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         '?*
                                vi

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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
                               viif

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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.


                           -1-

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         SECTION  I




SUBSIDY DESIGN CONSIDERATIONS
          -J2-

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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).


                           -3-

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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.&
                           ..4-.

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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).
                          -5-

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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
                           -6-

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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-
                          -7-

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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
                             -8-

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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
                            -9-

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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;
                            -10-

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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-

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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-

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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-

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     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-

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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-

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                             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-

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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-

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           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-

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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-

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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

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             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

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      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


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     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

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                                                          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.

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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.

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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  ^

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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-

-------
                                           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-

-------
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-

-------
  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-

-------
                                                       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-

-------
                       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-

-------
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-

-------
                      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-

-------
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-

-------
                           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-

-------
     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-

-------
                        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-

-------
      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-

-------
                                                                    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-

-------
                      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-

-------
                     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-

-------
     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-

-------
                        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
                                 < *
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fa* |J ^^
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    o

§£~
H W EH

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W U EH

gss
en
D
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Q
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CQ J3
D W


b in co
O w g
  > o
                                                                   o
                                                                   o
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                           Q H O
                           H > O
                             H 03
                               *
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                           U O Q
                           <   W
                           fti w in
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                                          S:
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                                                   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
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O J2 EH
CO ft.
W ^1 0
X ft 0
o
K ^i «-^
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H W En
j ^ 3
w 6 ft
CO CJ EH
< W 3
cq K 0
1 CO
CO S
D P
J5
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O
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H
^ W
W W
CO D
•a;
W S
O
^1 C^
EH >H
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EH EH

^4
a
H
CO EH
g w
CO S
EH *-*
fa CO CO
0 W E
> O
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CJ H
< 0
ft So
2 WO
H ^l ^"^
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so
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•• CJ
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CO EH

fa CJ rt
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ft
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QJ
ft

^|
EH CO
CO !2
D O
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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
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75

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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\
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(O M
PQ CO


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U CO
PS g
3 EH O
O 3 EH
CO *£
H 1-3 0
K PH 0
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3 0£
H W EH

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n u EH
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D e^
&
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o
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3 ^^
H
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CO D
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o

<
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EH EH

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^4
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(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
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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
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CU W CO
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K D CQ

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PJ

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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-

-------
                   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-

-------
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
                            -115-

-------
                  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.-

-------
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.
                         -117-

-------
                  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-

-------
     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-

-------
                       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-

-------
                       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).
                          -121-

-------
                  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-

-------
                           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-

-------
                       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-

-------
                       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-

-------
                       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-

-------
                        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-

-------
                       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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