBIT II-8
SUMMARY RESULTS OF SUBSIDIES TO WASTE PAPER USERS
PAPER
1976-1985
Note 1
Note 2
Note 3
Note 4
Note 5
Incremental Recycling
(000,000 tons)
Total Cost to Federal
Government (000,000$)
Cost per Incremental
Ton
Incremental Increase
in Recycling (%)
Windfall (%)
30% of
Purchase
Price
43.7
1,289
29.50
45
69
$6 Per
Ton of
Input
22.8
728
31.94
23
81
25%
Investment
Tax Credit
23.0
305
13.26
23
61
5-Year
Accelerated
Depreciation
11.9
95
8.02
12
79
75%
Credit
29.4
734
18.65
30
68
-------
EXHIBIT II-9
SUMMARY RESULTS OF SUBSIDY TO CAN USERS
CANS
1976-1985
Note 1
Note 2
Note 3
Note 4
Note 5
Incremental Recycling
(000,000 tons)
Total Cost to Federal
Government (000,000$)
Cost per Incremental
Ton
Incremental Increase
in Recycling (%)
Windfall (%)
30% of
Purchase
Price
5.6
47
8.42
160
43
$6 Per
Ton of
Input
8.6
78
8.86
250
32
25%
Investment
Tax Credit
7
23
3.26
206
31
5-Year
Accelerated
Depreciation
3.1
7
1.78
91
44
75%
Credit
6.6
45
6.85
194
35
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EXHIBIT 11-10
SUMMARY RESULTS OF SUBSIDY TO WASTE GLASS USERS'
GLASS
1976-19S5
Note 1
Note 2
Note 3
Mote 4
Note 5
Incremental Recycling
(000,000 tons)
Total Cost to Federal
Government (000,000$)
Cost per Incremental
Ton
Incremental Increase
in Recycling (%)
Windfall (%)
30% of
Purchase
Price
1.6
42
25.70
30
77
$6 Per
Ton of
Input
0.9
37
43.41
17
86
25%
Investment
Tax Credit
2
19
9.74
37
55
5-Year
Accelerated
Depreciation
0.5
0.2
0.44
9
82
75%
Credit
1
31
32.55
19
76
*.
o>
I
-------
Notes to Exhibits II-7 Through II- 10
Note 1 - Incremental Recycling
The incremental recycling is the increase in recycling
above the baseline which will result from a subsidy.
With one exception, the results presented above were ob-
tained through application of the methodology described
earlier in this section. As the discussion up to this
point has indicated the underlying assumption of the
analysis was that increased recycling required investment
in new facilities, probably in different locations than
those using virgin materials. On the whole this assump-
tion fits actual industry patterns; however, an exception
for the paper industry seemed necessary. Some paper in-
dustry segments which use primarily virgin raw materials
in "wood pulp based" products use a small percentage of
recycled fiber in their furnish. The Kraft linerboard
and printing-writing paper segments of the industry, which
represent a fairly significant percentage of industry
output, have a potential for increased waste use which would
be influenced by a subsidy. Estimates of increased waste
paper usage in virgin-based facilities were provided by
the EPA and based primarily on a report to the American
Paper Institute.1 The breakdown between new investment in
wastepaper-based facilities and additional usage in virgin-
based plants is presented below. The results presented in
Exhibit II-8 are the combination of both impacts.
Increase in Recycling
(000 tons)
Subsidy
30% of Purchase
Price
$6/ton of input
25% Investment
Tax Credit
75% Credit
5-yr Accel. Depr.
1975
New
Cnvest-
ment
1,130
599
435
770
323
PCW
Addi-
tion
252
117
117
161
30
1980
New
Invest-
ment
3,607
1,899
1,422
2,430
1,015
PCW
Addi-
tion
540
265
265
355
113
1985
• New
Invest-
ment
5,895
3,101
2,322
3,973
1,648
PCW
Addi-
tion
840
419
419
560
186
1 Paper Recyling; The Art of the Possible, American Paper Institute, 1973.
-44-
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Note 2 - Cost to the Federal Government
The caluclation of the cost to the Federal Govern-
ment varies by subsidy but the cost basically reflects
the net income transfer from the Federal government to
all subsidy recipients. The overall cost analysis would
also include additional (lost) tax revenues, administra-
tive costs and induced economic inefficiencies created
by the reactions to the subsidy.
The cost to the government of the input subsidies
(30% of purchase price and $6 per input ton) equals the
amount of the subsidy multiplied by the total number of
tons of PCW used, the cost of the 75% credit subsidy
equals 75% of the total interest expense incurred in the
purchase of capital equipment times the percent of PCW
in the raw material input. The Federal commitment for
this subsidy continues as far as 2005 in some cases be-
cause of the residual commitment on 20 year loans made
during the target period 1975-1985. The cost of the
25% investment tax credit equals the cost of capital
equipment times the percentage of PCW in the raw material
input times 25%. The cost of 5-year accelerated depre-
ciation equals the discounted value of the cash flow lost
to the government as a result of lower taxes paid using
the accelerated depreciation versus currently used methods.
The calculation of the net income transfer does not
take into account possible increased tax revenues that
might be generated bacause of the increased profitability
of subsidy recipients. The amount is rather small, and
the calculation is subject to the vagaries of accounting
systems.
Note 3 - Cost per Incremental Ton
This figure equals the cost to the government (2)
divided by the incremental recycling (1). It provides a
relative measure of the efficiency of the subsidy.
Note 4 - Incremental Increase in Recycling
This figure equals the incremental recycling divided
by the baseline recycling that is projected to take place
-45-
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in the absence of a subsidy.
The following table presents the baseline figures
used in this study. They are for post consumer waste
only. Skimming refers to material recycled through
source separation programs. Resource recovery plants
refers to material recycled from large scale resource
recovery plants.
Baseline
Material
Paper
Cans
Glass
Year
1975
1980
1985
1975
1980
1985
1975
1980
1985
Skimming
(000 tons)
8258
9509
10951
86
116
210
261
333
425
Resource
Recovery
Plants
(000 tons)
82
151
263
135
246
431
92
168
294
Total
(000 tons,
1
8340 i
9660 |
11220 ;
221 i
362
641 j
r — i
' >
353
501
719
!
Note 5 - Windfall
The windfall figure represents the percentage of the
total cost of the subsidy that the Federal government
pays out to recipients that would have added capacity the-
uses PCW anyway. It is a measure of the efficiency of
the subsidy. 'The higher the windfall the lower the
efficiency.
The windfall is calculated by dividing the cost of
subsidizing the baseline by the total cost to the govern-
ment of a particular subsidy.
-46-
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Subsidies for Construction of Municipal Resource Recovery
Plants
Outline of Prediction Methodology
An alternative to subsidizing demand for secondary
materials is to .subsidize supply. Subsidization of trad-
itional suppliers of waste materials, i.e., the salvage
industry, is really closely akin to subsidizing demand in
that both the suppliers and users will ultimately receive
a part of the subsidy through the normal functioning of
the market. In the case of the demand subsidies just ex-
amined it was determined that part of the subsidy would
be "bid away" as the price of secondary materials in-
creased as a result of increasing demand.
A totally di fferent approach to supply subsidization
is a direct subsidy to municipalities for construction of
resource recovery plants, i.e. large processing/recovery
facilities for recovery of materials or energy. This
segment of the report discusses subsidies to municipal-
ities for construction of such plants.
The methodology for evaluating the impact of the sub-
sidies is somewhat similar to that used to evaluate de-
mand subsidies. There are three basic steps:
(1) Cost Impact - Determine the impact of each sub-
sidy on the cost of recovery from each plant type.
(2) Plant Potential - Determine the maximum poten-
tial for plant construction and the expected number of
plants to be built without the subsidy.
(3) Actual Subsidy Effectiveness - Predict the
number of plants which would be built with each subsidy.
Outline of Subsidies and Their Cost Impact
A subsidy to municipally-owned resource recovery
plants is intended to make resource recovery less ex-
pensive, and hence more attractive for municipalities.
To examine the impact of a subsidy on such a plant, and
-47-
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to illustrate the calculation necessary to view the im-
pact of the subsidy we will use cost projections for a
hypothetical recovery plant. This plant recovers both
energy and materials. The investment cost categories
require some clarification. (See Exhibit 11-11.)
Typically* a municipality will purchase a process-
ing facility through the use of bonded debt rather than
out of a general operating budget. There are two major
reasons for using this form of financing. First, the
purchase of a processing system almost always represents
a substantial dollar cost. The ability of a municipal-
ity to pay for an expensive system out of one year's tax
revenues is limited. Secondly, by purchasing the system
through bonded debt with equal sinking fund payments,
it is thought that the costs of owning the system will
be spread equitably over those who benefit from the
system's use. Any year's sinking fund payment is paid
by that year's general tax revenues, which in turn are
paid by the residents of a municipality in that year.
There are three separate categories of items that
must be financed before a municipality can expect to
have an on-going system. In our analysis of subsidies,
these items are termed recoverable (non-depreciable),
amortized, and fixed investment. Recoverable investment
consists of those items for which it is assumed that
their use constitutes no loss of economic value. The
major component of the category is land, which may be
sold after the economic life of the processing system is
exhausted. The costs associated with recoverable assets
is interest on the principle amount borrowed to finance
the purchase. This assumes that the principle amount is
repaid by selling the recoverable assets.
Fixed assets represent the actual hardware of the
recovery system. This item makes up the bulk of the
installed cost of resource recovery plant, and is financed
by bonded debt. The cost associated with this category
of assets is composed of the principle and interest
components of the debt structured in such a way as to
result in constant annual payments. The resulting effect
is exactly analogous to conventional home mortgages.
-48-
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EXHIBIT 11-11
HYPOTHETICAL RESOURCE RECOVERY PLANT
PARAMETERS:
1,000 TONS PER DAY INPUT CAPACITY, OR 300,000 TONS
PER YEAR
FIXED INVESTMENT REQUIRED:
AMORTIZED INVESTMENT REQUIRED:
RECOVERABLE INVESTMENT REQUIRED:
ENERGY SALES PER YEAR:
MATERIAL SALES PER YEAR:
TONS OF MATERIAL SOLD:
OPERATING EXPENSES PER YEAR:
ECONOMIC OPERATING LIFE:
$6,200,000
$1,500,000
$700,000
$150,000
$80,000
8,000 T
$200,000
20 years
TOTAL ANNUAL
REVENUES
Material sales
Energy sales
TOTAL REVENUES
COSTS
Operating costs
Fixed Investment
Costs1
Amortized Investment
Costs 2
Recoverable Investment
Costs 3
TOTAL COSTS
NET COSTS
$
$
$
$
$
80,000
150,000
230,000
200,000
497,504
346,462
35,000
1,078,966
848,966
PER INPUT TON
$ .27
.40
$ .67
1.66
1.15
.12
$ 3.60
$ 2.83
Annual payment sufficient to amortize a 20 yr.,5% loan for
6,200,000.
^Annual payment sufficient to amortize a 5 yr. ,5% loan
for 1,500,000
Interest only at 5% on $700,000.
-4Q-
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EXHIBIT 11-12
HYPOTHETICAL RESOURCE RECOVERY PLANT WITH APPLICATION OF SUBSIDIES
REVENUES
Material Seles
Frcrcy Sales
i'1'fAL REVENUE
COSTS
Operating Costs
Fixed Invest-
1 irent costs
01
o Amortized In-
1 vestment Costs
Recoverable In-
vestment Costs
TOTAL COSTS f\
NET COSTS
P RE-SUBSIDY
total per
annual ton
80,000 .27
150,000 .50
230,000 .77
200,000 .67
497,504 1.66
346,462 1.15
35,000 .12
,079,966 3.60
848,966 2.83
30 PERCENT OF
SALES SUBSIDY
total per
annual ton
104, COO .35
195,000 .65
299,000 1.00
200,000 .67
497,504 1.66
346,462 1.15
35,000 .12
1,078,966 3.60
799,966 2.60
$6 PER TON
SUBSIDY
total per
annual ton
128,000 .43
150,000 .50
278,000 .92
200,000 .67
497,504 1.66
346,462 1.15
35,000 .12
1,078,966 3.60
800,966 2.67
25 PERCENT CON-
STRUCTION GRANT
total per
annual ton
80,000 .27
150,000 .50
230,000 .93
200,000 .67
373,128 1.24
346,462 1.15
35,000 .12
954,590 -3.18
724,590 2.42
50 PERCENT CON-
STRUCTION GRANT
total per
annual ton
80,000 .27
1)50,000 .50
230,000 .77
200,000 .67
248,752 .83
346,452 1.15
35,000 .12
830,213 2.77
600,214 2.00
75 PERCENT CON-
STRUCTION GRANT
total per
annual ton
80,000 .27
150,000 .50
230,000 .77
200,000 .67
124,376 .41
346,462 1.15
35,000
705,838 2.35
475,838 1.59
75 PERCENT
CREDIT SUBSIDY
total per
annual ton
80,000 .27
150,000 .50
230,000- .77
200,000 .67
352,286 1.17
311,343 1..04
8,750 .03
"872,379 2.91
642,379 2.14
-------
The last category is referred to as amortized in-
vestment. This is composed chiefly of front-end planning,
research and development, and engineering. Like fixed
investments, amortized investment has cost components
consisting of principle and interest payments paid in
equal annual installments. Generally, we considered a
five year economic life for this category of assets.
