THE
ECONOMIC
IMPACT OF POLLUTION
CONTROL
A Summary of
Recent Studies
Prepared for the
Council on Environmental Quality, Department of Commerce, and

March 1972

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THE ECONOMIC IMPACT OF POLLUTION CONTROL
A Summary of Recent Studies
Prepared for the
Council on Environmental Quality,
Department of Commerce, and
Environmental Protection Agency
March 1972

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For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C, 20402 - Price 13,50

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CONTENTS
An Overview --------------------	1
Automobiles --------------------	43
Baking ----------------------	69
Cement ----------------------	75
Electric Power Generators -------------	91
Fruit and Vegetable canning and Freezing -----	105
Iron Foundries	129
Leather Tanning ------------------	145
Nonferrous Metals Smelting and Refining ------	167
Aluminum -------------------	169
Copper --------------------	191
Lead -				215
Zinc ---------------------	239
Petroleum Refineries ---------------	261
Pulp and Paper Mills ---------------	277
Steel Making ----------- ------ - -	293
The General Economy - - - -- - - - ----- - - -	311

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AN OVERVIEW
1

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AN OVERVIEW
The purpose of this overview is to put into perspective
studies which were conducted to assess the economic impacts
of air and water pollution abatement requirements on a
number of industrial activities.
The studies were conducted under contract with the
Council on Environmental Quality, the Environmental Protec-
tion Agency, and the Department of Commerce. The Council of
Economic Advisers provided guidance on economic methodology
for the studies.
The contractors' reports included summaries, detailed
analyses, and background data. Reprinted in this volume are
the summaries of the reports prepared by the contractors.
Adequate data are not yet available on all the ways in
which pollution control requirements will affect industrial
activity. Environmental standards as well as the changes
being induced in the way materials are extracted, processed,
transported, fabricated, consumed and ultimately disposed of
are not only extensive but still evolving. Comprehensive
studies would require a great deal more time to conduct than
was allotted to these preliminary analyses.
In view of these recognized limitations, none of the
studies can be considered definitive presentations of total
impact on the industrial activities examined or on the economy.
However, it is reasonable to believe that the relative rela-
tionship of postulated standards and pollution abatement cost
consequences are at least indicative of the nature and order
of magnitude of the economic impacts.
In general, the studies found that the impact of those
pollution control costs that were estimated and examined
would not be severe in that they would not seriously threaten
the long-run economic viability of the industrial activities
examined. However, the estimated impact is not inconsequen-
tial in that there are likely to be measurable impacts both
on the economy as a whole and on individual industries.
I. BACKGROUND
Pollution abatement regulations have been implemented
by government at all levels in order to reduce the substan-
tial and rising costs society has been bearing as a result
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of pollution. These costs are reflected to varying degrees —
sometimes subtly, sometimes directly — in such factors as
increased demands for medical services, property devalua-
tions, lost man-hours of productive work, lower crop yields,
shorter useful lives of man-made structures, animal losses,
and soiling costs, as well as in such considerations as
aesthetics and the quality of life.
In the absence of public action, the full costs to
society of producing goods are not reflected in the prices
of goods since society rather than the producer bears the
costs of pollution. Environmental regulations are a means
to "internalize" these costs by requiring producers to bear
the costs of pollution abatement. As prices change to reflect
pollution abatement costs, consumers can be expected to
shift their purchases to relatively less expensive goods which
are produced with lower pollution abatement costs. Hence,
more low-pollution and fewer high—pollution products will be
produced. As a result, less pollution will be created,
fewer resources will be required for pollution abatement,
and more resources will be available for meeting society's
demands for other goods and services.
However, the process of reallocating society's economic
resources outlined above can in the short run have adverse
as well as positive impacts on society. Specifically,
transitional economic dislocations may occur. For example,
although sales and employment may be rising in one industry
while falling in another, the employees laid off from one
industry are not likely to be immediately hired by the other
industry due to such considerations as geography, skill
requirements, and lack of knowledge of job opportunities.
The purpose of the economic impact studies was to
begin to develop a better understanding of the nature and
order of magnitude of the adverse impacts of environmental
regulations on the economy as a whole and on individual
industries and regions within the economy.
Although these studies focused on adverse economic
impacts, it should be noted that there will be positive
economic impacts as well. An example of positive economic
impacts, which were not addressed by the microeconomic
studies, is increased profits and employment (a) in the
industries that produce pollution abatement equipment and
services, (b) the industries that produce relatively low-
polluting products, and (c) some of the firms in the
industries that are impacted by environmental regulations
(i.e., firms that absorb the market shares previously held
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by firms that are not efficient when measured by their use of
total resources, including the environment, and thus close
when they must incur pollution abatement costs).
Examples of positive economic impacts, which were not
addressed by either the microeconomic or macroeconomic
studies, are (a^ possible productivity increases where envi-
ronmental regulations stimulate technological developments
(e.g., changes in production processes which both increase
productivity and reduce pollution), and (b^ increases in the
average level of productivity in some industries as environ-
mental regulations result in the closing of plants that are
inefficient in their use of total resources. Further, no
attempt was made to quantify the economic benefits of a
cleaner environment (e.g., higher crop yield, increased man-
hours of productive work) or to compare these benefits with
the costs of pollution abatement. Finally, since the
macroeconomic analysis employs the conventional national
income accounts framework, it overstates the net costs (or
understates the net benefits) to society because such account-
ing fails to include the benefits of a cleaner environment.
II. APPROACH
One macroeconomic study and eleven microeconomic studies
were conducted. The macroeconomic study used a computer-based
econometric model to determine the impact of pollution abate-
ment costs on such macroeconomic variables as growth of GNP,
inflation, unemployment, interest rates and balances of trade
and payments.
The microeconomic studies concentrated on major elements
of eleven specific industries selected in part because of
availability of pollution abatement cost data from the Environ-
mental Protection Agency and in part because they were thought
to represent a reasonably complete spectrum of industrial
activities that might experience significant dislocations and
impacts. The microeconomic studies concentrated on such
variables as sales, prices, profits, plant closings, employ-
ment and community impacts in the industries studied.
While effects on related (customer, supplier, and com-
peting) industries were examined, the simultaneous impacts
on different industries and their cross relationships were
not studied in detail.
All of the studies were performed by contractors; the
specific industrial activity areas examined and the contractors
are listed in Exhibit I.
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Exhibit I
ECONOMIC STUDIES
MICROECONOMIC STUDIES
Automob i1e s*
CONSULTING FIRM
Chase Econometric Associates,
Inc.
Baking
Cement
Electric Power Generators
Fruit and Vegetable Canning
and Freezing
Iron Foundries
Leather Tanning
Nonferrous Metals Smelting
and Refining (Aluminum,
Copper, Lead, zinc)
Petroleum Refineries
Pulp and Paper Mills
Steel Making
Ernst & Ernst
The Boston Consulting Group, Inc,
National Economic Research
Associates, Inc.
Agri Division, Dunlap and
Associates, Inc.
A.T. Kearney & Company, Inc.
Urban Systems Research &
Engineering, Inc.
Charles River Associates
Incorporated
Stephen Sobotka & Company
Arthur D. Little, Inc.
Booz-Allen Public Administration
Services, Inc.
MACROECONOMIC STUDY
Chase Econometric Associates,
Inc.
*A11 of the microeconomic studies analyzed the impact of
the pollution abatement costs associated with assumed
air and water emission standards on an industry, except
in the case of the automobile study, in which the impact
of the cost of the auto-emissions-control device required
to meet legislated auto emissions standards was analyzed.
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In interpreting the findings of these studies, it is
important to be aware of the nature and limitations of the
cost data and the key assumptions which were used. Al-
though these are outlined in each report in detail, some of
the major considerations are outlined below:
1.	Cost Definitions. The investment costs of pollu-
tion control equipment were defined to include
the direct incremental investment required to at-
tain environmental standards (a) for existing
facilities and (b) for new facilities. The
operating costs for pollution control equipment
were defined to be incremental and net of any
productivity increases or by-product revenues.
It should be noted that the figures used in
these studies sometimes differ from the cost
estimates prepared by others. However, in
general, a significant portion of such differences
can be explained by the fact that the costs were
estimated using definitions different from those
above.
2.	Water Pollution Abatement Costs. The water cost
data were estimated under the assumption that the
relevant standard is the best practicable treat-
ment — roughly the industrial equivalent of
secondary treatment. If the pending water
quality bill set more stringent standards to be
met at any time in the next decade, investment
and engineering decisions would undoubtedly be
affected and higher costs would result.
3.	Air Pollution Abatement Costs. The air cost
data were estimated in most cases under the
assumption that the same set of emission stan-
dards would apply in every state. The standards
assumed were those published by EPA in the guide-
lines for developing state implementation plans.
If the states adopt different control strategies
in order to meet national ambient air quality
standards, the costs would vary accordingly.
The studies did not include consideration of
the proposed sulfur tax.
4.	Other Pollution Abatement Costs. Only air and
water pollution abatement costs associated with
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Federal standards were considered. If localities
implement more stringent standards or other
standards (e.g., standards for odors), the total
pollution abatement costs would be higher than
assumed in these studies. Further, although some
solid waste costs were reflected in the air and
water estimates, these were not comprehensively
estimated. Because the volumes of solid waste which
will require recovery and disposal will vary
appreciably depending upon how air, water and
solid waste control requirements are addressed,
no meaningful and comprehensive solid waste
control costs can as yet be estimated.
5.	Phasing. The year in which the pollution abate-
ment costs must be absorbed is a significant
determinant of economic impact. For the purpose
of the studies, it was assumed that all pollution
abatement costs for existing plants and for those
to be completed by 1976 would be incurred by 1976.
Further, it was assumed that the water pollution
abatement costs would be incurred in equal incre-
ments over the period and that those for air
would be incurred over the 5 year period 1972-
1976 in the following annual proportions: 5%,
10%, 35%, 40%, 10%, respectively.
6.	Time Frame and Coverage. The microeconomic
studies covered only the period 1972-1976. The
macroeconomic study covered the period 1972—
1980. For the macroeconomic study the cost
estimates for the period 1972-1976 included
the same estimates as used for the microeconomic
studies plus additional estimates of pollution
abatement costs for other industries impacted by
environmental regulations. For the 1977-1980
period, the cost estimates included (a) the
operating and maintenance, interest, and replace-
ment costs on the facilities and equipment
installed by 1976 in all industries, plus (b)
the capital and operating costs associated with
the equipment required for control equipment in
facilities expected to be built during the period.
7.	Technology. Most cost estimates were based on
end-of-line control technologies. Since some of
these are still in the early stages of development,
the actual cost of these technologies may vary
considerably, in either direction, from current
estimates. To the extent that firms meet abate-
ment requirements by production process changes
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rather than end-of-line controls, the costs
employed in these studies could be over-
estimated.
Inflation. It was assumed that the prices of
pollution abatement equipment and services
remain constant relative to other prices over
the decade. In fact, the prices of pollution
abatement equipment and services could rise
faster than other prices due to significantly
increased demand which is likely to peak in
mid-decade. If this occurs, the costs employed
in these studies would be understated.
All of the cost data were estimated by the Environmental
Protection Agency (EPA). Although the data were examined with
the assistance of industry experts identified with assistance
of the National Industrial Pollution Control Council (NIPCC),
the cost estimates provided to the contractors represented
the views of the interdepartmental task force and were not
necessarily endorsed by the industry experts. The con-
tractors were asked only to assess the economic impact of
the cost data given them. They were not asked to assess
the accuracy of the cost estimates. Since definitive
cost estimates could not be developed, ranges of estimates
were given to the contractors so that they could test the
sensitivity of the impact to different cost estimates.
However, in some cases, additional cost analyses conducted
simultaneously with the economic studies indicated that the
actual costs could be higher than even the high range of
estimates given the contractors. These additional analyses
are noted below in summarizing the contractor reports.
III. MICROECONOMIC IMPACT
The microeconomic studies indicated that none of the
industries studied would be severely impacted in that the
long-run viability of no industry is seriously threatened
solely by the pollution abatement costs estimated. How-
ever, profits will decline for some firms in most of these
industries because firms will not be able to pass on the
full cost of pollution abatement to consumers in the form
of higher prices. Costs will not be passed on completely
either because substitute or foreign produced products are
available so that none of the firms in the industry can pass
on their full costs or because the price increases of the
smaller firms which have higher unit abatement costs are
constrained by those of the larger firms with lower unit
abatement costs. Accordingly, some firms will earn lower
profits, some will curtail production, and some firms and
plants will be forced to close.
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However, the studies indicated there will be some price
increases as a result of environmental regulations. Depend-
ing on the industrial activity in question, prices are likely
to rise from 0% to 10% over the period 1972-1976. This is
equivalent to average annual increases of from 0% to 2%
with the bulk of the increases likely to come in 1974 and
1975.
Most of the firms or plants that will be forced to
close are currently marginal operations (e.g., smaller,
older, less efficient producers) that were already in eco-
nomic jeopardy due to other competitive factors. In such
cases, the impact of environmental standards is only to
accelerate closings that would have occurred anyway. The
pollution abatement costs either eliminate already slender
profit margins or reduce them to a level at which they fail to
justify the required capital expenditures in pollution abate-
ment equipment (in terms of an adequate return on investment).
There are approximately 12,000 plants currently
operating in the industrial activities studied. Of these
it is expected that approximately 800 would close in the
normal course of business between 1972 and 1976. It
would appear from the contractors¦ evaluations that an
additional 200-300 will be forced to close because of
pollution abatement requirements. Many of these additional
closings would appear to involve plants trhat were vulnerable
for other reasons and, hence, that were likely to have
closed anyway a few years later.
These plant closings and production curtailments will
have both direct and indirect impacts. The direct impacts
include the loss of jobs and reduced value of equity. An
indirect impact is that related (customer and supplier)
firms will be forced to close or reduce production. For
example, farms which have marketed their produce to a
cannery that closed might be unable to find new markets
for their produce. Another indirect impact is that the
communities where such plants are located may suffer local
recessions—an impact which will be most severe in one-
plant towns.
The studies suggest that direct job loss attributable
to environmental regulations in the affected industry
activities examined may range from 50,000 to 125,000 jobs
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over the 1972-76 period*. These figures represent approxi-
mately 1% to 4% of total employment in the industry activities
studied. The direct average annual unemployment created in
these industries represents .05% of the 1970 total national
work force. However, the studies suggest that these esti-
mates could be substantially higher if the economy is not at
full employment.
While the total plant closings in the industries in which
plant closings might have a community impact appear to be
about 150, the data presented are not in sufficient detail to
determine the number of these communities that will be
significantly impacted.
It is important to note that the figures reported in
the preceeding paragraphs apply to the industrial activities
studied; neither the positive nor negative impacts on other
industrial activities have been included. However/ in a
general sense these other impacts are considered in the
macroeconomic study.
In the appendix, a brief description of the impact of
pollution abatement costs on each of the industry activities
studied is presented.
IV. MACROECONOMIC IMPACT
The macroeconomic study indicated that the national
economy will not be severely impacted by the imposition of
pollution abatement standards. However, the impact is not
insignificant.
In general, the dynamics of impact are as follows.
Pollution control costs are assumed to affect the economy
in the form of higher product prices and new demands for
investments in pollution control facilities by industry
($26 billion in 1971 dollars over the 1972-80 period). Prices
rise as a result of the cost-push impact of pollution
control costs. In the absence of compensatory macroeconomic
policies, the effect of rising prices, which tends to slow
the growth of demand in the economy, outweighs the stimu-
lating impact of investments in pollution control facilities.
*These figures represent the total number of people dis-
employed as a result of environmental regulations. They are
not net figures because they do not account for the number
of people (conceivably the same people that are disemployed)
who find employment in the industry over the same period.
In many industries the net figures indicate that more
people find jobs than lose them.
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Consequently, the rate of growth of GNP in constant dollars
is retarded. The increase in unemployment is tied to the
slowdown in real product growth. The current account
balance of international trade deteriorates primarily as
a result of the increase in domestic prices relative to
world prices.* Monetary and fiscal policy adjustments can
be initiated to completely offset the slowdown in GNP and
employment declines but at the expense of more rapid price
rises and further decline in the balance of international
trade.
The impact of pollution control abatement costs is
discussed below in the context of three alternative pro-
jections of the national economy:
a baseline projection assuming a return to
a near full employment economy and no
pollution control costs
the addition of pollution control costs to
the baseline projection using best estimates
of pollution control costs as well as a variant
with costs 50% hicrher than the best estimates
the addition of compensatory monetary-fiscal
policies and pollution control costs to the
baseline projection.
To put these findings in perspective, the key assump-
tions and possible sources of bias are discussed, followed
by a brief description of the methodology employed in this
study.
Baseline Projection
The baseline used in this study was constructed to
push the economy toward full employment. This trend
toward full employment shows the unemployment rate falling
to 4.4% by 1976. Over the . 1971-76 interval, the
value of GNP in constant dollars grows at an average annual
rate of 5.2% and consumer prices by 4%.** Because this
study concentrates on the changes in the economy due to
pollution control costs, the specific details of the base-
line case are not at issue here.
*For lack of data, this exercise assumes that price increases
resulting from pollution control occurs only in the U.S.
To the extent that similar price rises do take place in the
economies of our major trading partners, the trade effects
are overstated.
**These guidelines were provided to the contractor before the
Phase II economic policy was announced.
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Impact of Pollution Control Costs
Constant dollar GNP grows more rapidly in 1972 than
in the baseline case as a result of additional demand
generated by pollution control investments. However, re-
flecting the impact of higher prices for consumer and
capital goods, constant dollar GNP falls below the base-
line in 1973 and remains below the baseline throughout the
decade. As shown in Table 1/ the annual rate of GNP
growth averages .3 percentage points lower over the 1972-76
interval (average annual growth rate drops from 5.2 to 4.9%)
and .1 percentage points lower over the decade
(from 4.8 to 4.7%). These averages are not fully informative
because the assumed time-phasing of pollution control
investments concentrated in 1975-1976 lowers the growth rate
by one-half of a percentage point in those years, whereas
the economy recovers somewhat near the end of the decade.
The impact on prices is felt immediately, with the
most significant increases occurring in plant and equipment
prices as a result of cost increases in steel/ nonferrous
metals and electricity. Over the 1971-76 interval/ fixed
investment prices rise at an annual rate of .5 percentage
points above the baseline/ while the consumer price index
increases by .2 percentage points on an annual basis from
a baseline average of 4.0 % per year. Here again,
the largest price increases occur in mid-decade. Inflationary
pressures ease considerably by 1976, and near the end of
the decade prices rise at a lower rate than in the baseline
case. In large part this is a result of lesser incremental
pollution control costs in conjunction with a greater degree
of excess capacity in the economy.
The unemployment rate is slightly higher (.1-.2
percentage points from a baseline of 4.6 %) over
the decade with employment declines nearly offset by new
jobs created by pollution control investments.
4&8-411 O - TO - 2
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TABLE 1,—Average Yearly Baseline Level and Absolute Differences From the Baseline
Input of Best Estimate Of	Input 150% of Best Estimate
Pollution control Costs	Of Pollution Control Costs
Units 72-76 77-80 72-80	72-76 77-80 72-80
GUP - baseline average 872.2 1062.8 956.9	872.2 1962.8 956.9
With Pollution Control Costs (P.C.) billion of -4.7 -7.6 -6.0	-7.0 -13.1 -9.7
With P.C. and Monetary Fiscal Policy Offsets* 1958 dollars 0.0 0.0 0.0	.4 1.6 .9
Annual Growth ot Constant
Dollar GUP - baseline average percent 5.17 4.35 4.80	5.17 4.35 4.80
With P.C. -.29 .16 -.09	-.46 .37 -.09
With P.C. and Offsets 0.0 0.0 0.0	.01 -.01 0.0
Unemployment Rate - baseline average
With P.C.
With P.C. and Offsets
percent
4.82
.1
.06
4.43
.15
0.0
4.64
.12
.03
4.82
.18
.04
4.43
. 28
-.02
4.64
.22
.01
Net Exports of Goods
and Services - baseline average
With P.C.
With P.C. and Offsets
Annual Rate of Inflation (CPI) -
With P.C.
With P.C. and Offsets
baseline avq.
billions
of current
dollars
percent
2.0
-1. 2
-1.5
4.0
.23
.29
.45
-.15
-2.5
3.73
-.30
.23
1.3
-.7
-1.9
3.87
0.0
.26
2.0
-1.7
-2.3
4.0
.34
.49
.45
.4
-4.3
3.73
-. 78
.36
1. 3
-.8
-3. 2
3.87
-.15
.43
Fixed Investment Less P.C. Investment -	billion of 124.8	153.6	137.6	124.8	153.6	137.6
baseline average		1958 dollars
With P.C.	-2.3	-2.5	-2.3	-3.5	-2.7	-3.1
With P.C. and Offsets	-1,9	-2.8	-2.3	-2.9	-4.3	-3.4
•The contractor experimented with monetary fiscal policy adjustments to force the economy back to baseline values of GNP
and unemployment. In the casein which costs were increased by 50%, the policy offsets do not quite achieve resumption of
baseline product and employment paths only because the contractor lacked the time to refine the policy effects.