Besides the capital charges referred to above, the
resource recovery system will incur variable operating
costs consisting of items such as labor, administration,
fuel utilities, and the like. Operating revenues will
be generated through the sale of recovered materials and
energy.
The analysis included the impacts of four different
kinds of subsidies. The effects of these subsidies on
the hypothetical recovery plant are shown in Exhibit 11-12,
Percent of Sales Subsidy
A percent of sales cash subsidy takes the form of a
non-taxable cash payment from the Federal government to
the municipality. The amount of the subsidy is equal to
a fixed percent of the revenue generated by the sale of
material or energy after recovery from the waste stream.
Our projections are based on a 30% subsidy.
To illustrate the effect of a 30% sales subsidy, see
Exhibit 11-12, where the subsidy is applied to the hypo-
thetical plant. For the hypothetical plant, the subsidy
reduces net cost per ton to 92% of its former value, and
represents an increased cashflow to the municipality of
$69,000 annually. Since the subsidy is tied to output,
its greatest effect is on systems that have low capital
investment and high revenues from .sale of recovered
resources. Since the subsidy is based on selling price,
there is a positive incentive to process PCW into a
form dictated by the demands of the market place. The
more effective the marketing, the larger the sales price
received, and the larger the subsidy.
-51-
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Another effect of the subsidy is a productiv-
ity change. The subsidy rewards hiqhly priced
goods much more than low prices goods. The mar-
ginal cost of processing a particular type of waste for
sale would be weighed against the marginal revenue
(plus subsidy) gained. We believe that the net effect
would be to stimulate more material recovery oriented
systems (mechanical separation) over energy, recovery
systems. An advantage of this subsidy is that it is
easily understood and has short lead time for implement-
ation.
Per-Ton Cash Subsidies
A per-ton cash subsidy takes the form of a non-
taxable cash payment from the Federal government to the
municipal processor. The amount of the subsidy is
determined by the number of tons of recovered material
sold, times the subsidy ($6 per ton in this analysis) .
A per-ton subsidy percentage-wise delivers more sub-
sidy dollars to low quality, low price material outputs
than to higher-priced, harder to obtain materials. This
is in one way beneficial since lower valued materials are
often those which cannot be economically recycled. How-
ever, there would also be little incentive to upgrade the
quality of processed waste. There would be a tendency to
produce high volume, low value outputs such as compost.
Only market demand would act to require high quality PCW
output. Because of this, standards for outputs would
have to be set and enforced which could make the admini-
strative costs of this subsidy high.
Construction Grants
A construction grant is a cash payment from the
Federal government to a municipality based on a percent
of the purchasve price of hardware. Our analysis looked
at the effects of 25 percent, 50 percent, and 75 percent
•construction grants.
Construction grants, as a one-time, non-refundable
payment to the municipality, reduce their overall costs
regardless of the markets for their output. This re-
duces the inherent risks and thus encourages the purchase
-52-
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of a resource recovery system.
There area number of major caveats attributable to
construction grants, as with all capital subsidies.
First, construction grants tend to encourage inefficient
capital solutions. Previous capital subsidies (in the
transportation and maritime industries) have resulted in
decidedly overcapitalized technology, inadequate main-
tenance, and premature replacement. Secondly, previous
capital grants have been awarded on a readiness to proceed
basis, with little analysis as to the economic feasibility
of a subsidized facility. Thirdly, it is difficult to
ensure that the legislative intent will be carried out.
For instance, if an incinerator with waste heat recovery
is built, there is no guarantee that the steam will be
produced or sold. The subsidies might be a way for a
municipality to build a cheaper incinerator.
The above problems make effective administration of
the program critical to its success. A proper administra-
tion would require both technical expertise and executive
capability. Technical expertise would be necessary to
assess the risks of any experimentation and overall tech-
nological feasibility of proposed projects.
The executive function would consist of seeing that
proposed facilities implemented resource recovery, and
assigning priorities for the awarding of grants.
Const-ruction grants are most often used where it is
thought that the target (the municipality) is capital
poor. It is doubtful whether this is the case, as most
municipalities seem to have unused debt capacity.1 In
this instance, the construction grant should be viewed as
a device for encouraging experimentation with new recovery
systems.
Credit Subsidies
The credit subsidy considered here is in the form of
a direct loan from the Federal government to a municipal-
ity equal to the installed cost of equipment, the recover-
able investment, and the amortized investment. The inter-
est rate on the loan would be 75 percent less than the
current market rate. Unlike the construction grant, the
75 percent credit subsidy was assumed to apply to all
Assessment of Alternative Financing Methods for Solid
Waste Facilities and Equipment, Resource Planning Assoc.
Draft report to U.S. Environmental Protection Agency, 1973,
-53-
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classes o'f capital; and, even though it is a- 75 percent
credit subsidy, capital charges to a municipality de-
crease by only 24 percent. This is because a large por-
tion of'annual debt service is repayment of principal
rather th'an interest expense.
Credit subsidies, like construction grants, should
be viewed primarily as a means of delivering a cost re-
ducing subsidy rather than as a means to solve problems
of obtaining capital, which as mentioned above does not
appear a major deterrent to cities at present. However,
by removing much of the burden of obtaining capital, it
obviously has an appeal to cities.
Once the candidate for a credit subsidy has been
selected, administrative details are relatively insigni-
ficant. Essentially, the Federal government acts as a
bond trustee. Since municipalities, the debtor, have
historically been very credit worthy, the risk of default
on the loan is quite small.
The major administrative problem with this subsidy
is similar to that of construction grants: namely, assur-
ing that the goal of the subsidy (recovery of resources)
will be met. Since the loan agreement is signed prior to
operation, there is no assurance that recovered resources
can or will be sold over the life of the project. This
implies the need for a highly selective screening process
carried out by a technically competent staff.
i.
Outlays for a credit subsidy program are highly pre-
dictable at th;e time the loan agreement is signed. Add-
itionally, while future costs of a specific project are
fixed", ending new outlays should cause few problems.
Resource Recovery Systems
The six resource recovery systems used in this re-
port as models are:
Mechanical Separation
Incineration With Residue Recovery
Recovery for Supplemental Fuel
Incineration with Steam Recovery
-54-
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Incineration with Electric Generation
Pyrolysis
Appendix D contains a brief description of each of
the six systems and presents a "no-subsidy" cost and re-
venue breakdown for each plant. The dollar figures on
investment requirement, operating costs, and, resource
recovery revenues are all extracted from, the U.S.
Government document entitled "Resource Recovery, the
State of Technology," published in February, 1973. There
have been steady trends in the last couple of years which
strongly indicate that many of the investment figures are
low and, in some cases, substantially so.- In addition,
while cost projections often include revenues from the
sale of such recovered materials as glass and non-ferrous
metals, there are no full-scale operational systems which
have demonstrated the ability to recover these materials
from mixed municipal solid waste satisfactorily through
recovery techniques are being developed and demonstration
of one system recently began.
The figures from the aforementioned report are used
here because they represent a single comprehensive basis
for comparison. Development of this data was not part of
the study being presented.
Exhibit 11-13 indicates the effect on net cost per ton
of operation of each subsidy for each model plant. It
should be mentioned at this time that privately owned
plants were not directly considered in this analysis but
should not be ruled out as possible subsidy recipients.
It was assumed that analysis on municipally-owned plants
was representative of subsidy impact even if in actuality
privately owned plants were eligible for the subsidy.
In reality a number of these plants would undoubtedly be
financed and operated by the private sector. For illu-
strative purposes Exhibit 11-14 presents the net profit
and internal rate of return of the six plants considered
assuming private ownership. These calculations are based
on data from the report previously mentioned. The costs
appear less favorable than those for municipally-owned
plants because of higher borrowing costs and property
and income taxes.
-55-
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EXHIBIT 11-13
.IMPACT OF SUBSIDIES ON THE ECONOMICS OF MUNICIPALLY OWNED
RESOURCE RECOVERY PLANTS
(Net Annual Cost of Operation in $/Ton)
RECOVERY INCINERATION INCINERATION INCINERATION
FOR WITH WITH WITH
MECHANICAL SUPPLEMENTAL RESIDUE STEAM ELECTRIC
SEPARATION FUEL RECOVERY RECOVERY GENERATION PYROLYSIS
No Subsidy
30% of Sales
$6/Ton Sold
251
Construction Grant
50%
Construction Grant
75%
Construction Grant
75% Credit
4.77
3.45
3.10
4.13
3.49
2.86
3.84
2.70
1.78
2.30
2.29
1.88
1.46
2.09
7.18
6.64
6.56
6.60
6.01
5.33
6.33
7.05
6.05
7.05
6.42
5.79
5.15
6.12
8.97
6.99
8.97
7.97
6.96
5.95
7.75
3.76
3.76
4.66
4.76
4.07
3.40
4.42
-------
EXHIBIT 11-14
IMPACT OF SELECTED SUBSIDIES ON THE ECONOMICS OT PMVATELY OWNED RESOURCE KBCOVEBY PLANTS
Profit After"
Tax ($/ton of
input)2
IRR2
25% Investment Tax Credit3
Fuel
Recovery
Materials
Recovery
Pyrolysis
$6/ton Cash Subsidy
Incineration
with Residue
Recovery
Incineration
with Steam
Recovery
Incineration
with Electricity
Generation
5-Year Accelerated
Depreciation4
$2.56
16
$1.50
$1:20
$0.53
$0.40"
($1.50)
Negative
1000 TPD plants with a 20 year life.
' 2$8/ton dumping fee assumed. IRR is the internal rate of return, the rate at which the present value of cash in-flow equals
i^ the present value of cash out-flow.
' 3This subsidy affects profit after tax in the year of the investment, but the subsidy impact has been shown as an equivalent
annuity for illustrative purposes. It is also assumed that the plant either makes sufficient profit to allow taking the
credit, or that the owner has -other profitable businesses.
4This subsidy does not actually change plant profitability except in terms of the time value of money. (Cash flow is
greater in early years, less in later years.) The tine value impact has been shown as an equivalent annuity for
illustrative purposes. This also assumes that the plant either makes a sufficient profit to allow taking the credit or
that the owner has other profitable businesses.
Source: EPA calculations based on data from: Midwest Research Institute, Resource Recovery: The State of Technology, Washington,
U.S. Government Printing Office, Feb. 1973.
-------
Resource Recovery Plant Potential
The potential for resource recovery plant construc-
tion was determined by defining the maximum potential
population base which could logically be served by such
plants. There are a number of options for defining the
maximum population base which recovery plants might serve.
Using the total U.S. population is not reasonable be-
cause waste in rural areas in not likely to find its way
to an urban recovery plant. A more logical base would
be Standard Metropolitan Statistical Areas/ but the
political problems of bringing together numerous juris-
dictional areas make this base larger than the practical
potential. Cities were the base which we chose to use
in this study since they represent population concentra-
tions with the potential for building recovery plants.
The cities which could support a 1000 ton per day plant
and which now use or are highly likely to use incinera-
tion (or some other waste disposal method other than
land fill) were identified as the specific base for de-
fining the potential. It was felt that cost of resource
recovery-was far more comparable to disposal costs in
these cities than in those with the option of land fill.
Exhibit 11-15 shows the population base used to define
the potential.
Predicting the number of plants which will be built
by 1985 ..in the absence of a subsidy is difficult because
of the uncertainties of cost and technological feasibility
associated with most of the recovery systems. Signfi-
cant indications of municipal interest in these plants
has only come about in the last couple of years. The
baseline estimate for plant construction was derived by
EPA from their contacts with cities across the nation and
was based on a city by city analysis of resource recovery-
plant interest. The estimate was that by 1985 the equiv-
alent of 35 plants of 1000 ton per day capacity would be
built.
-58-
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3T :sir i-T"
MAXIMUM POTENTIAL IMPACT
FOR SUBSIDIES TO RESOURCE RECOVERY PLANTS
US Population^
(000)
Per Capita Solid
Waste Generation
(lbs./day)2
Population Required
to support a
1000 TPD Plant
Number of Cities
with population
to support a _
1000 TPD PlantJ
Population served
by Incineration .
in 1000 TPD Plants*
(000)
Tons of Solid Waste
served by Incineration
per year
(000)
1970
203,212
4
500,000
26
9,398
6,861
1975
216,553
4.64
431,034
32
10,364
8,776
1980
232,966
5.38
371,747
41
15,935
15,646
1985
251,271
6.23
321,027
51
23,619
26,854
Ln
vo
I
1 Based on a growth rate of 1.25% per year; Series C projections by the U.S.
Department of Commerce, Bureau of the Census
2 Based on a 3% per year increase in per capita solid waste generation
3 Population in central cities is assumed to grown at a rate of 1% per year
4 EPA estimates based on the following percentages, 30%, 30%, 38%, 41% for 1970,
1975, 1980, and 1985 respectively which assume a 5% per yar increase in popu-
lation served fay incineration from 1975 through 1985.
Source: EPA Estimates based on data from U.S. Department of Commerce, Bureau
of the Census.
-------
Prediction of Subsidy Impact
The prediction of subsidy impact is based on cost
changes brought about by the subsidies. This prediction
technique is limited, however, because cost is only one
of many factors which weigh upon the decision to build
a resource recovery plant. Risk, political implications,
public attitudes and pressures and other factors are also
very important in the decision process. Since there is
no reasonable way of quantifying these factors, the pre-
diction was made based on comparative plant economics.
The graph or "decision curve" used to make the pre-
diction is illustrated in Exhibit 11-16 . This curve
was constructed to relate the average cost per ton of the
resource recovery plants to the number of municipalities
that would build some form of plant. Developed through
discussions with EPA, the graph represents a best esti-
mate of the municipal decision to build a resource recov-
ery plant based on a general knowledge of current alter-
native disposal means and costs.
The vertical axis of the graph is a percentage scale
and indicates what percentage of the tons of solid waste
available to be recovered through resource recovery will
be recovered through municipally owned plants given
various subsidies and their impact on the net annual cost
per ton of operation. Exhibit 11-17 gives the numerical
results used in later calculations. The total available
solid waste is assumed to be the tons of solid waste pre-
dicted to be served through incineration, or the tons
which would be served through any disposal method other
than close-in landfill. The graph uses cost per ton as
the horizontal axis and the deciding factor as to what
percentage of the total available solid waste will be
processed through resource recovery systems given differ-
ent costs per ton. The cost per ton figures used were
average costs per ton of the six plants taken as a com-
posite.
The decision curve itself was developed to reflect
a number of factors and forms the classic "S" shaped
curve typical of this type of analysis. The extent of
present activity in resource recovery by cities and stateh
and EPA's projections of this activity in the future pro-
vided a benchmark to judge the relative level of municipal
-60-
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EXHIBIT 11-16
MUNICIPAL HFCISION CURVE
H
H
Vi
a
H
100%
80%
W
*3
ca
<
i ^
-------
interest for the "no-subsidy" case. While this approach
allows a straight-forward estimate of plant construction,
the results must be considered "ballpark" figures since
it is almost impossible to quantify and predict the exact
nature of municipal decisions of this type.
The results of the prediction appear in Exhibit II- 17
which shows the percentages of the total solid waste
available to be processed and the number of plants con-
structed under the "no-subsidy" case and the six subsidy
cases as well as the amount of materials and energy re-
covered through the projected plants. It should be noted
here that no explicit consideration is taken of any learn-
ing curve effect for those plants which are built in the
later years.
In order to predict the amounts of materials and
energy to be recovered through the projected plants the
six models were assumed to be combined in one composite
type plant with average percentages of the various out-
puts. The combination of the six plants leads to the
following percentages of the total tons processed going
to the various materials and energy. The different kinds
of energy recovery systems were analyzed in terms of
BTU's per ton of solid waste processed.
RECOVERY RATES FOR COMPOSITE PLANT
Paper 2.5%
Glass 2.8%
Ferrous Metals 4.1%
(both before and
after incineration)
Non-Ferrous Metal 0.2%
Energy (£.8 x 1012BTU's
per 1.8 million tons
processed)
The paper fraction recovered appears small consider-
ing its high (37 percent) proportional representation in
the waste stream due to the fact that only one of the
recovery systems studied had any paper recovery and that
the figures are on a dry weight basis. The ferrous
fraction recovered is relatively significant because four:
of the six systems retrieve this resource in some1 form cr
-62-
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EXHIBIT 11-17
RESULTS FROM DECISION CURVE
Subsidy
No Subsidy
30% of Sales
$6/Ton Sold
25% C.G.
50% C.G.
75% C.G.
75% Credit
Percent*
38.7
73
51
58
76
89
62
NO. Of
Plants
Built
1975
11
21
15
17
22
26
18
1980
(Cumulative)
20
38
27
30
40
46
32
1985
35
65
47
52
68
80
55
*These percentages indicate the percentage of the total
available solid waste which will be processed through
municipally-owned resource recovery plants.
-63-
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other. Again it should be recognized that these recovery
rates releot a composite of six plants not a representa-
tion of the potential of recovery of any of these out-
puts from any one plant.
Results of Analysis
The results of the application of the prediction
methodology just described are presented in Exhibit 11-18
which follows. Additional data, breaking the results down
by year are presented in Appendix E.
There are some observations which should be made con-
cerning the results presented in the following exhibit.
The pattern of recycling brought about by these sub-
sidies is very different from that resulting from demand
(user) subsidies. Energy recovery predominates over materials
recovery because resource recovery plant technology is
heavily weighted toward energy recovery at the present time.
Windfall is high, ranging from 44 to 71 percent. This
results from the EPA prediction that roughly 35 plants
would be built by 1985 without a subsidy.
Comparison of the various subsidies is difficult be-
cause they are not equivalent level subsidies. Were all
of the subsidies made equivalent, the incremental recycling
induced and the incremental cost per ton for all of the
subsidies would be roughly the same. A choice between
subsidies would have to be made on the basis of other criteria,
such as the mix of plant types encouraged by the different
subsidies. A $5 per ton subsidy, for example, would apply
only to material output, and would therefore tend to en-
courage plants which emphasize materials rather than energy
recovery.
It should .again be emphasized that these are "ballpark
predictions. The difficulty in understanding and quantify-
ing the municipal decision-making process as well as the
'still uncertain economics of the plants-make high con-
fidence predictions almost impossible.
-64-
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EXHIBIT 11-18
SUMMARY RESULTS OF SUBSIDY TO MUNICIPAL RESOURCE RECOVERY PLANTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Incremental
Resource
Recovery
Paper (000 tons)
Cans (000 tons)
Glass (000 tons)
Energy (10*2 BTUs)
Total Cost to
Federal Government
[ ($000,000)
Incremental Cost
($/ton)
Incremental
Increase in-Resource
Recovery (%)
Windfall (%)
Incremental Number of
Resource Recovery
Plants
30% or
Sales
1,500
2,460
1,678
221
70
4.96
88
53
30
$6 per
Ton
Sold
593
970
665
90
52
3.67
35
74
12
Construction Grant
(% Federal Share)
. 25%
850
1,390
948
128
128
2.13
50
67
17
50%
1,660
2,718
1,846
256
334
5.57
97
52
33
75%
2,215
3,633
2,475
334
590
9.83
130
44
45
75%
Credit'
1,059
1,650'
1,125
•1:52. .
• f*
232
8.69
62
64
20
I
ot
in
-------
Notes to the Tables.
Note 1. Incremental Resource Recovery
This is simply the result of the prediction method-
ology previously described. Incremental recycling is
that from plants built over the baseline which is shown
below.
Baseline
Paper (Total) 1,705,000 tons
1976-1985
Cans 2,793,000 tons
Glass 1,905,000 tons
Energy 258 x 10I2 BTU
Plants 35
Note 2. Total Cost to the Federal Government
The cost of the output subsidies^ (30% 9ft Sales and
$6 per ton) equa.1 the total .salej of the plant times fhe
amount of the subsidy. In the case or'the per-ton sub-'
sidy ($6 per- ton) energy sales are ex«a^e^r,Ih£..jcq.s£i.1o.
the construction grants equals 'the Federal" share 'of
capital costs pf the plants. The cost of the credit sub
sidy equals the 75% of the interest expense over the
period 1975-2005.
Note 3. Cost Per Incremental Process Ton
Because both energy and materials are recovered, ti-.
incremental cost is calculated using total processed ton-
nage rather than output. Thus, the figures are most im-
portant from a relative standpoint and should not be com-
pared with the user subsidy analysis. The cost per ton
equals Total Cost to Federal Government divided by the
total tonnage processed through resource recovery syste*
For the credit subsidy, the total tonnage processed
includes only the total amount over the ten year period
of the subsidy.
-66-
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Note 4. Incremental Increase in Resource Recovery
This figure equals the percentage increase in re-
covery over the baseline.
Note 5. Windfalls
The windfall is calculated by dividing the cost of
subsidizing the baseline by the total cost of the re-
source recovery plants subsidies.
Note 6. Incremental Number of Resource Recovery Plants
One measure of the success of a subsidy is the number
of resource recovery plants that would be built as a result
of its application. The number of plants listed represents
composite 1000 ton per day plants.
-67-
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APPENDIX A
USER COST MODELS
-------
Introduction
The following discussion is intended to provide the
reader with a brief background on each user industry and
to present the user cost models used in the analysis.
Paper and Paperboard
Exhibit A-l presents the flow of materials and
products in the paper industry. An old saying illustrat-
ing one of the major factors affecting recycling in this
industry is "paper is not paper is not paper." The
production process starts with two basic types of round-
wood (softwood and hardwood); processes them into approx-
imately eight major grades of pulp (sulphite, sulphate,
dissolving, soda, semi-chemical, groundwood, defibrated,
screenings); manufactures these into eleven basic grades
of paper and naperboard (newsprint, printing and
writing, packaging, tissue, unbleached kraft, solid
bleached, semi-chemical, combination); which are con-
verted and combined into a myriad of products, The
mechanics of reclassifying these products into a raw
material form that is compatible with one or more
of the basic processes are not simple.
The percentage of total wastepaper (including PCW)
as a fibrous input has declined from 36.6 percent in
1944 to 19.8 percent in 1971. The wastepaper recycled
in 1971 (10.996 million tons) may be subdivided as
follows:4
Percent of
Grade Recycled Paper
Mixed 29.6
Mews 18.9
Corrugated 31.9
High Grade Pulp Subs. 12.5
High Grade Deinking 4.5
There are a number of factors that have acted to
limit and reduce the amount of post consumer waste used
in this industry:
1. Level of Integration - Integrated mills account
for the major part of the total output — the twenty
largest account for 70 percent, the 50 largest for
90 percent. This has resulted in a production orientation
-68-
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EXHIBIT A-l
PAPEII. PAPERBCAKa. CCjayyeTlO!! PAPCT
AMD BOAim «M) HAST£ PUPEB TUM.
UHITEB STUTEC - 1070
P reduction
1
Tt
£>
1
waste Paper Znpute
Corro- Pulp Subs •
nixed Keus eaeed Utah Grades
I 7S « B19 ,
171
71(
IS I If 77 ,
140 107 It] 11!
l.«7« 1,*17 J.MS I. Ill [~~"
1_—
41 11 Cll SJ
II I 1(1 «7 1
Virgin Hoi
Pron Round
food
JS.fOO
J
Pacer
newsprint
Croundvooi
Prlrtlng.
id Pulp
proii Hood
Residues
11.700
I
I
writing
Bleiched Briatols
Packaging
Convert
Building P
Other
Fibrous
Materiala
167
1
1.109
1.240
o.eo»
1,091
4 Industrial - ...
iner t Board
Construction Paper *
Board -
Wet Hachl
Parerboard
Other Con
Confcinatl
Seal-Chen
iUnbleaehe
Bleached
3.09 2.2JS 4.010 1.017 [_
4.117
blnatlon Hoard 5.581
on Contalnei
leal Corrugi
d (raft Boa
board 1.401
tine 3. ill
rd 11.C14
BKOOrt.