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Fixed investment, excluding those for pollution con-
trol purposes, declines slightly over the decade as a result
of slower GNP growth, rising prices and a lower level of
capacity utilization in the economy. By 1976, investment
levels for non-pollution control purposes are 3,2% below
the baseline level of $112 billion in 1958 dollars and 1.3%
below by 1980. Total fixed investment lies above the
baseline until 1976 when pollution control investments fall
sharply. The resultant decline leaves total fixed invest-
ment $.6 billion below the baseline in 1980.
Net exports of goods and services fall
below the base case with imports risinq due to
domestic price increases. The current account balance
declines by more than $1 billion per year over the 1972-76
period from a baseline of $2 billion in current dollars.
Less confidence should be placed on the reliability of these
trade results because the model deals with such impacts very
crudely. However, given the assumption that foreign prices
will not increase due to environmental regulations overseas,
it is clear that net exports would decline.
Although the previous results were based on best esti-
mates of pollution control costs, another variant was run
assuming that pollution control costs were 50% higher, in
part to account for any costs which may have been excluded.
In general these new results (shown in Table 1) were simply
about 50% greater than before for nearly all variables, e.g.,
GNP growth over the 1972-76 interval slowed by .45 percentage
points instead of .3. Thus, except for the unemployment
rate, which increased by more than 50%, variations in
economic variables were roughly proportional to the per-
centage variation in pollution control costs.
Impact with Monetary-Fiscal Policy Adjustments
Assuming that the federal government may try to offset
some of these impacts, the contractor experimented with
monetary-fiscal policy changes in order to bring the
economy back to its baseline path with respect to GNP
growth and the level of unemployment. Although it is not
at all clear that the particular mix of adjustment poli-
cies selected by the contractor, relying primarily on
government spending, would be the most appropriate one,
the results are nevertheless indicative of the magnitude of
adjustments required and the impact of expansionary policy
changes.
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The fiscal stimulus required to return the economy
to its baseline growth path is substantial. Federal
spending over the nine year projection period sums to over
$70 billion above the baseline case, implying annual in-
creases in expenditures less revenues of from $7-10 billion
during the last half of the decade.
This stimulus does bring the economy back to the
baseline growth path, but in the process it aggravates the
impacts on prices and the balance of payments. Inflationary
pressures increase slightly in 1972-76 but do not ease off
after that period as they did when only pollution control
costs were added. For the 1972-80 period, the consumer price
index rises by about one-quarter of one percentage point
annually above the baseline.
The sustained price increases further aggravate the
current account balance, generating an average annual de-
cline in net exports of about $2 billion per year over the
1972-80 period.
Interest rates were essentially unchanged because the
policy adjustments employed in the study were designed to
maintain stable interest rates.
In this case, the effect of raising pollution control
costs by 50% produces somewhat more than proportional
impacts on the economic variables. The federal budget
deficit must be increased to attain baseline GNP levels
while prices and the balance of payments deficit incrfiase
by slightly trore than 5n%.
Assumptions and Sources of Bias
This section looks at issues which may have biased the
results in the areas of the basic pollution control cost
data, the method of inserting costs into the model and the
model itself. Finally, a few comments are made concerning
the probable direction of bias in the macro-impact results.
A. The Input Data
(1) Coverage - pollution control costs were
included for 15 industry groups which were con-
sidered the major sources of industrial pollution.
It is probable that other sectors are affected but
the empirical impact is expected to be negligible.
As shown earlier, pollution control costs are pre-
dominately air and water for industry which excludes
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costs in the areas of solid waste disposal,
governmental water pollution abatement activities
and public air pollution abatement. The absence of
these figures implies the assumption that there
are no incremental costs in industrial solid
waste disposal and that no adjustments were made
to increase revenues of state and local governments
above the baseline projections.
(2)	Cost data issues - aside from any diffi-
culties in the engineering cost work, there are
some conceptual issues although the direction of
possible bias is not clear. For example, invest-
ment costs in the water area include a 20% up-
ward revision in part to compensate for down time
required to install abatement facilities while down
time should be reflected as a decline in production,
not as an increase in aggregate demand.
(3)	Cost phasing - phasing patterns clearly
have an important impact on the timing of economic
effects, e.g., assumptions used herein produce the
most significant effects in 1974-76. However, it
is not clear that other phasing assumptions would
reduce impacts over the decade as a whole,
(4)	Costs of pollution control facilities - a
key assumption underlying the cost data is that the
prices of abatement facilities relative to other
prices remain constant over the decade. In fact,
if new demand is significant enough and especially
if demands are bunched, prices of facilities might
rise at a much greater rate relative to other prices
in the economy. If these effects occur, costs would
be understated. Obviously, the time phasing assump-
tion might have a critical impact on the basic cost
numbers.
(5)	Foreign trade assumptions - no allowance
was made in the results for any price increases of
world prices as a result of pollution control
efforts outside the U.S. or the use of higher cost
U.S. goods in production processes elsewhere. To
the extent that foreign prides do rise, net exports
would rise. Further analyses are to be made that
consider increases in world prices. There is also
a probability that the U.S. may be exporting pollu-
tion control equipment in the future, a factor which
could improve the balance of trade but has not been
included in this study.
17