In-
porte
I'"
120)
S.491J
J30
tl«)
III
(111)
14]
1141)
IS
(SB)
1 (17S1!
Total i 33.0t«_J
~l~iT
Ll-
ports
(Thousand
TDOI)
Available
' Conivnption
1
l.»2 1
1
).eoo i
1.470 !
8,520 '
1.090 1
1.114 '
1
1
1.179 !
1
1C1I
1.42«!_
1.45S 1
1
S.853I
1 1 Total!
1 L'llUtl
X
Permanent End Use
r SO Hanqinq Paper ~>
I linn Hooks. Records
1 1100 Photo,
1 200 Tab Cards. Piles
' ... Laoinates. AsphaLt-
1 lso ing. Special Indoa-
t trial
1
1
1 4279 Insulation
' l«2 Shoe Board, Table
1 in.. S^P'f0 t-inerboard,
1 1000 Panel and Hall
1 Boards
1 300 Furniture, Canes
. 1
[_ Totali 7,711 J
1!
8I
Qthvr
tfaata
Papar
Available
icr
Recovery
1
3.S52
9.800
1.410
7.120
190
4.774
4.419
14.417
3.2S2
2619) 3
Mixed
Peper
Recovered
Paper
<2
.213)
(H)
(Ml
IH)
M.O'.O)
For
13.021 J . ]
(1)
• ::.s:!
i
Oeitruetlve
Dispoeal
fkastt Streaa)
,B, fl4M
7.S69
0)
101
oi i toli<; >>
"*' J 4 i
(0)
17, JJ7
(0)
.
<
Pulps j
Subs at Corn- !;•
High 1 9aced f
aste
•a
e[
i t
^
••
Kunlclpal
Incinerator*
3.341
Sanitary Land'
(ill and
Open Du*pe
000
**IBC* Including
apirtrant l pri-
vate incinera-
tors and Indus-
trial (acillties
and rural
E17
Special disposal
such as conpost-
or expei
operatic
eligible
Recovery
mental
na.
Hesouree Planning Asaoctatee, Inc.
Aaar lean Paper Institute
Bocae
^*-»-l-^^~~^^—^^^^^^^^^—f^
i 'a* - Volunea to vaete Streaa are unknown
*K* - Bacovary ae nixed papere, Toluoes u
Reproduced Irom
b«t Bailable
-------
with a high degree of concern for the predictability of
raw material supplies thus limiting the interest in
waste paper.
2. The supply of paper waste and the practicability
of recycling varies regionally (urban area sources of
waste stock vs. rural area sources of virgin fiber).
3. The market demand for products made of secondary
fibers is decreasing. This trend has resulted from
economies of scale possible with virgin mills, the
specification set by the commercial packager or user
(not the final consumer) and the adverse economics of
paper stock mills versus wood pulp mills.
To examine the possibilities of post consumer waste
use in more depth, five segments of the industry that use
PCW were reviewed for structural, technical, economic,
and attitudinal factors affecting PCW use. These industry
segments (linerboard, corrugating medium, and folding box-
board in the paperboard industry; news and tissue in the
paper industry) represent the largest relatively homo-
geneous sectors which could technologically use secondary
fiber input.
Linerboard
In 1971 linerboard accounted for 43.4 percent of all
paperboard production and 21.5 percent of the output of
the domestic paper industry. For the past 17 years, pro-
duction has exceeded the average growth of the paperboard
industry (6.5 percent versus 3.8 percent) and it is
estimated that this growth will continue well into the
1980's.
Linerboard production is concentrated in the South
Atlantic and East South Central states. Most production
of the unbleached Kraft linerboard (98 percent of all
linerboard production) usually occurs in large integrated
mills. The-average capacity of the 40 mills producing
Kraft linerboard is approximately 800 tons per day.
In contr.ast to virgin linerboard, combination liner-
board has tafcen a progressively smaller share of the
market declining from 11.6 percent in 1961 to 2.3 percent
in 1971. Industry observers attribute most of this
-70-
-------
decline to three factors: improved economics of the new,
l$u?ge scale integrated Southern and Western paper mills;
'the higher quality and strength of the virgin-based Kraft
li'ne'rboard; and consumer preference for virgin-based
products.,
Much investment is in new, large, and relatively
efficient virgin mills. Increased use of PCW will there-
fore most likely result either from new plants as in-
creased capacity is required, or possibly from incremental
furnish to some of the large, integrated mills.
The economics of a new mill designed to use only PCW
in the production of combination linerboard are shown in Ex-
hibit Ar2. The projected mill will have the capacity to
produce 375 tons of combination linerboard per day
(135,000 tons per year) from 100 percent waste paper,
primarily old corrugated containers. The mill is assumed
to be located near sources of waste paper. Investment
required is approximatly $18 million.
'The selling price of the linerboard is $119/ton F.O.B.
mill. , It is assumed that the customer pays an additional
$4/ton freight charge, bringing the price of the realized
combination linerboard to approximately $123. The Ameri-
can Paper Institute indicates that this price would be
competitive with the price for virgin linerboard at
approximately $139 per ton.
Corrugating Medium
Virgin corrugating medium, usually Neutral Sulfite
Semi-Chemical with some chemical or waste added, has
increased in market share over bogus medium over the
past ten years (from about 72 percent in 1960 to 81
percent in 1970).
Medium production is not nearly as integrated as
linerboard production. In general, the mills are smaller,
not'geographically concentrated, and|correspond more with
population distribution than linerboard mills making them
very accessible to waste paper.
The semi-chemical process (neutral sulfite) converts
hardwood pulpwood into a special high-yield pulp used
largely for corrugating medium. The average mill has a
capacity of 250 tons per day and there are approximately
-71-
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EXHIBIT A-2
LINERBOARD MILL INCOME/COST MODEL
Annual Per Output
($000) Ton
<$)
Revenues
Sales of Combination
Linerboard (135,000
tons @ $123) 16,065 . 119.00
TOTAL REVENUE 16,065 119.00
Expenses
PCW Input Cost * 4,500 33.33
Operating Cost 8,100 60.00
Depreciation (16 yrs.
straight line) 1,125 8.33
Interest (@ 9:%) 1,620 12.00
TOTAL EXPENSES 15,345 113.67
PROFIT BEFORE TAX 720 5.33
(per year)
*-50/50 mix of old corrugated containers @ $32 per ton and
prompt at $42 iper ton.
Source: American Paper Institute (This information was
culled from a number of studies supported by
the API and updated from discussions with
Institute personnel.)
-72-
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40 semi-chemical pulp mills and 35 semi-chemical corru-
gating medium mills. In 1971 about 714 thousand tons of
waste paper, mostly old corrugated boxes, were used in
the production of corrugating medium. Corrugating medium
made from combination furnish now holds about 19 percent
of the market.
Corrugating medium is a growing sector of the paper-
board industry. The production of semi-chemical rce<3ium
has grown at the rate of 6.4% annually over the last 17
years. This sector of the paper industry offers sub-
stantial opportunities to increase demand for PCW.
In the semi-chemical production old and converting
corrugated constitute over 82 percent of the waste paper/
board used. In combination board production in general
about 44 percent was corrugated, 24 percent mixed, 18
percent news and 14 percent pulp substitutes and high
grades.
Observations which can be made about further use of
PCW in corrugating medium include the following:
First, extensive commercial use of combination medium
already exists on a nearly comparable basis with virgin
medium.
Second, medium production is not nearly as integrated
as linerboard production. The mills tend to be smaller,
not geographically concentrated, and more in line with
population distribution than linerboard.
Third, like linerboard, corrugating medium is a
growth sector of the paperboard industry, indicating sub-
stantial opportunities to increase the number of PCW
based mills as capacity additions are made.
The projected mill is designed to produce 9-point
corrugating medium using 100 percent waste paper (seventy
percent PCW). The mill has an output capacity of 300
-tons per day (105,000 tons per year) and is assumed to be
located near the customers and sources of secondary fiber
(primarily old corrugated containers) of a large Mid-
western city. Investment required for a new mill in
1972 was approximately $18.6 million. (See Exhibit A-3)
-73-
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EXHIBIT A-3
CORRUGATING MEDIUM INCOME/COST MODEL
1 per
Annual Ton
($000) ($)
Revenues
Sales of corrugated medium
(105,000 tons @ $123.-00) 12,915 123.00
Expenses
Wastepaper raw materials**
PCW wastepaper (81,,200 tons
@ $32) 2,598 24.74
Prompt wastepaper (34 ,,800
tons @ $42) 1,4'62 13.90
Operating 4,020 38.29
Depreciation (16 year-
straight line) 1*163 11.08
Interest (8 9%) 1*674 15.94
TOTAL EXPENSES 10,917 103.97
PROFIT BEFORE TAX 1,998 19.03
**116fOOO tons total, principally old corrugated contain-
ers. Industry source estimates 70 .percent obsolete,
30 percent prompt. Freight at $5.00 per ton average is
included in the wastepaper prices.
Source; RPA estimates from confidential industry source.
-74-
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Folding Boxboard
Folding boxboard made from virgin fiber has increased
its market share from 24 percent to 39 percent between
1960 and 1970. In the same period, market share of
combination boxboard has declined from 76 percent to
61 percent. Indications are that this trend will continue,
Folding boxboard is a relatively low growth segment
of the paperboard industry, showing only a 2.1 percent
increase in total output, from 3,375,000 tons in 1961
to 4,090,000 tons in 1971.
A number of factors have contributed to the decline
in market share of combination folding boxboard. Chief
among these is its adverse technical performance relative
to virgin material. Also, there has been an increased
sensitivity to potential adverse health effects in food
packaging made from contaminated PCW (PCS problem). A
shift to plastic and novelty containers by former users
of combination folding boxboard has also contributed to
the decline.
Economically, combination boxboard can compete
adequately with the virgin material; however, the
marketing factors mentioned above appear to be a signifi-
cant constraint.
In 1972, a new combination boxboard mill producing
"newsback" grade board of a caliper of .020 inches
would have had the following economic and performance
characteristics.
The mill would produce 300 tons per day (105,000
tons per year). It is assumed to be located near a major
city where wastepaper could be delivered at a transporta-
tion cost of $6/ton. Investment required for a new mill
is approximately $25,000,000. (See Exhibit A-4)
Newsprint
Domestic newsprint production is concentrated in
the Southern region of the U.S., with over 54 percent
of 1971 capacity located in the 16 states of this region.
The area with the next highest concentration is the
mountain Pacific region, with over 25 percent of the
total capacity.
-75-
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EXHIBIT A-4
FOLDING BOXBOARD INCOME/COST MODEL
Revenues
Expenses
Annual Per To"
($000) <$)
Sales of newsback (105,000
tons @ $165.0'O) ' 17,300 165.OP
Wastepaper
PCW wastepaper @ $27 2,500 23.fi'1
Prompt wastepaper @ $40 1,264 12.0?
Operating Costs (including
labor, chemicals, S, G&A, and all
other costs) 8,460 80.5/
Depreciation (16 yrs., straight
line) 1,560 14.8:
Interest (@ 9%) 2,250 21.4i
TOTAL EXPENSES 16,034 152.6"'
Profit before tax 1,266 12
Source: RPA estimates based on data from Midwest Research r.i.
•study, "Resource Recovery - The State of Technology"
-76-
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Exhibit A-l points out that in 1971, approximately
68 percent of domestically-used newsprint was imported.
Over 97 percent of these imports came from Canada.
Most U.S. newsprint production takes place in 25
mills with capacities ranging from 300 to 500 tons per
day. About 2 million tons of the newsprint consumed in
the U.S. comes from mills that are owned or controlled
by American newspaper publishing companies.
It is now possible to de-ink old newspapers and
reconstitute the fibers into new newsprint. To date,
only one domestic producer, The Garden State Paper
Company, has made extensive use of the technique. Yearly
its three facilities process 350,000 tons of the approx-
imately three and one half million tons of newsprint
produced in this country. Other companies have recently
announced plans to implement the process.
In the short run, at least, markets are "locked in".
Publishers own their sources of supplies and provide
20 percent of domestic consumption. Much of the virgin
mill capacity in the South is new and large. However,
since consumption is growing at 5 percent annually,
opportunities exist for installing PCW mills to satisfy
new capacity needs.
Our newsprint mill is located near a large urban
area that can provide both sources of waste news and
customers for newsprint. (See Exhibit A-5)
The mill will use 100 percent old news as the
fiber raw material. The plant requires $24 million
investment. This facility can accept baled old news, de-
ink it, and produce new newsprint as a final product.
Tissue
Tissue production in the United States is heaviest in
the two adjacent regions of the Mid-Atlantic and East
North Central States, with over 50 percent produced here.
The low cost of the product and its light weight make
it advantageous to locate mills close to the areas of
highest population density.
Tissue production has grown at the rate of 5.1 per-
cent annually over the past 17 years and now stands at
3,697 thousand tons (1971).
-77-
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EXHIBIT A-5
NEWSPRINT INCOME/COST MODEL
Annual Per Ton
(SOOO) ($)
Revenues
Sales of newsprint (110,000
tons 8 $150) 16,500 150.00
Expenses
Wastepaper raw materials*
PCW News (107,900 tons
@ $35.08) 3,785 34.41
@ $35.08)
Other materials and direct costs
Selling, General $ Administrative
Depreciation (16 years, straight
line)
Interest (@ 9%)
TOTAL EXPENSES
PROFIT BEFORE TAX
775
7,206
385
1,500
2,160
15,811
689
7.05
65.50
3.50
13.64
19.64
143.74
6.26
*RPA estimates 130,000 tons old news total will be
divided into 83% obsolete, 17% prompt. Freight at $5.08
per ton average is included.
Source: The figures come from a confidential, knowledgable
industry source.
-------
EXHIBIT A-6
PCW TISSUE MILL INCOME/COST MODEL
Annual Per Ton
($000) ($)
Revenues
Sales of tissue pulp (17,375
tons @ $156) 2,711 156.03
Expenses
Ledger wastepaper (22,890
tons @ 76% yield)
Chemicals
Labor and Service
Utilities and Waste Treatment
Depreciation (16 yrs., straight
line)
Interest (@ 9%)
TOTAL EXPENSES
PROFIT (LOSS) BEFORE TAX
1,877
131
285
256
153
207
2,909
(198)*
108.03
7.52
16.40
14.75
8.81
11.91
167.42
(11.40)*
*The loss reflects a mismatch between the price of waste
paper which generally was not controlled as closely as
the price of tissue pulp in 1972. Since the evaluation
of the impact of the subsidies is in relative terms,
absolute profit or loss was not that significant.
Source; Confidential Industry Source.
-79-
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There are approximately 100 mills producing tissue in
the U.S., and although some mill capacity may reach over
600 tons per day, the average mill produces between 100
and 110 tons per day.
In 1971 about 1,054 thousand tons of waste paper were
used in tissue production. About 90% of this (884 thou-
sand tons) came from pulp substitutes and high grade
waste paper such as uncoated milk carton overruns,
stampings from cup stock base, and other conversion
plant waste paper. These high grades need almost no
processing and are simply repulped and screened. In
certain tissues, it is possible to use waste papers of
lower quality, such as old newsprint and containers.
Geographically, tissue producers generally are in
good locations to receive PCW. Also, there are no major
technical problems in using PCW in tissue products. The
limitation is in getting an adequate supply of a specific
quality. 'Product performance as well as health consider-
ations cause many tissue manufacturers to shy away from
PCW.
A new tissue pulp mill produces 17,375 tons of pulp
made from 100 percent PCW ledger wastepaper. The selling
price for tissue pulp is based on the market price of the
virgin pulp replaced. Investment required is $2,300,000.
(See Exhibit A.-6.)
Steel Industry
A recent study by the EPA staff has identified five
potential markets for post-consumer cans. In all but
the copper precipitation industry, little experience
exists with the use of these cans. In most cases, there
are some technological problems and substantial logistical
problems working to limit recycling.
The analysis focused on two of the more promising
alternatives, the use of post-consumer cans as part of
'the scrap charge to electric furnaces and as inputs to
the "detinning industry. Exhibit A-7 presents the
overall flow of materials in the industry.
Mini-Mills
Mini-mills typically using electric arc-type furnaces-
-80-
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EXHIBIT A-7
29,130 Purchased Sere?
«2% of Scrap Consu.-ed)
1970 IRON AKO STEEL INDUSTRY
(Thousand Tons)
Prompt Scrap 28,000
?jrc!-.ased Scrap (701 of Scrap Consumed)
Purchased Scrap (64% of Scrap Consumed)
4.700 Auto=oSi
Scrap (3,500 N
Bundles) .8
Shredded Scrap,
Sources: Institute of Scrap Iron and Steel
Bureau of Mines
Resource Planning Associates
39,700 Purchased Scrap
•1980 Forecast of domestic iron and steel
consumption and obsolete scrap generation.
-------
have capacities usually ranging between 10 and 35 tons per
heat with total time cycle averaging about five hours.
Mini-mills operate in a supply-sales radius of
200 to 300 miles. In the 20 years since their establish-
ment, about 45 mills have been built with total annual
capacity of over 6 million tons of carbon steel pro-
ducts.
Mini-mills currently have the capacity for using
over 6 million tons annually of ferrous scrap. However,
almost all of the scrap now used comes from industrial
sources or auto shredders within a 300 mile radius of
the mill. This scrap typically includes #1 and #2 heavy
melting, #1 and #2 bundles, shredded scrap, turnings,
and #1 bushelings. There has been virtually no use of
undetinned steel cans from municipal refuse.
'The principal constraint associated with undetinned
cans is the potential problems caused by tin and lead.
Lead tends to migrate to the bottom of a melt and
damage furnace linings, and tin, which is soluble in
steel, decreases product ductility and leads to cracking
and tearing during forming operations. It has been
estimated that a 5% charge of undetinned can scrap could
be used in the production of reinforcing bars (low
quality steel).
The economics of a hypothetical mill using PCW are
shown in Exhibit A-8. The proposed mill would use an
electric furnace to produce 100,000 tons per year of re-
bars or structurals from 135,400 input tons of scrap. . The
required investment for such a mill would be ?10 million.
Such a mill would include the following equipment and
facilities: an electric furnace, a billet continuous
caster, a billet reheat furnace, a rolling mill, in-
process storage, a warehouse, and laboratories.
Detinners
The detinning industry consists of five companies
with processing operations in fourteen locations. The
two largest, M & T Chemical and Vulcan Materials, are
approximately the same size and represent over 90 percent
of the industry's sales. M & T, a subsidiary of the
American Can Company since 1961, has six plants located
in Maryland, Indiana, New Jersey, Washington, California
-82-
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EXHIBIT A-8
MINI-MILL INCOME/COST MODEL
Annual Per Ton
($000) ($)
Revenues
Sales of rebar (100,000 tons
@ $130) 13,000 130.00
Expenses
i
Raw Materials (Total) 4,856 48.86
Incinerator bundles (10,400
tons @ $14) 146 1.46
Detinned cans (30,000 tons
@ $35) 1,050 10.50
Auto scrap (70,000 tons @ $38) 2,660 26.60
Home and other purchased scrap
(25,000 tons @ $40) 1,000 10.00
Non-classified processing costs
(@ $7/output ton) 4,700 47.00
Selling, General & Administrative
(8.5% of sales) 1,100 11.00
Depreciation (20 yr., straight
line) 500 5.00
Interest (@ 9%) 900 9.00
TOTAL EXPENSES 12,056 120.56
PROFIT BEFORE TAX 944 9.44
Source: RPA estimate from discussions with Florida
Steel Corporation.
-83-
-------
and Florida. M & T processes about 350,000 gross tons of
tinplate scrap yearly. Other detinners have plants in
Pennsylvania, Wisconsin, California and New Jersey.
Detinning has not grown substantially since 1960.
Tonnage of tinplate processed in 1960 and 1971 equalled
700,000 and 752,000 gross tons, respectively. Tin re-
covery has dropped from 3,275 to 2,369 gross tons over
the same period because of the thinner coatings of tin
on cans and the introduction of tin-free steel cans with
durable lacquers replacing the tin. Currently, most
detinning facilities are operating below capacity.1
Currently almost all tinplate scrap comes from in-
dustrial sources. In 1972 only 3000 gross tons of tin
cans were processed by M & T, yielding 6 pounds per ton
of reclaimed tin.
The detinned steel scrap, when baled, is a high
grade material for producing new steel products. When
shredded, it provides a clean, uniform and reactive in-
gredient for reclaiming copper by the precipitation pro-
cess. It sells at or near the price for #1 bundles.
There are several factors which inhibit the use of
post consumer cans in the detinning industry. As noted
above, the majority of raw materials into the detinning
plant were prompt can scrap; only 3,000 tons of post
consumer cans were processed in 1971. The factors
which inhibit greater use are outlined below.
. Presence of aluminum: Aluminumiin the municipal
can fraction adversely affects the production
process. The caustic detinning solutions
preferentially attack the aluminum, resulting
in large quantities of processing chemicals
being used.
. Physical form: Cans for detinning must be clean
and have a high area to weight ratio. Thus,
the cans cannot be baled or balled during
shredding and must be cleaned prior to detinning.
. Non-incinerated: Incinerated post consumer cans
cannot be detinned.
Steel Can Study - R.R. Div. U.S. EPA, June 1973.
-84-
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EXHIBIT A-9
DETINNING PLANT INCOME/COST MODEL
Revenues
Annual Per Ton
($000) ($)
Sales of #1 bundles
(30,000 tons @ $30) 900 29.88
Sales of Tin (225,000 pounds
§ $1.75) 394 13.08
Total Revenues 1,294 42.96
Expenses
Raw Materials
Metal cans (30,113 tons
@ $20)* 602 20.00
Processing Costs (labor,
caustic soda, fuel) 300 9.96
Depreciation (15 years, avg.) 100 3.32
Interest (@ 9%) 135 4.48
TOTAL EXPENSES 1,137 37.76
PROFIT BEFORE TAX 157 5.20
*The $20/ton price for cans assumed a 1.5 percent aluminum
content. If there were a .75 percent'aluminum content,
the detinner would be willing to pay $25/ton. If the
cans have a 3 percent aluminum content (tops and bottoms)
then the detinner would pay only $10-15/ton because his
processing costs would rise between $5 and $10.
Source: RPA estimate based on confidential industry sources.
-85-
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For an example of the economics of detinning, we
worked with a detinner to estimate the costs of a new
hypothetical plant using PCW cans. As yet, no such
plant has been built. (See Exhibit A-9.)
The projected detinning plant buys 30,113 tons of
cans per year, separates the tin from the steel, and
sells 30,000 tons of steel and 225,000 pounds of tin.
Investment required is $1,500,000.
Glass
Glass manufacturing is divided into three components:
container, flat and pressed/blown. Container glass
accounts for about 73 percent of total industry pro-
duction, with flat and pressed/blown comprising the
remaining 27 percent. In 1972 container manufacturers
produced 11.6 million tons of glass. The container seg-
ment of the industry will be the focus of this analysis
because it contributes the bulk of the glass flowing •
into the municipal waste stream.
Containers can be categorized into three main groups:
1) beverage (soft drink, beer, liquor and wine);
2) food; and 3) sundry (medicines, cosmetics, and chem-
icals). In 1972, 56.0 percent were for food and 12.9
percent for sundries. Ninety-five percent of beverage
container shipments were one way bottles.
In the United States the glass container industry
consists of 40 companies operating 120 plants. Between
1960 and 1970, glass container shipments increased 70
percent, from 157 to 267 million gross. Container ship-
ments by weight increased 75 percent during the same
period, from 6.5 to 11.3 million tons.
The future suggests an overall' increase in pro-
duction of glass containers. Between 1971 and 1975,
for example, we can expect a rise of 11 percent in
-container manufacture, from 267 to 296 million gross. And
between 1971 and 1980, we estimate a 32 percent increase
over the decade, from 267 to 352 million gross.
Glass container manufacture is a fully integrated
process in that basic raw materials are converted to
finished products at one location. Silica sand is com-
-86-
-------
bined with soda ash, burnt lime or limestone, and other
materials. The industry, historically, has looked to
plant cullet as a vital component in the manufacturing
process.
Cullet,with a lower melting temperature than the mix-
ture of virgin raw materials,tends to reduce overall
energy needs. The temperature decrease also results in
an extended furnace life.