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B.	Problems of the Treatment of Cost Data in the
Model
As mentioned above, a critical assumption in
this study is that pollution control costs are
entirely unproductive. By making this assumption
we have by-passed an area of intense controversy
where a great deal of research is now taking
place.
Abatement costs are assumed to be based on end-
of-line control technologies. In fact, a lower
cost approach may be adopted relying on managerial
improvements or changes in basic production processes.
Such changes would affect the results both with
respect to the magnitude of costs which in turn
affects the magnitude of increases in prices and in
cost of capital.
There are many ramifications of this issue. For
example, pollution control efforts may spur increases
in labor productivity because of a more rapid adop-
tion of new technologies, which often tend to produce
fewer pollutants per unit of output. It can also be
argued that cost increases may eliminate marginal
firms and thereby average labor productivity could
increase if aggregate demand is maintained at full
employment. The results also ignore possible feed-
backs on labor productivity from improved health,
etc., as a result of less pollution which could
lead to results different from those indicated by
the study.
C.	Problems with the Econometric Model
It is not clear at this point what the nature
of bias may be from incorrect specification in the
model itself. Clearly the model was not designed
to handle the special case of pollution control
and thus refinements could be made (such as produc-
tion functions by industry to account for producti-
vity impacts varying with pollution control technolo-
gies) . Whether such changes would substantially alter
the results reported is not known. One part of the
model which may be weak is the trade sector, which is
quite simple, including only 4-5 sectors. For
example, if imports fall off more than proportionately
as GNP declines, then net exports would not fall as
18

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much as they do in current results. Another
issue is the inability of the model to capture
employment loses due to plant shutdowns or cut-
backs as profits, in some cases, are squeezed.
Because the model relates unemployment only to
aggregate variables, it may understate the impact
of pollution control costs on unemployment. While
we are not sure bias in the model is significant,
we do believe that further study and refinement may be
warranted in order to realistically capture pollu-
tion control impacts.
D. Possible Direction of Bias
As a result of this complex set of qualifications,
in which some have biases in opposite directions and
other factors have unknown effects, no statement can
be made with confidence about the direction of net
bias in the present study.
Methodology
Pollution control costs are assumed to affect the
economy in several respects: The efficiency of capital
in the aggregate production function is reduced, prices
of consumer and capital goods increase, the cost of
capital per unit output increases and finally pollution
control investments generate new output and employment in
industries producing abatement facilities. It is worth-
while emphasizing that the quantitative magnitude of the
first three negative impacts hinges importantly on our
assumption that pollution control costs are entirely "un-
productive" in the sense of generating new capacity in
industrial establishments.
A. Prices
Annual costs in the form of percentage cost
increases were inputed into the industrial sector
of an input-output table. These cost increases are
initially converted to first-round price increases
by industry markup factors which range from .8-1.0.
These price increases are then passed on through
other industries which use other products as inputs,
assuming that all raw material price increases are
passed on 100%. After taking account of these
inter-industry effects, these price increases were
passed on through another series of markup factors
for final demand components, such as cars, shoes, and
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plant and equipment. This set of price
increases is then used to move the economy off
the baseline growth path.
B.	Aggregate Production Function
Pollution control investments are included as
a factor boosting aggregate demand in the economy,
thereby generating output and employment, but were
not considered to augment the productive or capacity-
augmenting capital stock of the nation. No adjust-
ment was made for reducing the efficiency of labor
in the aggregate production function, although
this effect is probably small compared to that for
capital stock.
C.	Cost of Capital
Since pollution control expenditures are assumed
not to be capacity-augmenting, some further adjust-
ment was necessary to reflect the negative incentive
this would have on industry's consideration of new
investments which would augment capacity. This
adjustment was necessary because the determination
of investment in the macro model did not explicitly
consider the impact of more capital required per
unit of output. This was done by boosting the "user
cost of capital" by the ratio of pollution control
costs to baseline investment levels. Conceptually/
this is equivalent to raising the cost of capital
needed to produce a unit of output. To provide
some feeling for the complicated set of factors which
affect investment (excluding pollution control)
demands in the model, we note that it is negatively
affected by the slowdown in GNP growth, the rise
in capital goods prices, the rise in the cost of
capital and by the decline in the degree of capa-
city utilization. Offsetting these factors to
some degree, investment demand is stimulated by
the increase in wholesale prices.
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A P P E N D I X
AUTOMOBILES
The study of the automobile industry differed from
the studies of all other industry activities. In all other
cases the studies focused on the impact of air and water
pollution control costs required in the production process
itself, while the auto study focused solely on the impact on
the industry of air pollution control equipment to be install-
ed on vehicles.
The installation of required pollution control equipment
on automobiles and small trucks was estimated to add approxi-
mately $350 to the cost of manufacturing a vehicle by 1976-77.
This is the same estimate as reported in EPA's Economics of
Clean Air. Since approximately $35 of the $350 was already
in place by the 1972 model year, only $315 remained to be
added. The contractor rounded this figure to $300, but
included a range of - 30% in estimating the impact of the
cost increase on the industry. The range which he used for
cost increase after the 1972 model year is therefore $210 to
$390. The cumulative cost increase over the uncontrolled car
is $35 higher or $245 to $425.
The contractor was also given an estimate of increased
operating and maintenance costs of $65 annually or $325 over
a five year period (approximately 50,000 miles^. However,
these costs were not employed in the analysis because the
contractor was unable "to reject on either statistical or
theoretical grounds the hypothesis that for this range of
additions to operating costs the response of new car
purchases is negligible." The high estimate (i.e., $425) may
or may not capture any impact which these costs might have on
auto sales.
It is important to note that the purpose of this study
was to assess the impact on the automobile industry of the
requirements of the Clean Air Act, It does not include cost
increases which can be expected from new safety regulations,
costs which some studies suggest are of a magnitude equivalent
to those for control of pollution. The increased costs from
the two sources, control of pollution and new safety features,
could have impacts on the industry which are more than propor-
tional to the sum of these costs.
21

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The contractor's study of demand relationships for all auto-
mobiles and among the different classes of automobiles indicated
that from 84% to 9 8% of the cost increases associated with air
pollution control equipment will be passed on to consumers in
the form of higher automobile prices. Thus the price
of sub-compact cars was expected to rise approximately $29 4 by
19 76-19 77 because of required installation of pollution control
equipment. The price of luxury cars was expected to rise
approximately $343.
This increase in automobile prices was expected to have
two effects upon automobile sales. First, some change was
expected in the class of car purchased. In comparison with
baseline projections, sub-compjact automobiles were expected
to lose 0.25% of the market, and standard si?ed automobiles
1.6%, by 1980 because of the cost of pollution control
equipment. This market share would be absorbed to some
extent by compacts, intermediate, and luxury cars (0.26%
to 0.4%); and to a greater extent (0.8%) by a new class of
cars, the sub-sub-compacts,which was expected to be a factor
in the market by that time.
It was also expected that because of increased automo-
bile prices, the total sales of new automobiles will be
decreased. Projections indicate that, in comparison with
baseline estimates, the total number of new passenger car
registrations in 1976 would be reduced by 420,000 or 3% from
13.31 million to 12.89 million; in 1980 a reduction of 180,000
or 1.2% from 14.53 million to 14.35 million was expected.
The reduced sales of automobiles through 1980 are expected
to lead to some reduction in employment from the baseline
projections, especially in the period 1973 through 1977.
Although total employment in the automobile industry is not
expected to be reduced below current employment at any time,
the growth in employment will be slower than the baseline
projections and in some years employment will be reduced from
the previous year's level.
The maximum reduction in jobs from baseline projections
was 1.8% or 18,000 jobs in 1976, from 1,025,000 to 1,007,000.
Only in one year, 19 75, is the total number of jobs in the
industry reduced below the previous year's level. In that year
jobs are expected to decline by 13,000 or 1.3% from 979,000
to 966,000. By 1980, it is expected that industry employment
will be 0.9% or 9,000 jobs below the baseline projection of
1,044,000.
In eleven other industries significantly affected by
these changes, total employment in 1976 is expected to be 0.25%
or 35,000 jobs below the baseline projection of 13,119,000.
22

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By 1980, however, total employment in these industries is
expected to be 53,000 or 0.35% above the baseline projection
15,273,000.
Because the contractor assumed a substantial increase in
imports of sub-sub-compact cars, the U.S. balance of payments
is expected to be adversely affected by the increased
automobile costs associated with pollution control equipment.
The annual net exports of goods and services of the U.S. are
expected to be reduced by a maximum of $700 million in 1980.
28

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BAKING
Total investment required to meet water pollution control
standards associated with the baking process from 1972 through
1976 was estimated to be $11.8 million to $21.3 million.
Annual costs were estimated to increase from $0.4 million in
1972 to $2.0 million in 19 76. Average costs per pound of
products were estimated to range from 0.011$ to 0.02C for
bread and related products, and from 0.05$ to 0.09$ for biscuits
and crackers.
Because COsts of pollution abatement in the baking
process are so low—0.2% of sales—no impact was expected in
"the bakery products industry.
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CEMENT
Capital expenditures required from 1972 through 19 76 to
meet air and water pollution control requirements associated with
the manufacturing of cement in kilns and clinker coolers were
estimated to total $122 million. Annual costs were estimated
to increase from $3.0 million in 1972 to $43 million in 1976.
"These costs average out to $0.08 to $0.10 per barrel of cement.
Projections of cash flow and capital needs including
pollution abatement expenditures for the cement industry through
1980 indicated that the industry will be able to meet its cash
needs. Given the most severe set of assumptions, however, many
changes in the industry's financial policies would be required.
These would include a reduction in the divident payout ratio
from 59% to 49%, and an increase in the debt/equity ratio from
0.39:1 to 0.6:1. Both of these were considered manageable.
Alternatively, a 4%-5% real price increase would be employed
to provide most of the required funds.
Pollution control costs in the cement industry were expected
to accelerate the current trend in the industry toward the clos-
ing of small, old plants and the construction of large, modern
facilities. This, in turn, would increase the capital pressure
upon the industry. The combined effect has been estimated to
result in the closing of approximately 25 cement plants in the
1972-1976 period. The additional impact upon cement industry
employment was expected to be minimal. Only one possible
community impact has been identified.
The increase of prices because of pollution controls was
expected to accelerate the current increase in cement imports.
No estimate of the magnitude of this impact has been made,
however.
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ELECTRIC POWER GENERATORS
It was estimated that the total investment required to
meet air and thermal pollution control requirements associated
with the generation of electricity from 1972 to 19 76 will be
$10.7 billion. Of this, $7.5 billion would be required for air
pollution control, and $3.2 billion for thermal pollution
control. It has been suggested that the cost of installing
pollution control equipment on existing plants might be twice
those included in these estimates. If so, the total investment
required through 1976 would reach $17.8 billion. Annual costs
associated with pollution controls were estimated to rise from
$338 million in 1972 to $2.5 billion in 1976. Costs per
kilowatt hour in 1976 would range from 0.22 mills to 1.52 mills
depending upon the region of the country. These costs did not
include additional costs that might be required for the control
of nitrogen oxides and radiation.
The impact of pollution control costs will vary from region
to region across the U.S. depending upon the source .of energy
employed. In the West South Central, for example, almost
all generators are gas-fueled, and will require almost no
air pollution control facilities. Consequently, pollution
control costs in this region in 19 76 were estimated to total
only 2.8% of 1970 average revenues. In the Tennessee Valley
Authority region, on the other hand, approximately 80% of the
generating facilities are coal- fired. These will be faced
with the full cost of air and thermal pollution controls.
This, combined with a low revenue level, was estimated to lead
to pollution control costs in 19 76 totaling 10.65% of average
1970 revenues. The average of all regions' air and thermal
pollution control costs in 1976 was estimated to be 7% of 1970
average revenues.
In the philosophy of utility regulation, justified cost
increases are passed on to the consumer. Thus, it can be
assumed the above costs will ultimately be passed on
completely to the electric ratepayers through higher
electricity rates. Past experience, however, indicates that
the passing on may not be complete and in any event will
occur with some delay. Furthermore, given the complexity and
variety of rate structures, it was not possible to determine
how these price increases might be distributed among the
various categories of consumers.
No adequate information was available on the demand
responsiveness of the users of electricity to changes in
electricity's price. The total demand for electricity
was judged to be extremely unresponsive to price.
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Six industries were identified for which electric
power costs amounted to 5% or more of the total value of
shipments. These are Atomic Energy Commission plants, primary
aluminum, electrometallurgical products, alkalies and chlorine,
industrial gases, and hydraulic cement. The anticipated increase
in the price of electricity was expected to have little impact,
even upon these industries.
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FRUIT AND VEGETABLE CANNING AND FREEZING
Water pollution abatement regulations were estimated to
require the investment of approximately $120 million by the
fruit and vegetable canning and freezing industry through 1976.
Annual costs of pollution control equipment were estimated
at $4.3 million in 1972 increasing to $21.3 million in 1976.
In the fruit and vegetable canning and freezing industry,
the largest third of the plants produce about 80% of total
industry volume. These plants enjoy a considerable cost
advantage over the remaining plants, and are consequently much
more profitable. This advantage has created a trend over the
past 10-15 years toward fewer and larger processing plants.
Census figures indicate that from 1958 to 1967 the total number
of fruit and vegetable canning plants declined 25%. The number
of fruit and vegetable freezing plants more than doubled from
1958 to 1964, but then decreased 6.6% through 1967. Both of
these trends were expected to continue through 1980 with a 25%
decrease projected from 1971 through 1980.
It was expected that the larger canning and freezing plants
will also enjoy a cost advantage in installing and operating
pollution control equipment. For those plants which must
install their own facilities, for'example, the price increase
that would be required to offset abatement costs would be 5.5%
for large plants, but 9.6% for small plants.
Given estimates that half of the plants will be able to
find lower cost abatement solutions, and that 58% of the projected
abatement technology is already installed, actual price increases
were not expected to be as high as above. Prices were expected to
rise 1.4% to 2.3%. Such an increase would cover the average costs
of the larger producers, but not of the smaller plants.
The increased prices were expected to lead to a 0.5% to 1.0%
decrease in consumption. Such a decrease would be less than
the total annual increase expected in consumption because of
population expansion and increases in per capita consumption.
The increased costs of pollution control were expected
to further reduce the profits of the already marginally
profitable small plants. Many of these plants will be able to
tie into municipal systems or to find other low cost pollution
abatement techniques that will enable them to stay in business.
Experience in some states indicates that half of the small
plants might be unable to find such alternatives. In this case,
up to half of the small plants in the industry, or one-third of all
plants, were expected to be forced to close. Of the 1,200 plants
included in the industry directory, therefore, 400 might be forced
to close because of pollution abatement costs. As noted above,
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25% of the plants, or 300 of the 1,200, would be expected to
close by 1980 in any event. Thus, the addition of pollution
control costs was expected to lead to the additional closing
of 100 plants, or 8.3% of the total. In addition, closing of
the other plants was expected to occur some years earlier than
otherwise.
It was estimated that the closing of 400 plants would result
in the loss of jobs by approximately 28,000 employees. The
disemployment created by the 100 plants that were estimated to
close because of pollution controls would be. one-fourth of that
number or 7,000. Many of these would be in small towns and
rural areas where reemployment would not be readily available.
Up to 90% of the jobs lost would be part-time positions.
Because many of the plant closings would be in small towns
or rural areas, the community impact of these closings could
be significant. This would be further complicated if the farmers
in the surrounding areas are unable to find alternate markets
for their products. This possibility was suggested, but no
careful analysis has been made of the experience in such cases
or of yie technical factors involved. Accordingly, no estimate
is available for the magnitude of this impact.
The impact of increased prices in the industry upon the
U.S. balance of payments was expected to be small.
458-471 O- It - s
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IRON FOUNDRIES
Approximately $348 million in capital expenditures was
estimated to control the air pollution associated with the
making of iron castings through 19 76. Annual costs of pollu-
tion control equipment were expected to increase from $6.2 million
in 1972 to $125 million in 1976. Average costs per ton of
castings produced would depend upon plant size, with an expected
range of $2 per ton for large producers to $14 per ton for
small producers.
The iron foundry industry is composed of a relatively small
number (30%) of large producers whose costs and investment per
ton of castings are less than half of the smaller producers1.
From 1947 to 1969, the total number of foundries has declined
from 3,200 to 1,6 70. Most of these closings have involved
small foundries which have been unable to raise capital to
modernize. This trend is expected to continue through 1980,
with the additional closing of some 670 foundries.
Requirements to install pollution control equipment were
expected to intensify capital availability problems, and thereby
accelerate the rate of plant closings. It was estimated'that
approximately 10% of these 670 closings would be caused wholly
or in large part by pollution control requirements. In an
additional 50% of the closings, pollution control costs were
expected to be a significant factor.
Pollution control costs will range from 1*5% to 4.0% of
sales. Price increases of 1.7% to 5.0% were expected to be
necessary to cover these costs and to preserve current rates
of return. Such increases were estimated to be possible with
a negligible effect upon demand.
Total employment loss in all plants projected to close
by 1980 was estimated at 26,600, It was expected that approxi-
mately half of these would be reemployed in other iron foundries.
The net unemployment was therefore estimated to be 13,300.
For the 60% of the plant closings in which pollution control was
expected to be a factor, disemployment would be approximately
16,000 with a net unemployment of 8,000.
Approximately 2,250 of these 13,300 unemployed workers
would possess transferable skills. The remainder would be
unskilled, and was therefore expected to experience difficulty
in obtaining reemployment.
Because foundries are generally located near industrial
markets, it was not expected that many communities will be
severely impacted by the projected closings.
30

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Some increase was expected in imports of iron castings
because of increased costs in the U.S. Because imports
currently account for 0.1% of the U.S. market/ these
increases were not expected to be significant.
LIBRARY/EPA
National Environmental Research Center
200 $M. 36th Si.
31	CorvalBs, OH 97380

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LEATHER TANNING
The total investment required of the leather tanning
and finishing industry between 1972 and 1976 for water
pollution abatement equipment was estimated at $89 million.
Annual pollution control costs were expected to rise from
$2.1 million in 1972 to $10.7 million in 1976.
A survey of the costs of pollution control alternatives
available to leather tanneries found that, on average, pol-
lution control costs were less than or equal to 1% of sales.
At most, costs were found to be 2%-3% of sales. Such costs
were estimated to be well within the capacity of the industry,
which frequently experiences increases and decreases in the
costs of its raw-material hides of as much as 50% to 100% in
a one to two year period. Selling prices have correspond-
ingly changed from 10% to 25% in the same period with no
apparent affect on production. Thus, it was assumed that
cost increases of l%-2% because of pollution controls could
easily be passed on by the industry.
Available financial data and an industry survey were
interpreted as indicating that those firms which were not
likely to close for other reasons would be able to finance
the required capital expenditures. It was estimated that a
few small, marginal firms might close more quickly because
of pollution control costs, but this impact was judged to be
slight.
The aggregate effects on employment or production in
the leather industry as a result of pollution control costs
were estimated to be minimal. The closing of beam houses by
some firms was expected to result in the unemployment of
some 600 workers. These job losses were expected to be widely
scattered geographically, however, with no important community
impacts. Some subsequent increase in employment was expected
where the beam house work would be picked up.
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NONFERROUS METALS
SMELTING AND REFINING
ALUMINUM
Total investment expected to control the air and water
pollution associated with the smelting and refining of aluminum
for the period 1972 through 19 76 was estimated at approximately
$9 35 million. Annual costs were estimated to range from $22
million in 19 72 to approximately $290 million in 19 76. Cost
increases per pound of aluminum in 19 76 would average $0,020
to $0,032.
Although the required capital expenditures are large,
aluminum producers were judged to have the necessary
financial resources.
Cost increases are expected to be passed on to consumers
of aluminum. Historically, demand for aluminum has been sensi-
tive to price. Thus it was expected that by 1976 price increases
of approximately 5%-8% will lead to a level of aluminum con-
sumption 4%-6% lower than would otherwise have existed. In
the longer run, price increases of approximately 10% were ex-
pected to lead to a 13% reduction in aluminum consumption.
This does not mean that the demand for aluminum would be reduced
below current levels. Instead, demand would not grow as fast
as would otherwise be expected.
It was not expected that pollution control costs will force
any existing plants to shut down, although it is possible that
some of the other plants may be closed sooner than otherwise.
No decline of employment in the aluminum industry was expected
because of pollution controls. As with demand for production,
employment would not grow as fast as otherwise.
Increased costs were expected to have an adverse effect
upon the U.S. balance of payments by leading to a decline in
U.S. exports of ingot and mill products and an increase in
U.S. imports of mill products.
The latter effect might be especially severe because
pollution control costs may lead to new aluminum smelters being
located outside of the U.S. No total estimate of the balance
of payments effect has been made, although it was noted that
the eventual decline in exports may total $100 million to
$200 million.
Because of the uncertainties associated with the financial
capacity of the industry and the economics of individual smelting
and refining plants, further Study is currently being made of
the impact of pollution abatement requirements upon the aluminum
industry.
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NONFERROUS METALS
SMELTING AND REFINING
COPPER
The capital investment required in the copper industry,
because of air and water pollution controls from 1972 through
1976, was estimated to total $300 million to $690 million, with
a most likely estimate of $341 million. Annual costs were
expected to increase from $6 million in 1972 to $95 million
in 1976. Per pound of refined copper, these costs average
$0,001 in 1972 and $0,025 in 1976, with a possible high
estimate of $0.05 in 1976.
It is expected that the industry can finance the required
capital expenditures.
The effect of cost increases has been analysed considering
a basic projection for the copper industry without pollution
control costs; and two alternative assumptions: (a) that
foreign competition will not compete in the U.S. market, so
that U.S. producers are able to raise prices, and (b) that
foreign competition will prevent any price increase in the
U.S. market as a result of pollution control coasts. It was
assumed that the actual impact of pollution control costs will
lie somewhere between these two extremes.
If the average pollution control costs are considered, (a)
U.S. production of copper in 1980 was expected to be approximately
7% less than the base projections of 4,169,000 short tons if
foreign competition prevents price increases while prices and
consumption would not change? (b) U.S. production would be 3.5%
lower than base projections; U.S. consumption 4.6% lower; and
U.S. prices 4% higher; if foreign competition is not a factor.
If costs equal the highest estimates, (a) U.S.production
would be 14% lower than projected, if no price increase is
possible; (b) U.S. production would be 7.4% lower; U.S. consump-
tion 9% lower, and U.S. price 8% higher, if low foreign
competition permits price increases.
Thus depending upon costs and foreign competition,it was
estimated that U.S. supply be reduced 3.5% to 14% and U.S.
consumption 0% to 9%;and U.S. prices may increase 0% to 8%
because of pollution controls.
It was estimated that most existing U.S. smelters will
continue to operate under pollution control requirements.
Two smelters were identified, however, as being forced to
close. No estimate was made of additional smelters which
might close.
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With the imposition of pollution controls, employment in
the copper industry was not expected to decline, but would grow
more slowly than the base projections. Without pollution
control costs, employment was expected to grow from 54,000 in
1970 to 76,900 in 19 80. Pollution control costs were
expected to reduce the 1980 employment by 2,800 to 10,900 or
3.6% to 14% depending upon the cost and foreign competition
assumptions discussed above. Where individual smelters
close, of course, all workers would become unemployed. The
two smelters identified as closing currently employ 1,150
employees. No estimate was made of the associated
mining employment. In both instances, a significant community
impact was expected.
No estimate was made of the effects of pollution
controls in the copper industry upon U.S. balance of payments.
In the extreme case, it was mentioned, all new smelting
capacity might be located offshore. This would mean that
the current capacity of 3,066,000 short tons would not be
expanded to the predicted 4,169,000 short tons in 1980, a
reduction of 26% from the baseline trend. ¦This would have
substantial financial and employment consequences within the
industry in addition to the balance of payments effects.
As with the aluminum industry, further study is being
made of the copper industry to ascertain on a plant by plant
basis the costs of pollution controls and the economic
viability of the controlled plants.
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NONFERROUS METALS
SMELTING AND REFINING
LEAD
The total capital expenditure required to control the
air and water pollution associated with the smelting and
refining of lead was estimated at about $70 million for the
1972-1976 period. Annual costs were expected to increase
from $1.1 million in 1972 to $20 million in 1976. Costs per
pound of lead in 1976 were estimated as $0,012 to $0,017,
with a best estimate of $0,014. These studies did not
consider the substantial changes in the lead markets that will
be caused by other pollution abatement regulations such as
those which would lead to reductions in the lead content of
gasoline.
The U.S. lead industry currently can be divided into
the low-cost producers in Missouri which account for 55% to 60%
of U.S. production; and the high-cost producers located else-
where. Estimates of production and pollution control costs
indicated that the low-cost producers would be able to raise the
required capital and to maintain production even if forced to
absorb pollution control costs. High-cost producers, on the
other hand, may not be able to raise the required capital. If
some are forced to close, this will be an acceleration of the
current industry trend which could be expected to continue even
in the absence of pollution control costs. Any price increases
were expected to be small, reflecting the costs of the low-cost
producers. One estimate was of an increase of $0,007 per pound
or 5%. Such an increase was not expected to alter the trend
towards the exit of high-cost producers.
Because the demand for lead was not very sensitive to
price, no significant reduction in lead consumption was expected
to result from pollution control costs. The shift in produc-
tion toward the less labor intensive, low-cost producers was
expected to result in a net loss of employment in the industry
even in the absence of pollution control costs. One smelter which
was expected to close soon would result in the unemployment of
some 200 persons. Fewer employees would be needed in the low-cost
smelters which pick up this demand, and none would be needed in
the community where the plant closes.
No estimate was made of the impact of pollution control costs
in the lead industry upon the U.S. balance of payments. Some
increase in imports were expected, of course, if prices are
raised, but the expected price increase was judged to be small.
No incentive to relocate smelters abroad is anticipated.
Further study is being made of the economic impact of pollution
abatement regulations on the lead industry.
36