Experience with municipal cullet has varied widely.
Recently some manufacturers have developed techniques
for increasing the ratio of cullet to other raw materials.
For example, one company has manufactured containers
using a mix of 15 percent in-house cullet and 85 percent
external cullet for a period of one week with good results.
This test batch was limited in time due to the lack of
a dependable supply of external cullet.
While the glass industry recycled approximately
250,000 tons of PCW glass in 1972, any plan to increase
the recycling of glass would require a means of developing
a consistent supply source. Unlike paper (with established
brokers or dealers) or ferrous (with magnetic separation),
at this time PCW glass can only be recycled through
source separation because of the lack of any automatic
color sorting.
The postulated plant uses 100- percent cullet to
produce new glass containers. Plant output is 200 gross
tons per day, with 15 percent generated as scrap cullet,
for a net yield of 170 tons per day, or 62,050 tons per
year. Investment required is $7,145,000. (See Exhibit A-10.)
-87-
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EXHIBIT A-10
GLASS BOTTLE PLANT INCOME/COST MODEL
Total
(15% Home Gullet)
(85% PCW Gullet)
($000)
Revenues
Sales of glass containers
(62,050 tons @ $140)
Expenses
Raw Materials
Home cullet (10,950 tons
@ $00)
PCW cullet (62,050 tons
8,687
Per Ton
($)
140.00
@ $20)
Fuel
Labor through furnace
Other labor
Selling, General & Other
Overhead
Depreciation
Interest (@ 9%)
TOTAL EXPENSES
PROFIT BEFORE TAX
1,241
243
110
1,533
2,993
861
643
7,624
1,063
20.00
3.92
1.77
24.70
48.24
13.88
10.36
122.87
17.13
Source: Confidential Industry Source.
-88-
-------
APPENDIX B
EXAMPLE OF THE APPLICATION OF USER METHODOLOGY
-i*
-------
This appendix serves as an example of the procedure
for evaluating subsidies, in-this case, to the newsprint
segment of the paper industry. The example is presented
to provide the reader with a more concrete idea of the
procedure used to evaluate each subsidy applied to each
industry segment. The example illustrates the shapes of
the curves and provides a summary of the factors con-
sidered in their development. Exhibit B-l is presented
here as a roadmap to the analysis.
The procedure followed yields as a final result
the incremental amount of PCW-based capacity that will
be added in a given year. Five pieces of data are needed
to perform the calculation.
1. Internal Rate of Return (IRR)
with Subsidy
2. Investment Profile Curve Exhibit B-2
3. Supply/Price Risk Curve Exhibit B-3
4. Experience Curve Exhibit B-4
5. Maximum Potential Impact
Curve Exhibit B-5
Calculation
Step 1 - Apply Subsidy to Cost Model
This calculation shows that the new IRR with
subsidy would equal 35%.
Step 2 - Apply IRR to the Investment Profile Curve.
Entering the curve at 35% IRR indicates that 27.5% of
capacity needs would be met by PCW-based plant invest-
ments.
Step 3 - Calculate Maximum Supply/Price Risk Potential,
The calculation represents the % change in IRR that
would result if the price of the subsidized PCW
rises 25%. In the case of our newsprint plant
model, the IRR would drop to 28%. The Risk Potential
then is calculated as follows:
-89-
-------
EXHIBIT B-l
USER IMPACT ANALYSIS
Step 1
Apply Subsidy
to
Cost Model
Step 3
Calculate Maximum
Supply/Price
Risk Potential
Step 2
Apply IRR to
Investment Profile
IRR
/% of potential in-
( vestment which would
\^ go to PCW
I
)
\
f
Step 4
Apply A IRR to
Risk Profile
Step 5
Multiply
^ investment in PCW-
Dased -equipment
% of investment from
step 2 which would
actually go to PCW
Step 6
Apply to Experience
Curve
(1st
iteration)
C investment in PCW-"
based equipment
(subsequent
iterations)
Step 7
Apply to Maximum
Potential Subsidy
Impact Curve
Activity
Millions of
[tons of capacity^
to switch
O-
Output
Determine Equilibrium Solution
Amount of Subsidy-
Induced Recycling
-90-
-------
35% - 28% =20% IRR change
35%
Step 4 - Calculate Supply/Price Sensitivity.
Entering the Supply/Price Risk Curve at 20% yields
a 68% figure. This figure means that, given the
price/supply risks associated with use of secondary
material inputs to production, 68% of capacity needs
would be met by PCW-based plant investments.
Step 5 - Multiply Step 3 by Step 4.
The result from Step 3 is multiplied by the result
from Step 4 to yield (68% times 27.5%) 18.6%.
Therefore, given the general business risks and
price/supply risk, 18.6% of users with capacity
needs would choose PCW based investment.
Step 6 - Apply Experience Curve.
Entering the curve at 18.6% experience level, the
result is an experience factor of 1.38. Therefore
from 1975-1980 due to experience gained previously,
38% more capacity need will be met by PCW-based
capacity than in the pre-1975 period. To calculate
the 1980-1985 percentage for PCW-based capacity,
enter the curve at 25.6% experience level (18.6 x 1.38).
Step 7 - Apply Capacity % to Maximum Potential
Subsidy Impact
The maximum potential impact (the verticil distance
between production requirements and effective
capacity) on the curve is 1.5 million tons. Thus,
considering growth in the industry and rate of
obsolescence of capacity, 1.5 million tons of new
capacity will have to be added in 1975. Of this
capacity, 25.6% (from Step 6) will be PCW-based.
Therefore, 385,000 tons of PCW-based capacity would
be induced by the subsidy.
-91-
-------
EXHIBIT B-2
NEWSPRINT GENERAL BUSINESS RISK CURVE
100%
75%
4J
•H
o u
•P P<
•P, O
C-P
0)
u
n
0)
P4
50%
25%
0%
25% 50% 75% 100%
Internal Rate of Return (%)
-92-
-------
100%
EXHIBIT B-3
PRICE/SUPPLY RISK PROFILE
75%
x:
u
4J -P
•H 3
* 0,
w c
M
-P
c &
(U U
u &
14
0) O
Pi -P
50%
25%
0%
25 50 75
% Change in.IRR
100
-93-
-------
EXHIBIT H-4
NEWSPRINT EXPERIENCE CURVE
100%
0;
d
H
o
-p
o
-p
•H
£
en
o
-M
-p
c
8
M
0)
(X
50%
30% -rt
20%
10%
8%
6%
4%
2%
i--^l •=!= :-• K:Ti ^^
_r. ... t-,-.l . . U-1 ', .^.^ . . • t _;....
-*~t. * flTT^r L^CLHIin
i^f " fLT^ ,"' ;^ 1""^
I L_m, ..r ' l\^ r -"t • : • -^^..- ~ mrr~ • - —y_ _ • ^-- *—*-
=rrrr^ t rfr^t^rnszirrrrr-:
" ".. r~ ~' :"' H-T
v- T- :HI^i:—f—-•—F--
1%
I IS '2 2j
MULTIPLICJETION FACTOR
S • / I S It
-94-
-------
EXHIBIT B-5
MAXIMUM POTENTIAL IMPACT CURVE
NEWSPRINT
6
01
c
£
-------
APPENDIX C
DETAILED RESULTS OF USER SUBSIDY ANALYSIS
-------
EXHIBIT C-l •
POST CONSUMER WASTE USE
'30 PERCENT OF PURCHASE PRICE SUBSIDY
CO
w
I
EH
o
o
o
H H
CO H
< *
« W
H
U
to
3 EHO
O S EH
fa* |J ^^
rt &4 o
o
§£~
H W EH
3Sg
W U EH
gss
en
D
H C
o
Wo
H
W
s
, o
.1 Q.
<
O 0«
E-" H
}H
Q
H
CQ J3
D W
b in co
O w g
> o
o
o
H
Q H O
H > O
H 03
*
EH Fn
U O Q
< W
fti w in
Si co <
S:
CJ
OS «
EH CC
W 3
D O
Q EH
a o
H O
o
0
n
I
PAPER
CANS
GLASS
CONTAINERS
t
{
|
1975
1980
1985.
1975
1980
1985
1975
1980
1985
8258
9509
10957
86
116
210
261
333
425
82
151
263
135
246
431
92
168
294
8340
9660
11220
221
362
641
353
501
719
1130
3607
5895
262
567
754
53
157
248
252
540
840
NA
NA
NA
NA
NA
NA
9722
13807
17955
483
929
1395
406
658
967.
-------
EXHIBIT C-2
INCREMENTAL INDUSTRIAL USAGE OF POST CONSUMER WASTE
SUBSIDY: 30% CASH
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
1935
2488
3041
3594
4147
4665
5182
5700
6217
6735
43705
CANS
(000 tons)
323
384
445
506
567
604
642
679
717
754
5620
GLASS
(000 tons)
74
95
115
136
157
175
193
212
230
248
1635
-97-
-------
EXHIBIT C-3
SUBSIDY COST AND EFFECTIVENESS
30 PERCENT OF PURCHASE PRICE SUBSIDY
I
\o
00
PAPER
CANS
GLASS
TOTAL
COST TO
GOVERNMENT
($000)
1976-1985
1,289,365
47,319
42,018
1,388,702
PERCENT
WINDFALL
%
Avg.
74.42
42.63
76.65
INCREMENTAL
RECYCLING
(000 TONS)
1976-1985
43,705
5,620
1,635
COST PER
TON
$
Avg.
29.50
8.42
25.70
-------
EXHIBIT C-4
POST CONSUMER WASTE USE
$6 PER TON OF INPUT SUBSIDY
03
5
8
o
0
o
gg
H rt
^ S
M §
CO M
< «
CO CO
W *-+
% 2
8Bg
en <
W ^ o
2 ft o
o
W X*"
2 PS
H W EH
W Bft
W U EH
< W P
PQ « O
• i in
tn &
5;
H C
0
W 0
H
j rj
w tn
en D
u
EH H
*•
Q
M
en EH
cn §
fc, to co
O W 2
> o
EH 2 EH
U H
< 0
ft S o
s wo
H 2J *-
in •
2 O
mm M EH
>< K o
QUO
M > O
CQ 2
D H in
cn EH
h U •<
O ft 1-3
ft'
0 O O.
ft M cn
H P «
Sj
ft
<± *-*
r™* ' *
EH CO
P O
!•» X^
2 o
M O
O
•J —
< r
O cn
EH P
I
vo
10
PAPER
CANS
GLASS
CONTAINERS
1975-
1980
1985
1975
1930
1985
1975
1980
1985
8258
9509
10957
86
116
210
261
333
425
82
151
263
135
246
431
92
168
294
8340
9660
11220
221
362
641
353
501
719
599
1899
3101
407
872
1194
28
83
130
117
265
419
NA
NA
NA
NA
NA
NA
9056-
11824
14740
628
1234
1835
381
584
849
-------
EXHIBIT C-5
INCREMENTAL INDUSTRIAL USAGE OF POST CONSUMER WASTE
SUBSIDY: $6/TON CASH
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
lt)06
1295
1585
1874
2164
2435
2706
2978
3249
3520
22812
CANS
(000 tons)
500
593
686
779
872
936
1001
1065
1130
1194
8756
GLASS
(000 tons)
39
50
61
72
82
92
102
111
121
130
861
-100-
-------
EXHIBIT C-6
SUBSIDY COST AND EFFECTIVENESS
$6 PER TON OF INPUT
i
M
O
H
PAPER
CANS
GLASS
TOTAL
COST TO
GOVERNMENT
($000)
1976-1985
728,712
77,586
37,374
843,672
PERCENT
WINDFALL
%
Avg.
81.32
32.27
86.18
76.94
INCREMENTAL
RECYCLING
(000 TONS)
1976-1985
22,812
8,756
861
COST PER
TON
$
Avg.
31.94
8.86
43.41
-------
EXHIBIT C-7
POST CONSUMER WASTE USE
25 'PERCENT INVEST?'.ENT TAX CREDIT SUBSIDY
CO
p*
O
EH
o
o
o
*-*
W O
25 53
H H
H 2
CO W
n co
w —
CJ CO
pj Z
0 EH 0
O J2 EH
CO ft.