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NONFERROUS METALS
Smeltingand refining
zinc
During the period 1972-1976 it was estimated that $62
million of capital expenditures will be required
to control the air and water pollution asf	^ control costs
the smelting and refining of zinc. Annual	COStS
would increase from $1.5 million in !972 to $27	- with an
19 76. These would average $0.0123 to $0.0267 per p ,
expected cost of $0.0135 per pound.
The U.S. zinc industry can be segmented into ^h-cost
and low-cost producers, with a trend toward the ®xit
cost producers from the industry. Because pollution
costs were expected to fall upon high-cost producers m
heavily than upon their low-cost competitors, and because
price increases were not expected to equal pollution c
costs, some acceleration in the closing of high cost
facilities was expected from pollution abatement regulation .
An analysis of prices and average production cos^® ^or
low-cost producers indicated that these producers would be
able to absorb pollution control costs and raise the necessary
capital even if there is no resultant price increase, it is
possible, however, that such a situation would inhibit the
expansion of some low-cost producers. No similar analysis was
conducted for high-cost producers. It was assumed, however
that because the profit margins after absorbing pollution
control costs were so small for low-cost producers,	"ie
margins of high-cost producers would be reduced-below the
opportunity cost of capital and possibly to a i°s®'	.
the pressure of imports and substitute materials, 11 'was ^
expected that price increases could be large enough to ait
these conclusions.
Total employment in the zinc industry is expected to
decline in the long run, with three or four sneitors elosing,
even in the absence of pollution controls. The trend	-
be hastened by abatement requirements, but no estiinate	.
of the time periods involved. Total e^J°Yraent in the^smelters
expected to close was approximately 3,000. No esti a
related mining employment was made.
The accelerated demise of high-cost	ff
increases for low-cost producers would	S %
on the U.S. balance of payments. The.clo^i	SStild lead
smelters and the inhibition of expansion of ¦<>«*•«	lead
to an increase in zinc metal imports.	^ marly used
offset by the reduced imports of concentrates formerly
37

-------
by high-cost producers. Additional imports of zinc metal
were estimated to reach $78 million to $124 million per
year. No estimate was made of decreased imports of zinc
concentrates.
Further study of the zinc industry is being conducted
to ascertain the impacts of pollution abatement requirements
on individual smelting and refining plants.
38

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PETROLEUM REFINERIES
From 1972 through 1976, it was estimated that the petroleum
refining industry would be required to make capital expendi-
tures of $634 million to $1155 million to meet the air and water
pollution abatement requirements that apply to the refining of
petroleum. Annual costs of $2 million in 1972 rising to $21
million in 1976 would also be required. In addition, the cost
of using low sulfur fuels in refinery operations was estimated
to be $108 million annually by 1976. The average pollution abate-
ment costs per barrel in 1976 were estimated to be $0.06, thus
increasing the total cost per barrel by approximately 1.4%.
Because capital expenditures for pollution control equip-
ment would equal only 5% of the $21.4 billion capital expen-
ditures otherwise projected for the industry in the next ten
years, it was considered that these expenditures would be
manageable. A price increase of $0.08 per barrel was expected
to help defray the added costs. In addition to the annual costs
mentioned above, this $0.08 figure included an 8% return
judged to be necessary to attract the capital
required to install control equipment in new facilities.
This price increase was assumed to be possible because imports
are restricted by law and the demand for petroleum is not
elastic.
Given this $0.08/bbl. price increase, it was estimated
that most small producers will be able to sustain added pollu-
tion control costs. A few, perhaps 12, might be forced to close.
If a dozen small refineries	do close, approximately 1,000
workers would become unemployed.	These small refineries would
probably be located near smaller communities, and thus would
have a noticeable local impact.	Otherwise, industry employment
is expected to increase at about	the rate projected without
pollution control costs.
If desulfurization of the liquid fuels used in refinery
oeprations is required, additional imports of such fuels were
estimated to cost $40 million per year. No other balance of
payments effects as a result of pollution abatement requirements
on refinery operations were estimated.
This study did not take into account a number of major
changes likely to occur in the petroleum industry. These
include federal requirements for making lead-free gasoline
available, restriction of lead content in leaded gasoline,
higher average sulfur content in crude oil supplies, and
higher market demand for desulfurized residual oil. Further,
although environmental regulations will impact almost every
aspect of the petroleum industry from exploration through
production, transportation and refining to marketing, only

-------
the pollution abatement costs related to refinery operations
have been estimated. Consideration of the full impact of
environmental regulations on the petroleum industry could
result in substantial increases in capital requirements and
operating costs above those estimated for this study.
Additional studies of pollution abatement costs and the economic
impact of these costs will be undertaken. The findings of
these studies will be made available on completion.
40

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PULP AND PAPER MILLS
Approximately $3.3 billion was estimated to be required in
capital expenditures by the paper industry for the period 1972-
1976 to meet air and water pollution abatement requirements.
Annual costs per ton of product were estimated to range from
$5.50 to $12.50 depending upon product sector.
Because of an anticipated tightening of supply/demand
balances, price increases were expected in the paper industry.
These increases were likely to reflect the above-mentioned
annual costs of pollution controls. Increases of this magni-
tude would represent a 3.5% to 10% increase over current prices
depending upon product sector.
Given these increases it was anticipated that most mills
will be able to manage pollution control expenditures. However,
of the 752 pulp and paper mills in the U.S., 329 accounting
for 15% of U.S. production have been identified as marginal.
These mills currently have profit margins much below industry
averages (-7.7% to 4.8% vs 6.6%) and may experience pollution
control costs approximately twice as large as industry avarages.
Price increases were not expected to cover their increased costs.
This will reduce already low profit margins and create some
difficulty in raising the capital required for pollution control
equipment.
Even in the absence of pollution control requirements, 30-35
of these marginal mills were expected to close in the 1972-76
period. It was estimated that an additional 60-65 mills would
be forced to close with the imposition of abatement regulations.
These additional closings were expected to result in the loss
of 16,000 jobs by 19 76. A larger number of jobs will be made
available in plants which are expected to expand, but these of
course may not be in the same community. Many of the shut
downs are likely to be in rural areas where they would have
significant community impact.
Assuming that pollution abatement measures will be similar
in all paper producing countries, it was not anticipated that
pollution abatement costs would significantly affect the
international competitiveness of U.S. paper products.
41

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STEEL MAKING
Capital expenditures required by air and water pollution
abatement regulations were estimated to total $2.4 billion to
§3.5 billion for the period 1972 through 1976. Annual operating
and maintenance costs were estimated to be $45 million to $70
million in 1972, increasing to $760 million to $1,100 million in
19 76. Per net ton of steel shipped, these costs would average
from $0.47 to $0.73 in 1972 and $6.60 to $9.60 in 1976.
Price increases to cover pollution abatement costs would be
necessary to generate the cash required to meet projected
expenditures. The estimated 0.7% to 1.5% annual increases
were considered moderate, however, in relation to historical
price increases.
It was expected that most facilities would be able to install
pollution abatement equipment and continue operation. This
conclusion was strengthened by the fact that the demand
may exceed the capacity of the industry to supply steel so
that the industry would need all of its current capacity.
The possible effect of price increases upon the U.S. balance
of payments was assumed to be negligible because of continued
voluntary import restrictions, the re-alignment of currencies,
and the moderate size of expected price increases.
Because the estimates of the industry's ability_to
finance the required capital expenditures and to maintain
operations in the less modern facilities are sensitive to
several key assumptions (e.g., substantial increases in
demand for domestic steel, current industry capacity),
additional analysis is being conducted to confirm the validity
of these assumptions.
42

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AUTOMOBILES
Prepared by
Chase Econometric Associates, Inc.
43

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I. Introduction
This report has been prepared to estimate the economic
effects of mobile source emission controls on the automobile
industry. In this report we are not concerned about the addi-
tion of pollution control equipment to automobile manufacturing
plants. Instead we concentrate exclusively on the effects
which emission controls will have on the cost and price of
automobiles, and hence on shipments and employment of the
automobile industry and its supplier industries.
This executive summary follows the same logical outline as
Part III of the complete report, with key tables included but
much of the explanatory and numerical detail omitted. Since
the complete study by necessity follows a very distinct and
somewhat rigit} progression, the summary material presented here
follows this si^me order, which may differ slightly from the
order found in the other reports on pollution control. In brief,
the analysis which we use is based on the following pattern:
1.	We use the cost data supplied by The Council on Environ-
mental Quality for mobile source emission controls. These
data are available on an annual basis and cover the original
cost of the required equipment. Replacement and maintenance
costs are not considered separately as they are likely to be
covered by warranty.
2.	We estimate the change in price which will occur because
458-471 O - 72 - 4	45

-------
of the increase in pollution control costs. In particular we
examine whether auto companies raise their prices by an amount
greater than, equal to, or less than, the cost increases. We
then quantify these pass-on percentages by each size-price
classification of car.
3.	We estimate equations which are used for predicting the
share of the total market for each size-price classification.
These shares are a function of relative prices for different
sizes of cars and various macroeconomic variables. If we can
estimate the proportion of the cost which is passed along, and
hence the new relative price structure of cars by size-price
classification, we can then predict the change in relative shares
which will occur because emission control equipment is added.
4.	We use the Chase Econometrics macroeconomic model to esti-
mate the total level of car sales with and without emission
control equipment. These estimates are then used in conjunction
with the relative share equations to generate predictions of
the actual number of cars sold by size-price classification.
5.	We use the Chase Econometrics Inter-Industry Forecasting
Model to generate predictions of sales, profits, employment,
and shipments for all industries which are major suppliers to
the automobile industry as well as the auto industry itself.
6.	We have repeated these calculations, as requested, for a
rise in costs which are 30% less and 30% more than the expected
46

-------
increments estimated by The Council on Environmental Quality.
However, these calculations have been relegated to the Part III
of the report and the Appendix. For the most part the non-
linearities inherent in the system are negligible for changes
of this order of magnitude, and hence the basic conclusions
can be reproduced with the appropriate scale factor of + 30%.
II. Cost Data
The estimated investment costs for alternative mobile
source emission controls for the period 1967-1977 are given in
Table I. The costs for the period 1967-1972 are already known
and in fact have been included in the prices of automobiles to
date. As can be seen from Table I, these costs have already
cumulated to $34.50 per car. The 1973-74 incremental cost of
$48.00 is already a firm figure, since planning of these devices
is virtually complete. The 1975-77 costs have a much greater
range of uncertainty attached to them, which is why we have
repeated the calculation with figures of - 30%. While a
considerable amount of research has already been undertaken
by both automobile and chemical companies, the problem of
finding a catalytic unit which will last for 50,000 mileshas
not yet been solved.
After these emission control devices have been added, it
is unlikely that future pollution control equi^oent will be
required for automobiles during the next decade. However,
47

-------
Table I
ESTIMATED INVESTMENT COSTS FOR ALTERNATIVE MOBILE SOURCE
EMISSION CONTROLS 1967-1977
Autos and Light Duty Trucks
Model
Year
1967
1968-69
Controls Added
Cost
per New
Vehicle
(Dollars)
None
1970
1971
Valve and valve seat changes for
unleaded gasoline.
1972
1973-74 Exhaust gas recirculation for N0X
control, fixed orifice system.
Speed controlled spark advance.
1975 Catalytic oxidation of exhaust HC and
CO (includes long-life exhaust system).
Unitized ignition systems for 50,000
mile service-free performance.
Air injection for catalytic unit needs.
1976-77 Dual catalyst units for HC, CO oxida-
tion and NO reduction (additional
cost above previous controls which are
supplanted),.
Modified manifold reactors to reduce
catalyst load.
0.00
Closed PCV system (above cost of open system).
Carburetor changes.
Ignition timing changes.
Inlet air temperature control.
Additional carburetor changes.
Idle control solenoid.
Ignition timing changes.
Evaporative emission control.
Improved idle control solenoid with
overheat protection (above 'dS-'TO
costs) including transmission spark control.
Lower compression ratios.
Additional carburetor changes.
5.40
7.40
19.70
2.00
48.00
164.00
105.00
Cumulative
Costs
(Dollars)
0.00
5743"
!Oo
32.50
34.50
82.50
246.50
351.50
48

-------
the automobile and the internal combustion engine will un-
doubtedly continue to receive a great deal of unfavorable
comment from the ecologically minded public, particularly in
the field of urban transportation. Rotary engines (such as
the Wankel engine), mini-cars which could be electrically
powered and used only for short trips, turbines, and extended
mass transit systems could reduce the market for automobiles
and ic engines far more than will price increased due to
emission control devices. Furthermore, as discussed below,
the increased prices associated with these controls is likely
to spawn a new class of sub-sub-compacts, which may not be
produced by existing auto companies and in any case would
materially alter the present mix of car production facilities.
We were also given estimates by The Council on Environ-
mental Quality on the additional costs associated with
increased maintenance charges and decreased fuel efficiency,
but we have not processed those figures for use in this report.
First, in order to ensure that the emission control equipment
is in good working order, auto companies are likely to include
any required maintenance or adjustments under warranty. This
would add to the initial purchase price of the car but not
its annual operating expense. Second, there is no a priori
relationship between fuel efficiency and-number of new cars
purchased, ifoe average driver consider increased fuel costs
48

-------
to be higher operating costs, in which case he would use less
cars and more mass transit. He might also reduce the number
of miles driven per year and hence keep each car longer. On
the other hand, petroleum companies might lower the price of
gasoline or restructure their refining or marketing structures.
Until these intendationships have been explored in some detail,
it is not useful to speculate on the effect which decreased
fuel efficiency will have on new car sales.
III. Cost-Price Relationship
One of the most difficult and sophisticated parts of
this study involves the translation of costs to prices. In
a competitive industry, prices would originally rise by the
full amount of the cost increase, demand would slacken, some
firms would go out of business or reduce production, and
after some time a clearly definable new equilibrium position
would be reached. The U.S. automobile industry, however, is
the classic textbook example of the non-competitive industry.
General Motors is recognized as the industry "price leader" in
each price category, and can be seen as choosing each price
in the way that maximizes its total corporate profits from
the sale of automobiles. GM's competitors in each category
may then be seen as accepting the price set by GM and competing
on a non-price basis for various market shares. Recognizing
its dominant position in the industry, GM has set its prices
50

-------
based both on its average costs and on a variety of different
levels of mark-up which depend importantly on the elasticity of
demand for each different kind of car.
In order to solve this problem, we have divided total car
sales into five distinct classifications: sub-compacts, compact,
standard, intermediate, and luxury cars. We have then estimated
the elasticity of demand for each of these classifications,
taking into account the price of the class of car in question,
the prices of cars which are close substitutes, and price of
all cars in general. We would expect that the price elasti-
city is higher for smaller cars than for luxury cars and that
it would be higher for closer substitutes. The results do in
fact show just this. There is a particularly high cross-
elasticity between standard and intermediate cars, which is
quite understandable. As compact cars rise in price, some
consumers might still prefer them to standard-size cars
because of the ease of handling and parking or fuel economy.
However, as the price of a standard car (such as Chevy) rises
to and approaches the price of an intermediate (such as
Pontiac) there are very few consumers who would not be willing
to shift. The price elasticities for each size-price
classification are given in Table II.
We now must calculate the change in price for a given
change in marginal cost. This ratio depends on the cross-
51

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Class Number and Name
Table II
Price Elasticities by Size-Price Classification
*
1.	Sub-compact
2.	Compact
3.	Standard-size regular
4.	Intermediates
5.	Luxury
~Calculated at mean values
Total Price
Elasticity
-4.1
-5.4
-5.7
-1.8
-2.4
Cross-Elasticity
Relative to
Substitutes
(as Noted)
Class 1	Class 3
-3.1	-2.3
Class 2	Class 4
-1.0	-4.7
All
Cars
-1.8
-2.4
elasticities given in Table II and also the change in
elasticity as we move from one price to another. Since the
demand for each class of cars depends in general on prices
of all other cars as well as its own price, a complete set
of simultaneous equations must be solved which take into
account all of these relationships. In performing these
calculations it should be noted that the change in cost per
car is the same for all cars; hence the percentage increase
is much greater for smaller cars than for larger ones. Thus
in calculating these pass-along propositions, we also need to
consider the ratio of the change in costs to the total price
for each category as well as all the elasticity factors. We
52

-------
would expect that the pass-along proportions would be higher
for higher price elasticities and lower prices. The final
results, which are the percentage of the increased cost
which is passed along as a higher price, are given in Table III.
Table III
Pass-Along Proportions by Size-Price Classification
Class Number and Name
1.	Sub-compact
2.	Compact
3.	Standard-size regular
4.	Intermediate
5.	Luxury
Change in
Marginal Cost as
a % of 1976 Price
12.8
10.3
9.3
8.1
5.4
Pass-Along
Proportion of Price Increase
for Unit Cost Increase
0.84
0.90
0.90
0.90
0.98
IV. Changes in Demand
If we now know the change in price which will occur in
each size-price classification because of the addition of
various emission control devices, we can estimate the changes
in sales. We have used a two-step procedure. We first estimate
the share of the market for each size-price classification
before and after the additional costs of the control equipment.
These figures are given in Table IV.
It should be noted that 1973 (1975 if there are not pollu-
tion control standards) marks the introduction of what we have
called "Class Zero" cars — sub-sub compacts. Trends of auto-
mobile purchases during the last 15 years have been consis-
53

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Table IV
Shares of Total New Passenger Car Registrations
by Size-Price Category, Baseline and Impact:
1970-1980
Category
Baseline Impact
Di£.
B.
I.
D.
B.
I.
D.
B.
I.
D.
1970
.2012
.2012
.0000
.2468
.2468
.0000
.2570
.2570
.0000
.1983
.1983
.0000
1971
.1718
.1718
.0000
.2538
.2538
.0000
.2576
.2576
.0000
.2146
.2146
.0000
1972
.1438
.1438
.0000
.2667
.2667
.0000
.2644
.2644
.0000
.2187
.2187
.0000
1973
.1551
.1544
-.0007
.2665
.2674
.0009
.2573
.2542
-.0031
.2139
.2144
.0005
1974
.1667
.1662
-.0005
.2665
.2673
.0008
.2502
.2472
-.0030
.2079
.2083
.0004
1975
.1700
.1681
-.0019
.2666
.2696
.0030
.2440
.2318
-.0122
.2001
.2000
-.0001
1976
.1720
.1693
-.0027
.2667
.2711
.0044
.2374
.2200
-.0174
.1968
.1961
-.0007
1977
.1740
.1714
-.0026
.2667
.2709
.0042
.2305
.2137
-.0168
.1885
.1889
.0004
1978
.1760
.1734
-.0026
.2665
.2706
.0041
.2241
.2076
-.0165
.1789
.1803
.0014
1979
.1781
.1755
-.0026
.2664
.2704
.0040
.2172
.2010
-.0162
.1693
.1720
.0027
1980
.1800
.1775
-.0025
.2665
.2705
.0040
.2105
.1944
-.0161
.1611
.1637
.0026





5

ft
Class Zero"







B.
I.
D.
B.
I.
D.






1970
.0967
.9067
.0000
.0
.0
.0000






1971
.1022
.1022
.0000
.0
.0
.0000






1972
.1064
.1064
.0000
.0
.0
.0000






1973
.1071
.1080
.0009
.0
.0016
.0016






1974
.1086
.1094
.0008
.0
.0016
.0016






1975
.1107
.1141
.0034
.0086
.0164
.0078






1976
.1117
.1175
.0058
.0154
.0260
.0106






1977
.1136
.1183
.0047
.0267
.0368
.0101






1978
.1157
.1201
.0044
.0388
.0480
.0092






1979
.1179
.1220
.0041
.0511
.0591
.0080






1980
.1198
.1238
.0040
.0621
.0701
.0080

-------
tently in the direction of introducing new, smaller cars, and
there is no reason why this should not continue. In fact,
pollution standards as they now exist are likely to accelerate
this move for two reasons. First, motorcycle-size engines
are likely to emit pollutants which are within the required
limits even if they are not as efficient as larger engines,
simply because of the smaller size involved. Second, the major
problem with catalysts developed to date has been that they do
not last more than 10,000 or 15,000 miles. This suggests the
emergence of very inexpensive automobiles which are not expec-
ted to last more than 10-15,000 miles and would be constructed
with very inexpensive materials. Both the "motorcycles with
roofs" and the "throwaway cars" are likely to be sold within
the next five years, and by 1980 can be expected to have
annual sales in excess of 7% of the total auto market.
After calculating the relative shares of the auto market,
we then proceed to determine the size of the market itself.
For this purpose we use the Chase Econometrics macroeconomic
model to project the economic climate for the next ten years.
In generating this projection we have used as an overall
guideline the basic long-range forecasts made by the Council
of Economic Advisers, which assumes that unemployment declines
to 4 1/2% and stays there and inflation remains below 3%
throughout the decade. We have not, for example, included here
55

-------
the result of alternative runs incorporating a recession in
1974-1975. The levels of several key variables under these
baseline assumptions, plus the predictions for total auto sales
under the baseline and impact projections, are given in Table V.
Table V
Macroeconomic and Auto Sales Projections, 1970-1980
Year
GNP$
GNP
P
UN
NPCR
NPCR





Baseline
Impact
1970
974.1
720,0
116.3
5.0
8.44
8.44
1971
1050.3
741.9
121.2
5.9
10.32
10.32
1972
1147.1
785.7
124.8
5.4
11.17
11.17
1973
1266.8
836.1
129.8
4.9
11.91
11.83
1974
1374.2
875.5
135.5
4.7
12.37
12.30
1975
1477.7
906.6
141.5
4.8
12.68
12.36
1976
1608.0
952.8
147.0
4.4
13.31
12.89
197?
1742.6
996.2
153.0
4.4
13.60
13.27
1978
1881.3
1038.4
159.0
4.4
13.90
13.65
1979
2028.2
1083.4
164.6
4.4
14.24
14.04
1980
2182.1
1131.1
169.9
4.5
14.53
14.35
Where:
GNP$	=	Gross national product, billions of current dollars
GNP	=	Gross national product, 1958 dollars
P	-	Consumer price index, 1967=100
UN	=	Rate of unemployment, %
NPCR	=	New passenger car registrations, millions
We can then combine the estimates of shares with the
projections of total car market to generate predictions of
auto sales by size-price classification v/ith and without
emission control standards. These results are given in
Table VI.
From Table VI it can be seen that standard-size cars are
the hardest hit because of their high price elasticity.
Class I also drops substantially, as it loses ground to
56

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both the sub-sub-compacts (which require cheaper emission
control equipment) and the regular compacts (which have had
a much smaller percentage increase in price). The other
three classifications have a gain in market share but a drop
in actual sales. As might be expected, the drop in luxury
car sales caused by the control equipment is almost zero.
V. Macroeconomic Implications
We can also use the Chase Econometrics macroeconomic
model to determine the effects which the imposition of
emission control standards will have on output, prices,
employment and international trade.
It cannot be stressed too strongly that these effects
are largely a function of the state of the economy at the
time when the emission control standards are instituted.
If the economy is already in a recession, a further decline
in aggregate demand will lead to greater unemployment and
less output. If, on the other hand, the economy is at full
employment, there may be a short-run decline in demand, but
after a year or two the slack in automobile purchases will
be filled by other components of aggregate demand. This
transfer mechanism is likely to work through changes in
relative product and factor prices, including wage rates
and interest rates. Since we have been asked to prepare a
baseline solution with the economy at full employment, this
57