W ^1 0
X ft 0
o
K ^i «-^
g p;
H W En
j ^ 3
w 6 ft
CO CJ EH
< W 3
cq K 0
1 CO
CO S
D P
J5
H O
O
E4 0
H
^ W
W W
CO D
•a;
W S
O
^1 C^
EH >H
O «
EH EH
^4
a
H
CO EH
g w
CO S
EH *-*
fa CO CO
0 W E
> O
EH K EH
CJ H
< 0
ft So
2 WO
H ^l ^"^
CO
so
IH EH
•• CJ
^1 P^ O
OHO
H >0
CQ —
CQ &
D H CO
CO EH
fa CJ rt
O ft M
ft
EH fa
CJ O Q
ft H CO
S CO <
H D P3
QJ
ft
^|
EH CO
CO !2
D O
Q EH
23 O
M O
0
3~
EH W
O CO
EH 3
O
ro
PAPER
CANS
GLASS
CONTAINERS
1975
1980
1985
1975
1980
1985
1975
1980
1985
8258
9509
10957
86
116
210
261
333
425
82
151
263
135
246
431
92
168
294
8340
9660
11220
221
362
641
353
501
719
603
1935
3156
353
689
955
60
190
302
117
265
419
NA
NA
NA
NA
NA
NA
9060
11860
14795
574
1051
1596
413
691
1021
-------
EXHIBIT C-8
INCREMENTAL INDUSTRIAL USAGE OF POST CONSUMER WASTE
SUBSIDY:
25% INVESTMENT TAX CREDIT
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
1016
1312
1608
1904
2200
2475
2750
3025
3300
3575
23165
CANS
(000 tons)
420
487
555
622
689
742
795
849
902
955
1016
GLASS
(000 tons)
86
112
138
164
190
212
235
257
280
302
1976
-103-
-------
EXHIBIT C-g
SUBSIDY COST AND EFFECTIVENESS
25 PERCENT INVESTMENT TAX CREDIT SUBSIDY
PAPER
CANS
GLASS
TOTAL
COST TO
GOVERNMENT
($000)
1976-1985
304,795
22,826
19,238
346,859
PERCENT
WINDFALL
%
Avg.
61.0
30.55
54.79
INCREMENTAL
RECYCLING
(000 TONS)
1976-1985
23,165
7,016
1,976
COST PER
TON
$
Avg.
13.16
3.25
9.74
-------
EXHIBIT C-10
POST CONSUMER WASTE USE
CO
2
O
EH
O
*— *
w y
H M
i-3 S!
M §
M H
S*
IO
75
pa
u
«
o
o
£0
pj
K
w
2
H
i^
£3
1
PERCENT
^^
M
- &
EH O
S EH
rf ^^
3 3
ft 0
o
W EH
K* P
O ft
U EH
to
D
jg
M
H
J5
H
i_3
£3
CO
3
»^
^
g
CREDIT
CO
P
c
o
o
*•»
W
CO
D
U
0$
SUBSIDY
^
Q
H
to
«
to
&
EH
U
1
£4
^
pj
3
£^
(O
H
55
H
|
^ta^
CO
§
E-«
O
0
• •
>t
Q
M
CO
CD
IO
o
EH
O
ft
H
a:
M
>
g5
H
^f
ft
CT,
O
w
w"
o
EH
0
0
O
«w^
CO
*2j
3
ft
Q
CO
r>
ft
^j
Pi -~»
EH CO
Cti 2
» O
Q EH
250
H 0
O
H "-'
EH P4
O CO
H D
O
01
I
PAPER
CANS
GLASS
j CONTAINERS
L ..„..
1975
1980^
1985
19^75
1980
1985
1975
1980
.
8258
9509
10957
86
116
210
261
333
425
82
151
263
135
246
431
92
168
294
8340
'9660
11220
221
362
641
353
501
719
770
2430
3973
313
653
913
36
93
146
161
355
560
NA
NA
NA
NA
NA
Nfc
9271
12445
15753
534
1015
1554
389
594
865
-------
EXHIBIT C-ll
INCREMENTAL INDUSTRIAL USAGE OF POST CONSUMER WASTE
SUBSIDY: 75% USER CREDIT SUBSIDY
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
1302
1673
2043
2414
2785
3135
3484
3834
4183
4533
29386
CANS
(000 tons)
381
449
517
585
653
705
757
809
861
913
6630
GJASS
(000 tons)
47
59
70
82
93
104
114
125
135
146
975
-106-
-------
EXHIBIT C-12
SUBSIDY COST AND EFFECTIVENESS
75 PERCENT CRFDIT SUBSIDY
o
-j
i
PAPER
CANS
GLASS
TOTAL
COST TO
GOVERNMENT
($000)
1976-1985
734,526
45,383
31,735
811,644
PERCENT
WINDFALL
%
Avg.
68.29
34.51
76.11
76.11
INCREMENTAL
RECYCLING
(000 TONS)
1976-1985
29,386
6,630
975
COST PER
TON
$
Avg.
18.65
6.85
32.55
-------
EXHIBIT C-13
POST CONSUMER WASTE USE
5 YEAR ACCELERATED DEPRECIATION SUBSIDY
CO
O
EH
C
O
o
*M*
W O
!25
H H
tl Z\
W Si
(O M
PQ CO
M —
U CO
PS g
3 EH O
O 3 EH
CO *£
H 1-3 0
K PH 0
C3
3 0£
H W EH
H O PH
n u EH
< W 3
tq « o
1 CO
co z
D e^
&
H O
o
W o
3 ^^
H
J W
W to
CO D
m &
o
<
EH X
O DH
EH EH
••
^4
D
H
(0 EH
PQ 3
D W
to g^
b CO CO
O W Z
^* o
EH 3 EH
U H
< o
FU IS O
2 WO
H 2 *-
CO
H EH
• • ^JJ
X « o
QUO
H > 0
CO »-*
« 3
D H CO
10 ^ EH
& 3
fa U rf
O P^ M
o.
EH fa
0 0 Q
< W
CU W CO
2 to flj
K D CQ
^J
CJ
PJ
>-l
K •— •
EH W
CO 3
D O
P EH
H 0
M 0
O
ni "^
<;
EH C^
EH D
O
CO
I
PAPER
CANS
GLASS
CONTAINERS
1975
1980
1985
1975
1980
1985
1975
1980
1985
8258
9509
10957
86
116
210
261
333
425
82
151
263
135
246
431
92
168
294
8340
9660
11220
221
362
641
353
501
719
323
1015
1648
193
378
542
17
50
78
30
113
186
NA
NA
NA
NA
NA
NA
8693
10788
13045
414
740
1183
370
551
797
-------
EXHIBIT C-14
INCREMENTAL INDUSTRIAL USAGE OF POST CONSUMER WASTE
SUBSIDY: 5-YEAR ACCELERATED DEPRECIATION
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
508
663
818
973
1128
1269
1410
1552
1693
1834
11848
CANS
(000 tons)
230
267
304
341
378
411
444
476
509
542
3902
GLASS
(000 tons)
24
30
37
43
50
56
61
67
72
78
518
-109-
-------
EXHIBIT C-15
SUBSIDY COST AND EFFECTIVENESS
5 YEAR ACCELERATED DEPRECIATION SUBSIDY
I
I-1
o
PAPER
CANS
GLASS
TOTAL
COST TO
GOVERNMENT
($000)
1976-1985
95,010
6,953
230
102,193
PERCENT
WINDFALL
%
Avg.
79.19
43.66
82.43
76.78
INCREMENTAL
RECYCLING
(000 TONS)
1976-1985
11,848
3,902
518
COST PER
TON
$
Avg.
8.02
1.78
0.44
-------
APPENDIX D
DESCRIPTION OF RESOURCE RECOVERY PLANTS
-------
Introduction
This section contains a brief description of the six
resource recovery systems chosen for analysis. The dol-
lar figures on investment requirements, operating costs,.
and resource recovery revenues are all extracted from
the U.S. Government document entitled "Resource Recovery,
the State of Technology", published in February, 1973.
Trends in the last few years indicate that many of these
investment figures are low, in some cases substantially
so. In addition, while cost projections often include
revenues from the sale of such recovered materials as
glass and non-ferrous metals, no full-scale operational
systems have yet demonstrated their ability to recover
these materials from mixed municipal solid waste.
The results, then, must be viewed as most accurate
only from a relative standpoint. The six resources re-
covery systems evaluated include:
1. Mechanical Processing into Saleable Raw
Materials (Black Clawson System)
2. Incineration with Residue Recovery (Bureau
of Mines System)
3. Fuel Recovery for Utility Boilers (St. Louis
Model)
4. Incineration with Waste Heat Recovery
5. Combustion with Direct Conversion of Gases
into Electricity (CPU-400 Model)
6. Pyrolysis
Mechanical Processing
This plant is based mainly on the concept developed
by the Black-Clawson Company in their Hydrasposal/Fibre-
claim system currently in operation in a pilot project in
Franklin, Ohio. This system is a complete recovery and
disposal process using mixed municipal waste as an input.
The heart of the system is the hydropulper in which all
pulpable, grindable, and friable materials such as food
-111-
-------
EXHIBIT D - 1
MECHANICAL SEPARATION
.1,000 tons per day plant)
Total Investment Required: $11,568,000
Amortized:1 $1,368,000
Fixed:2 9,570,000
Recoverable:3 630,000
Cost per
Annual Costs Ton of Input
Operating 1,320,000
Fixed 182,000
Capital 1,257,000
Charges4
Total 2,759,000 9.20
Annual Revenues
Sale of Recovered
Resources
Ferrous 245,000
Nonferrous 240,000
Glass 158,000
Paper 675,000
Total 1,328,00 4.43
Net Annual Cost of Operation: 1,431,000 4.77
1
Engineering costs, R & D expenditures, starting costs,
2
Plant and equipment.
Land, working capital.
4 -112'
-------
waste, paper, plastics and rubber, rags, glass, wood,
leaves, etc., are disintegrated and removed through an
internal screen as a water slurry. After a series of
separation steps the longer paper fibers are recovered
and short fibers and other organic materials are burned.
Steel is magnetically separated while the glass and
aluminum portions are recovered through optical sorting.
Unless they are upgraded in some way the paper fibers
recovered from this system'will most likely have a limi-
ted market due to the fact that they are considered to
be a much lower grade than any fibers recovered by pre-
separation of solid waste. Only certain grades of paper
and board can use these fibers in the paper-making pro-
cesses unless they are upgraded. Black-Clawson has de-
signed a variation of this system which burns all of the
organic fraction to produce steam rather than recovering
paper fibers.
The income statement for the model plant indicates
the sensitivity of plant economics to the sale and market
prices of the recovered materials and, therefore, the
relatively significant impact of a $6/ton or 30 percent
of sales subsidy on the economics of the system. For
instance, if the value of the recovered resource were
to be half of that expected, the net annual cost of
operation would increase by 47 percent. If neither the
paper fibers nor the ferrous fraction could be sold at
all, the cost would increase by 64 percent even without
considering the increased cost of residue disposal.
Incineration With Residue Recovery
This plant uses as a model the United States Bureau
of Mines design for recovering non-ferrous and ferrous
metals, glass, and certain ash components'after inciner-
ation. Procedures such as shredding, screening, grind-
ing and magnetic separation are employed to recover the
saleable products — steel, aluminum, and glass.
These materials are assumed to be marketable al-
though the glass aggregate is more suitable for use in
special products such as bricks, glass wood, or road
surfacing than in glass-making. The incineration pro-
cess creates an inter-metallic bond between 'tin and iron
which precludes tin reclamation and limits the market
-113-
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EXHIBIT D - 2
INCINERATION WITH RESIDUE RECOVERY
(1,000 ton per day plant)
Total Investment Required: $10,676,000
Amortized: 1,277,000
Fixed: 8,760,000
Recoverable: 639,000
Cost per
Annual Costs Input Ton
Operating 1,355,000
Fixed 175,000
Capital Charges 1,159,000
Total 2,689,000 $8.96
Annual Revenues
Sales of Recovered Resources
Ferrous 127,000
Nonferrous 240,000
Glass 168,000
Total 535,000 $1.78
Net Annual Cost of Operation: $2,154,000 $7.18
-114-
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potential of the ferrous fraction of the residue.
When considered as a total system (incinerator and
recovery unit), this plant requires a capital invest-
ment of $10,676,000 or about $35.60 per yearly input
ton. The residue recovery unit accounts for about $1.3
million of the total investment. The economics of the
system as a whole are not highly sensitive to the -re-
venues derived from the residue recovery operations;
therefore, a materials output subsidy would not have a
major impact on operating cost per ton. It should be
noted, however, that the recovery unit can be installed
on existing incinerators and its economics would be
quite different. However, there are a very limited number
of existing incinerators which would be candidates for
the residue recovery unit because many existing incinera-
tors do not meet air pollution regulations.
Recovery for Supplemental Fuel
This plant is based primarily on the prototype plant
in St. Louis pioneered by Horner-Shifrin, Inc. where
milled solid waste is burned by Union Electric Company
as a supplemental fuel in their tangentially-fired sus-
pension power burning plant furnances. In this system,
raw municipal waste is first shredded and air classified
and ferrous metals are removed from the heavy fraction
and then the light, heavily organic fraction is trans-
ported to the utility for use as a fuel.
Recovery for supplemental fuel has been successfully
demonstrated and is perhaps the most promising of the
six plant types. It has stimulated considerable interest
by municipalities, utilities, and industry.
The attractively low capital investment of
$7,577,000 or $25.26 per yearly input ton, means that
even if revenues from the sale of the waste fuel are
lower than expected the net cost of the system will be
relatively low. However, the value of the waste fuel
Has a signficant impact on plant economics and can re-
duce net annual cost to very low levels. The low capital
investment level is mainly due to the fact that only the
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EXHIBIT D - 3
RECOVERY FOR SUPPLEMENTAL FUEL
(1,000 ton per day plant)
Total Investment Required: $7,577,000
Amortized: 877,000
Fixed: 6,200,000
Recoverable: 500,000
Cost per
Annual Costs Input Ton
Operating 798,000
Fixed 116,000
Capital Charges 817,000
Total $1,731,000 $5.77
Annual Revenues
Sale of Fuel 675,000
Sale of Ferrous 245,000
Total $920,000 $3.07
Net Annual Cost of Operation: $811,000 $2.70
-116.-
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waste processing system and not the waste burning system
must be constructed since the system utilizes existing
utility boilers. In the subsidy analysis the shredded
waste was not judged as an output which would be eligible
for a plant output subsidy based on a dollar-per ton,
though it was assumed eligible for the percent of value
output subsidy. A capital subsidy would have a relative-
ly small impact on this system compared with the other
five systems described here because of its low capital
investment. (See Exhibit D - 3.)
Incineration With Steam Recovery
This plant is based on the general economics of heat
recovery as steam either from a conventional incinerator
or a high temperature slagging incinerator. Various
methods for recovering energy as steam have been develop-
ed; however, the investment and the cost of operation for
the range of types do not differ substantially.
Several municipalities have utilized convectional
waste heat boilers installed in refractory wall inciner-
ators for heat recovery. Tn Chicago, Miami, Boston,
Providence and Hampstead, Long Island, such facilities
are now in operation. Some of these municipalities have
experienced difficulties or have been unable to market
the steam.
Another technique for a steam recovery is in the
waterwall incinerator. This system has worked success-
fully in Europe where the steam is fed to power stations.
In the United States, both Braintree, Massachusetts and
Chicago's Northwest Incinerator have waterwall systems;
Saugus, Massachusetts and Nashville, Tennessee have
similar systems under consideration.
It is important to note that because of the nature
of steam distribution, any incinerator producing recov-
ered steam must be located near its customers. This
sometimes means substantially higher land costs for such
a plant than for a conventional incinerator built on the
outskirts of the city.
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EXHIBIT D - 4
INCINERATION WITH STEAM RECOVERY
Total Investment Required: $11,607,000
Amortized: $1,414,000
Fixed: 9,480,000
Recoverable: 713,000
Cost per
Annual Costs Input Ton
Operating 1,654,000
Fixed 199,000
Capital Charges 1,263,000
Total 3,116,000 $10.38
Annual Revenues
Sale of Steam 1,000,000 $3.33
Net Annual Cost of Operation: $2,116,000 $7.05
-118-
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The investment required for this model is $11,607,000
or $38.70 per yearly input ton. The economics of this
system are relatively closely tied to the revenues re-
ceived from the sale of recovered steam. For example,
the net annual cost per ton increases by 24 percent if
sales drop by 50 percent; if there are no customers at
all, the cost per ton increases by 42 percent to $10.38
per ton. A material output subsidy based on $6 per ton
would not be applicable in this situation and the per-
centage of sales subsidy has only a small effect on the
costs of operation. However, a capital subsidy would
exert a major impact on the economics of an incinerator-
steam recovery system. (See Exhibit D - 4).
Direct Conversion to Electricity
This plant is based entirely on the pilot CPU-400
plant developed in 1971 by Combustion Power Company in
Menlo Park, California. This system includes a shredding
and classifying stage which prepares the waste for feed-
ing into a high pressure fluid bed combustor whose hot
gases drive a gas turbine/generator to produce electric-
ity. The shredding and classifying subsystem has been
demonstrated; however, the performance of the entire
system with its recent alterations has not been fully
demonstrated.
Although the model used in this study does not in-
clude a materials recovery system, the complete CPU-400
unit would contain equipment for recovering the ferrous
fraction, aluminum, and a mixed glass and rock fraction.
At this time, there are no full-scale plants of this kind
in operation, nor are there any known plans to build such
a system.
The high investment requirement of $17,717,000 or
$59 per yearly input ton capacity may limit the develop-
ment and implementation of this energy recovery system.
A capital subsidy would have a large impact on the eco-
nomics of the system; a material output subsidy would
have relatively little impact since the per-ton cash
subsidy does not apply to BTU's of energy. Cost per ton
for a 1000 tons per day plant is 34 percent higher than
for a plant processing 250 tons per day indicating that
this plant has significant economies of scale. (See
Exhibit D - 5).
-119-
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EXHIBIT D - 5
yjTTfl ELECTRIC GENERATION
(1000 tons per day)
Total Investment Required; $17,717,000
Amortized 2,080,000
Fixed 14,900,000
Recoverable 737,000
Annual Costs Cost per Input Ton
Operating 1,748,000
Fixed 212,000
Capital
Charges 1,932,000
TOTAL
Annual Revenues
$3,892,000 $12.97
Sale of
Electricity 1,200,000
TOTAL $1,240,000 $ 4.00
Net Annual Cost
ot Operation $2,692,000
-120-
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Pyrolysis
Various pyrolysis processes are currently in the
pilot plant and testing stages. This plant uses Garrett
Research and Development's system as a model. It pro-
duces fuel oil and recovers the ferrous, aluminum and
glass portions of the waste for sale. A 150 ton per day
demonstration plant, now operational in San Diego,
California, indicates that by using flash pyrolysis,
more than one barrel of oil can be produced from one ton
of dry, organic material. Development of other forms of
pyrolysis to produce various products such as methane
gas, methanol, acetone oil and a pure carbon char have
been undertaken by Monsanto's Enviro-Chem Systems,
Battelle Northwest, the University of West Virginia and
Union Carbide's Linde Division. Fuel oil pyrolysis has
two advantages over other energy recovery processes.
First, a nearby customer is not required and the output
can be stored easily and transported to alternative
customers.
Our Pyrolysis model plant requires an investment of
$12 million. The system's economics are, however, depen-
dent on the sale of the synthetic fuel and inorganic ma-
terials for a reasonable cost per ton range. If the fuel
does not find a market, the cost per ton would increase
62 percent to $8.78 and if all the materials sold for half
of their expected value, the increase would be 51 percent to
$8,17. The oil produced was not considered eligible for a
material output subsidy based on a $ per ton sold. (See
Exhibit D-6).
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EXHIBIT D - 6
PYROLYSIS
Total Investment Required: $12,334,000
Amortized: $1,500,000
Fixed: 10,100,000
Recoverable: 734,000
Cost per
Annual Costs Input Ton
Operating 1,734,000
Fixed 210,000
Capital Costs 1,343,000
Total $3,287,000 $10.96
Annual Revenues
Sale of Ferrous 245,.000
Nonferrous 240,000
Glass 168,000
Synthetic Feul Oil 1,008,000
Total $1,661,000 $5.54
Net Annual Cost of Operation: $1,626,000 $5.42
-122-
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APPENDIX E
DETAILED RESULTS OF ANALYSIS OF RESOURCE RECOVERY PLANT SUBSIDIES
-------
EXHIBIT E-l
BASELINE RESOURCE RFCOVERY THROUGH
MUNICIPALLY OWNED PLANTS
1976
1977
1978
1979
1980
1981
1982
1983
1934
1985
10 YEAR
TOTAL
PAPER
(000 tons)
96
110
123
137
150
173
195
218
240
263
1705
CANS
(000 tons)
157
179
202
224
246
283
320
357
394
431
2793
GLASS
(000 tons)
107
122
138
153
168
193
218
244
269
294
1905
ENERGY
(1012 BTU's)
14.5
16.5
18.6
20.7
22.7
26.1
29.5
32.1
36.3
39.7
257.42
-123-
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EXHIBIT E-2
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS
SUBSIDY: 30% CASH
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
87
99
111
123
135
153
171
189
207
225
1500
CANS
(000 tons)
143
162
182
201
221
251
280
310
339
369
2460
GLASS
(000 tons)
97
111
124
138
151
171
191
212
232
252
1678
ENERGY
(1012 BTU's)
13.2
14.9
".
16.8
18.6
20.4
23.1
25.9
28.5
31.3
34.6
226.7
-124-
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EXHIBIT E-3
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS
SUBSIDY: $6/TON CASH
1976
1977
1973
1979
1980
1981
1982
1933
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
35
39
44
48
53
60
68
75
83
90
593
CANS
(000 tons)
56
64
71
79
86
98
111
123
136
148
970
GLASS
(000 tons)
39
44
49
54
59
67
76
84
93
101
665
ENERGY
(1012 ETU's)
5.2
5.9
6.5
7.2
7.9
9.1
10.2
.11.3
12.5
s
13.6
89.5
-125-
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EXHIBIT E-4
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OWhED PLANTS
SUBSIDY: 25% CONSTRUCTION GRANT
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
51
57
63
69
75
86
96
107
117
126
850
CANS
(000 tons)
84
94
103
113
123
140
157
175
192
209
1390
GLASS
(000 tons)
57
64
70
77
84
96
107
119
130
142
948
ENERGY
(1012 BTU's)
7.7
8.6
9.5
10.4
11.3
12.9
14.5
16.1
17.7
19.3
128.1
-126-
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EXHIBIT E-5
INCREMENTAL RESOURCE RECOVERY THROUGH
MUMICIPALLY OWNED PLANTS
SUBSIDY: 50% CONSTRUCTION GRANT
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
96
110
123
137
150
170
189
209
228
248
1660
CANS
(000 tons)
157
179
202
224
246
278
310
342
374
406
2718
GLASS
(000 tons)
107
122
138
153
168
190
212
233
255
277
1846
ENERGY
(1012 BTU'S)
14.5
16.5
18.6
20.7
22.7
25.6
• 28.5
31.5
34.4
37.4
250.5
-127-
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EXHIBIT E-6
INCREMENTAL RESOURCE RECOVERY THROUGH
MUNICIPALLY OlvHED PLANTS
SUBSIDY: 75% CONSTRUCTION GRANT
1976
1977
1978
1979
1980
1983
1982
1983
1984
1985
10 YEAR
TOTAL
PAPER
(000 tons)
129
146
162
179
195
224
252
281
309
338
2215
CANS
(000 tons)
212
239
266
293
320
367
414
460
507
554
3633
GLASS
(000 tons)
144
163
181
200
218
250
282
314
346
378
'2475
ENERGY
(1012 BTU's)
19.5
22.0
24.5
26.9
29.5
33.7
38.1
42.4
46.7
57.0
334.2
-128-
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EXHIBIT E-7
INCREMENTAL RFSOURCE RECOVERY THROUGH
MUNICIPALLY OWNED PLANTS
SUBSIDY: 75% CREDIT SUBSIDY
•
1976
1977
1978
1979
1980
19B1
1982
1933
1984
19S5
10 YEAR
TOTAL
PAPER
(000 tons)
60
68
75
83
90
102
114
126
138
150
1059
CANS
(000 tons)
98
111
123
136
148
168
187
207
226
246
1650
GLASS
(000 tons)
67
76
84
93
-101
114
128
141
157
168
1125
ENERGY
(1012 BTU's)
9.1
10.2
11.3
12,5
13.6
15,4
17.2
19.1
20.8
22.7
151.9
-129-
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