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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Table VI
New Passenger Car Registrations by Size-Price Classification
Baseline
Registrations
1.698
1.773
1.606
1.847
2.062
2.156
2.289
2.366
2.446
2.536
2.615
Class I
Net Gain (Loss)
Due to Change
In Share
0
0
0
-.007
-.006
-.024
-.036
-.035
-.036
-.036
-.036
Class II
Net Loss Due
To Decline
In Total Market
0
0
0
-.013
-.012
-.054
-.071
-.057
-.043
-.036
-.032
Registrations After
Emission Controls
1.698
1.773
1.606
1.827
2.044
2.078
2.182
2.274
2.367
2.464
2.547
2.083
2.619
2.979
3.174
3.297
3.380
3.550
3.627
3.704
3.794
3.872
0
0
0
.010
.010
.037
.057
.057
.057
.056
.058
0
0
0
-.021
-.019
-.085
-.113
-.089
-.067
-.054
-.048
2.083
2.619
2.979
3.163
3.288
3.332
3.494
3.595
3.694
3.796
3.882

-------
Baseline
Registrations
1970	2.169
1971	2.658
1972	2.953
1973	3.064
1974	3.095
1975	3.094
1976	3.160
1977	3.135
1978	3.115
1979	3.093
1980	3.059
1970	1.674
1971	2.215
1972	2.443
1973	2.548
1974	2.572
1975	2.537
1976	2.619
1977	2.564
1978	2.487
1979	2.411
1980	2.341
Table VI (Cont'd)
Class III
Net Gain (Loss)
Due to Change
In Share
0
0
0
.036
.036
.155
.232
.288
.229
.231
.234
Net Loss Due
To Decline
In Total Market
0
0
0
-.021
-.018
-.074
-.092
-.071
-.052
-.040
-.035
Registrations After
Emission Controls
2.169
2.658
2.953
3.007
3.041
2.865
2.836
2.836
2.834
2.822
2.790
Class IV
0	0	1.674
0	0	2.215
0	0	2.443
.005	-.017	2.536
.005	-.015	2.562
•001	-.064	2.472
.008	-.083	2.528
.005	-.062	2.507
.019	-.045	2.461
•038	-.034	2.415
.037	-.029	2.349

-------
Baseline
Registrations
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
.816
1.055
1.188
1.276
1.343
1.404
1.487
1.545
1.608
1.679
1.741
Table VI (Cont'd)
Class V
Net Gain (Loss) Net Loss Due	Registrations After
Due to Change	To Decline	Emission Controls
In Share	In Total Market
0 0	.816
0 0	1.055
0 0	1.188
.011	-.009	1.278
.011	-.008	1.346
.042	-.036	1.410
.076	-.048	1.515
.063	-.038	1.570
.060	-.029	1.639
.058	-.024	1.713
-058	-.022	1.777

-------
is approximately what "happens, as explained next.
In 1976, when the maximum costs of emission control
standards first go into effect, auto sales are 400,000 units
lower with controls then without. However, there are offsetting
increases. Because unemployment is slightly higher and
capacity utilization is slightly lower in the impact case,
prices do not rise as fast (the CPI rises 3.85% compared to
3.90% in the baseline case). As a result, non-auto consumption
declines less than would otherwise be the case, residential
construction rises slightly, and government expenditures in
constant dollars are higher because the same number of dollars
can purchase more goods and services at lower prices. These
changes tend to offset the decline due to the reduction in
auto production. Thus by 1980, total employment (and unemploy-
ment) are the same under either the baseline or impact projec-
tion. This is the correct way to interpret the full employment
assumption under which these runs are calculated.
The net foreign balance, however, does suffer significantly
After emission control standards are set, there will be a sub-
stantial increase in sales of sub-sub-compact cars, and most
of these will be foreign produced. Thus, imports will rise
substantially and will more than offset the slight rise in
exports which occurs because non-auto prices are slightly
lower. In any case, this effect will be less than $1 billion.
458-411 O - 72 - 5	61

-------
The baseline and impact effects are compared for several
key variables in Table VII.
VI. Industry Implications
As pointed out in the previous section, the effects
on the economy from the imposition of emission control
standards work in opposite directions. Clearly a decrease
in automobile production will lower employment and
shipments in supplier industries, on the other hand,
increases in other consumption and investment will counter-
act these declines in many of the same industries. Tfrese
two effects are offsetting by 1980 for most industries
providing that we continue to operate in a full-employment
environment. Thus it can be seen from Table VIII that
constant-dollar sales (i.e., volume) increases in most of
the supplier industries by 1980. The same pattern is shown
for employment for these industries in Table IX.
While these results may seem somewhat paradoxical,
they are the direct result of the assumption that the
economy is at full employment. With unemployment under
4 1/2%, there are many alternative uses for the factor
resources which are idled by the decline in automobile
demand. While there is an undeniable drop in auto sales,
employment and profits, these are balanced in the aggregate
by increases elsewhere. If on the other hand these new
62

-------
Oi
co
TABLE VII.
Macroeconomic Effects of Emmission Control Standards
G.\'P$	GNP$ Diff.	GiVP GNP	Diff. CPI CPI	Diff. Einply. Emply. Diff.
B	I
1971	1050.3	1050.3 0.0	741.9 741.9	0.0 121.2 121.2	0.0 18.59 18.59	0
1972	1147.1	1147.1 0.0	785.7 785.7	0.0 124.8 124.8	0.0 18.79 18.79	0
1973	1266.8	1266.5 -0.3	836.1 835.9	-0.2 129.8 129.9	+0.1 19.27 19.26 -.01
1974	1374.2	1373.5 -0.7	875.5 875.1	-0.4 135.5 135.5	0.0 19.54 19.52 -.02
1975	1477.7	1476.3 -1.4	906.6 906.0	-0.6 141.5 141.6	+0.1 19.50 19.45 -.05
1976	1608.0	1604.7 -3.3	952.8 951.5	-1.3 147.0 147.0	0.0 20.01 19.93 -.12
1977	1742.6	1738.2 -4.4	996.2 995.7	-0.5 153.0 152.7	-0.3 20.37 20.31 -.06
1978	1881.3	1877.1 -4.2	1038.4 1039.7	+1.3 159.0 158.4	-0.6 20.63 20.60 -.03
1979	2028.2	2024.5 -3.7	1083.4 1086.0	+2.4 164.6 163.9	-0.7 20.92 20.92	0
1980	2182.1	2178.5 -3.6	1131.1 1134.3	+3.2 169.9 169.1	-0.8 21.23 21.23	0
UN	UN	Diff.	NFB NFB	Diff.
1971	5.94	5.94	0	1.0 1.0	0
1972	5.44	5.44	0	3.5 3.5	0
1973	4.94	4.95	+.01	3.7 3.6	-0.1
1974	4.71	4.72	+.01	1.8 1.7	-0.1
1975	4.76	4.81	+.05	1.3 0.9	-0.4
1976	4.41	4.46	+.05	0.7 0.2	-0.5
1977	4.37	4.40	+.03	-0.6 -1.0	-0.4
1978	4.43	4.43	0	-0.5 -0.9	-0.4
1979	4.42	4.41	-.01	1.3 0.8	+0.5
1980	4.45	4.44	-.01	3.9 3.2	+0.7

-------
Table VIII.
Industry Performance: 1970-1980
Variable
Sales FTC-SEC,
Constant $
Industry
SIC
371
Assumption
Baseline
Impact (1001.)
Difference
1970
50.24
11
0
1971
59.36
ti
0
1972
66.63
tt
0
1973
71.68
71.38
-.30
1974
74.05
73.82
-.23
1975
75.25
74.22
-1.03
1976
81.55
80.22
-1.33
1977
83.04
82.27
-.77
1978
84.93
84.52
-.41
1979
87.84
90.05
-.32
1980
90.42
90.05
-.37

331, 332
339

23.96
It
0
23.35
ft
0
26.12
tt
0
29.52
29.46
-.06
29.99
29.91
-.08
29.33
29.13
- .20
31.09
30.76
- .33
32.48
32.30
-.18
32.93
32.98
.05
33.68
33.85
•17
34.73
34.88
.15

333, 334
335, 339
•
16.81
ft
0
17.09
tt
0
18.91
11
0
21.19
21.16
-.03
21.99
21.96
-.03
22.05
21.96
- .09
23.49
23.34
- .15
24.50
24.43
-.07
25.18
25.25
.07
26.09
26.22
.13
27.20
27.32
.12

34

30.93
tt
0
32.41
tt
0
35.75
II
0
39.41
39.38
-.03
41.63
41.59
-.04
43.38
43.27
-.11
47.04
46.89
-.15
49.78
49.74
-.04
52.35
52.47
.12
55.36
55.59
.23
58.53
58.78
.25

3S

50.81
tt
0
48.67
tt
0
53.88
II
0
61.11
61.07
-.04
65.73
65.64
-.09
67.62
67.44
-.18
72.54
72.17
-.37
76.79
76.56
-.23
79.75
79.82
.07
83.42
83.73
.31
87.42
87.80
.38

36

66.83
If
0
69.46
it
0
80.35
II
0
93.38
93.32
-.06
101.10
100.98
-.12
106.07
105.83
-.24
117.26
116.76
-.50
127.39
127.17
-.22
136.14
136.45
.31
146.59
147.20
.61
158.47
159.03
.56

22

20.85
II
0
22.26
tt
0
24.28
II
0
26.16
26.14
-.02
27.79
27.78
-.01
28.62
28.56
-.06
30.67
30.58
-.09
32.05
32.06
.01
33.41
33.51
.10
34.95
35.09
.14
36.58
36.73
.15

23

19.83
II
0
20.08
ti
0
22.02
tt
0
24.15
24.13
-.02
25.75
25.73
-.02
26.39
26.34
-.05
28.04
27.95
-.09
29.26
29.23
-.03
30.38
30.45
.07
31.55
31.68
.13
32.83
32.99
.16

28

56.92
tt
0
58.98
II
0
66.05
II
0
72.57
72.53
-.04
76.80
76.76
-.04
78.79
78.69
-.10
84.65
84.51
-.14
87.83
87.92
.09
91.47
91.84
.37
95.84
96.36
.52
100.66
101.20
.54

30

15.35
tf
0
16.20
tt
0
17.56
It
0
18.58
18.56
-.02
18.50
18.48
-.02
17.96
17.89
-.07
19.19
19.13
-.06
19.26
19.33
.07
19.64
19.80
.16
20.21
20.40
.19
21.00
21.17
.17

32

15.50
M
0
15.83
tt
0
17.89
tt
0
19.73
19.71
-.02
20.53
20.51
-.02
21.35
21.30
-.05
23.33
23.25
-.08
24.77
24.77
0
26.05
26.15
.10
27.52
27.66
.14
28.90
29.03
.13

29

63.40
it
0
67.96
tt
0
73.39
tt
0
80.05
80.03
-.02
84.75
84.72
-.03
88.31
88.26
-.05
94.20
94.12
-.08
98.88
98.94
.06
103.61
103.88
.27
109.02
109.44
.42
114.96
115.43
.47

-------
Table VIII (Cont'd)
Effect on Shipments for Supplier Industries
Variable
Industry
I/O
Assumption
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Shipments,
Constant $
41
Baseline
Impact (100%)
Difference
7.78
It
0
8.31
it
0
8.98
II
0
9.79
9.78
-.01
10.43
10.41
-.02
10.90
10.84
-.06
11.65
11.56
-.09
12.27
12.21
-.06
12.86
12.83
-.03
13.53
13.53
0
14.25
14.26
.01

47

5.35
»1
0
5.38
ii
0
6.06
If
0
6.99
6.98
-.01
7.43
7.42
-.01
7.49
7.46
-.03
8.02
7.96
-.06
8.46
8.43
-.03
8.69
6.70
.01
9.00
9.05
.05
9.37
9.42
.05

49

6.67
it
0
6.71
ii
0
7.62
II
0
8.86
8.85
-.01
9.38
9.37
-.01
9.38
9.35
-.03
10.06
10.00
-.06
10.67
10.64
-.03
10.95
10.99
.04
11.35
11.43
.08
11.84
11.92
.08

50

3.12
it
0
3.18
ii
0
3.38
II
0
3.68
3.67
-.01
3.89
3.88
-.01
4.04
4.01
-.03
4.30
4.26
-.04
4.51
4.49
-.02
4-70
4-69
-.01
4.92
4.93
.01
5.16
5.17
.01

58

3.11
t>
0
3.17
ii
0
3.51
ii
0
3.90
3.90
.0
4.01
4.00
-.01
3.99
3.96
-.03
4.25
4.21
-.04
4.46
4.44
-.02
4.57
4.57
0
4.71
4.72
.01
4.88
4.89
.01

17

6.08
it
0
6.87
ii
0
7.55
it
0
8.35
8.35
0
9.11
9.10
-.01
9.72
9.71
-.01
10.56
10.54
-.02
11.37
11.36
12.20
12.22
.02
13.09
13.13
.04
14.08
14.12
.04

19

4.06
u
0
4.43
ti
0
4.79
it
0
5.22
5.21
-.01
5.60
5.59
-.01
5.82
5.80
-.02
6.20
6.17
-.03
6.52
6.50
-.02
6.83
6.84
.01
7.16
7.18
.02
7.52
7.54
.02

28

13.30
ii
0
14.87
it
0
17.53
it
0
19.86
19.84
-.02
21.44
21.43
-.01
22.55
22.47
-.08
25.63
25.52
-.11
27.43
27.45
.02
29.49
29.61
.15
32.04
32.19
.15
34.81
34.95
.14

30

2.67
ii
0
2.92
0
3.18
0
3.48
3.47
-.01
3.56
3.56
0-
3.57
3.56
-.01
3.75
3.73
-.02
3.91
3.90
-.01
4.00
4-01
.01
4.11
4.12
.01
4.24
4.25
.01

35

3.86
ii
0
4.00
ii
0
4.41
it
0
4.86
4.85
-.01
5.06
5.05
-.01
5.13
5.11
-.02
5.44
5.40
1 -.04
5.69
5-67
-.02
5.86
5.87
.01
6.06
6.08
.02
6.30
6.31
.01

-------
Table IX
Effect on Employment for Supplier Industries
Variable Industry
Assumption
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
SIC












Total Employment
Baseline
810
889
941
973
982
979
1025
1029
1031
1040
1044
ClOOO's) 37i
Impact
810
889
941
969
979
966
1007
1014
1020
1030
1035

Difference
0
0
0
-4
-3
-13
-18
-15
-11
-10
- 9
Ail

8bJ>
820
832
882
yib
yib
987
1U40
1071
1105
1143
339

855
820
832
880
914
932
980
1035
1070
1106
1145


0
0
0
-2
-2
- 4
- 7
- 5
- 1
1
2
333,334,335,

451
421
419
444
452
453
477
503
523
546
573
336,3392

451
421
419
444
450
452
474
501
523
548
575


0
0
0
0
-2
- 1
- 3
- 1
- 3
2
2


1386
1336
1366
1410
1424
1431
1481
1511
1538
1574
1613


1386
1336
1366
1410
1423
1429
1476
1509
1540
1578
1618
34

0
0
0
0
-1
-2
- 5
- 2
2
4
5


1964
1786
1906
2137
2308
2400
2549
2686
2785
2896
3016


1964
1786
1906
2136
2306
2398
2543
2682
2788
2906
3029
35

0
0
0
-1
-2
-2
- 6
- 4
3
10
13


1913
1785
1855
1993
2024
2021
2141
2254
2348
2478
263!)


1913
1785
1855
1992
2022
2017
2134
2251
2353
2489
2650
36

0
0
0
-1
_ T
-4
- 7
-3
5
11
11


965
949
971
1000
1018
1018
1035
1048
1056
1066
107§


965
949
971
999
1017
1016
1034
1048
1058
1069
1082
22

0
0
0
-1
-1
-2
- 1
0
2
3
3


1385
1425
1468
1533
1591
1615
1656
1693
1723
1753
1788


1385
1425
1468
1533
1590
1614
1653
1690
1725
1758
1795
23

0
0
0
0
-1
-1
-3
- 3
2
5
7


1057
1015
1047
1101
1151
1191
1244
1295
1342
1392
1444


1057
1015
1047
1101
1151
1190
1243
1294
1342
1393
1447
28

0
0
0
0
0
-1
-1
- 1
0
1
3


571
583
647
723
785
834
902
950
997
1045
1093


571
583
647
722
785
832
900
950
998
1047
1097
30

0
0
0
-1
0
-2
-2
0
1
2
4


638
627
640
661
665
668
690
704
714
725
738


638
627
640
661
665
668
690
704
716
728
741
32

0
0
0
0
0
0
0
0
2
3
3


192
191
186
182
176
172
168
162
157
153
147


192
191
186
182
176
172
168
162
157
153
147
29 \
1 o
1 o
0
0
0
0
0
0
0
0
0

-------
standards were added during the time of a recession, the
effects would be much more severe, although they too could
be offset by stimulatory fiscal and monetary policy.
VIII. Conclusion
The institution of mobile source emission control
standards will reduce auto sales by a maximum of 400,000
units in 1976, with almost all of the decrease centering
in the sub-compact, compact and standard sized cars. This
will reduce employment in the auto industry by about 20,000
workers and profits by approximately $150 million.
The effects on the rest of the economy are modest. Since
we are assuming that the economy will be at full employment
during the period 1976-1980, the decrease in auto sales will
be offset by the decline due to lower demand and hence lower
wage and price increases. There will be some deterioration
in net exports because sub-sub-compact cars, which will
probably be of foreign manufacture, will increase substantially.
However, foreign trade will not be harmed nearly as much as
could be the case for other industries saddled with stringent
pollution control requirements for two reasons. First,
foreign cars will be subject to the same control standards,
so that imports (except for sub-sub-compacts) will not gain
any additional competitive advantage. Second, either other
countires will institute similar controls, thus compensating
67

-------
for the price increase of our exports, or U.S. auto companies
will produce cars for export which do not contain the
emission control equipment.
There are, of course, many unanswered questions which
have been raised by this study, some of which have already
been mentioned in earlier sections of this summary. What
form will the market for sub-sub-compacts {or mini-cars)
actually take, and will it be primarily a domestic or
foreign industry? What about the interrelationships with
the petroleum industry; how will the reduced fuel economy
affect the demand for fuel, the refining structure, and
marketing methods of the petroleum companies? How will the
increased price of cars affect the demand for mass trans-
portation systems, and how will these systems be financed?
While these questions must be answered and the interrelation-
ships explored before any definitive answer can be given
about the effect of emission control standards, the results
of this study would suggest at a minimum that the strictly
economic effects of an additional rise in costs of approxi-
mately $300 per car by 1976 will not have severe effects on
tjie domestic automobile industry.
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BAKING
Prepared by
Ernst & Ernst
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INTRODUCTION
This report, Part I, provides a summary of the	findings of an investi-
gation into the effects of pollution abatement cost upon	the bakery industry.
The supporting information for the conclusions presented	in this summary can be
found in Parts II and III of the study.
SUMMARY OF FINDINGS
The major findings of the study are organized into the following
topics:
Industry structure
. Pollution control expenditures
Economic impact of control expenditures
-	Price and profit effects
-	Employment impacts
-	Industry dislocations
-	International impacts
-	Regional impacts
Future pollution abatement costs
. Public finance implications
Industry Structure
The bakery industry is characterized by a multij
firm sizes. Although there are some large firms, no planl
than 4 percent of the industry's output. This is due prir
able and/or fragile nature of the product. In fact, planl
largely by population concentrations, with the large firms operating piants oi
all sizes throughout the country.
Demand for bakery products has grown slowly. The rate of growth has
been about 1.5 percent per year, about half the rate of population increase.
However, prices for bakery products have increased rapidly in the recent past,
and hence dollar volume has grown more rapidly.
Industry concentration has been increasing slowly in the bread, cake,
and related products industry (SIC 2051 ) and has remained stable in the biscuit
and cracker industry (SIC 2052). As more firms automate concentration is likely
to increase. Nevertheless, the highly competitive nature of the industry is
unlikely to change because of geographic dispersion and offsetting diseconomies
°f scale in terms of ability to easily apply equipment to different products. These
characteristics are not likely to be affected by abatement costs since the
costs are extremely small.
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Pollution Control Expenditures
Pollution control expenditures are estimated to be very low in this
industry because of the mildness of the effluents and the low volume of waste water
discharge. The per unit cost of abatement for the industry is estimated at .01
to .02 cents per pound of product in the bread and related products industry and
.05 to ,09 cents per pound in the biscuit and cracker industry. It is likely
that most bakery firms would choose to pay higher sewer charges (e.g., $ .10 per
100 gallons of discharge) rather than build their own facilities because of the
location of most in urban or suburban areas where land is costly.
Economic Impact of Abatement
The very low costs involved in pollution abatement in this industry
suggest there is little likelihood of any significant economic impact. Abate-
ment costs in the form of effluent charges would have to be 1000 percent higher
to increase costs sufficiently to add 1 cent per pound to the prices of bakery
products. It is expected that costs will be absorbed in profit margins or re-
covered from price changes that take place for other reasons.
Thus the following impacts can be expected:
.	On prices and profits--negligible
.	On employment—none
.	On industry dislocations—none
.	On international trade—none
.	On regional trade—none
FUTURE POLLUTION ABATEMENT COSTS
Abatement costs are likely to be higher in the future than those
estimated by the Environmental Protection Agency (EPA) in its cost model. The
EPA model specifies standards equivalent to secondary treatment; however, future
costs will likely be based on implementation of tertiary treatment, which is a
far costlier level of control. These costs will probably come in the form of
higher sewer charges, since the economics of municipal treatment make it pre-
ferable to private treatment at the plant. In addition, tertiary treatment
requires land, which may well be unavailable to individual plants. Such costs,
if they approach the 1000 percent increase, could be expected to increase bread
prices and perhaps also accelerate the trend toward industry concentration
because larger firms may take advantage of cost reduction benefits from automation
in response to increased cost and hence put increased pressure on smaller firms.
Another aspect of pollution abatement in the bakery industry is odor
control, the costs for which would be quite high and would involve large capital
expenditures and significant downtime. If odor control is required, then the
price of bakery products would likely be affected as would concentration and
perhaps employment because of the move to fewer, larger, more automated bakeries.
A third aspect of pollution control is the possibility of higher
electric rates stemming from abatement costs for electricity generating plants.
As heavy users of electricity, bakeries might find their own costs significantly
increased from this quarter.
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PUBLIC FINANCE IMPLICATIONS
An important factor in assessing the impact of pollution control in the
bakery industry is the income redistributional effects of effluent charges or
cost increases due to abatement standards.
Bakery products make up a greater proportion of the food budgets of
poor families then those of wealthier families. Thus any cost increases that are
passed on to the consumer will be felt more heavily by the poor, creating a re-
gressive effect.
In addition, activities that involve enjoyment of the environment seem
to be engaged in less by the poor than by those better off, particularly such
amenities flowing from water pollution abatement as boating, fishing, swimming,
and other leisure activities. Thus, pollution control in the bakery industry
will, if costs are significant, result in a redistribution of income from the
lower to the middle and upper income groups. This factor should be considered
when deciding how to reduce pollution in the bakery industry.
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CEMENT
Prepared by
The Boston Consulting Group
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EXECUTIVE SUMMARY
THE PRODUCT
Portland cement is a powder which when mixed with
water will bind sand and stone into a hardened mass called
concrete. Portland cement concrete is a widely used con-
struction product because of its low cost, high compressive
strength, and durability. It is used, in varying amounts,
in all major forms of construction—highway, residential,
industrial, commercial, and public works. Grey portland
cement, the most common form, is a low priced, relatively
undifferentiated commodity selling for approximately one
cent per pound. Its low value-to-weight ratio has meant
land transportation, storage, and distribution costs are
high relative to most other manufactured products.
THE MARKET
Cement consumption in the U.S. reached 417 million
barrels (78.5 million short tons) in 1969. The major end
uses are as follows:
% of total
Residential Construction
23
Streets and Highways
19
Bridges, Airports, and Other
Public Works
14
Schools and Other Public
Buildings
14
Industrial and Commercial
21
Farms and Miscellaneous
9
100%
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Most cement, about 60 percent of the total, is shipped
to ready-mix concrete firms who supply construction projects
in the above categories in a regional metropolitan market.
Lesser amounts of cement are sold to manufacturers of con-
crete building products such as block, pipe, pre-cast panels,
etc.; to highway contractors; and to building material dealers.
Most shipments are now in bulk by truck, which has largely
replaced rail shipment. Cement is also shipped in bags (of
94 pounds), and water transportation by barges has been in-
creasingly used.
Cement demand is closely tied to overall construction
activity. Some construction projects (e.g., dams and roads)
use proportionately more cement than others (e.g., single-
family residences), but the demand for different types of
construction projects is closely interrelated so that overall
cement usage is closely correlated with aggregate construction
activity. Usage currently amounts to about 6.5 barrels for
each $1000 of total construction, expressed in constant (1957-
1959) dollars. This ratio has been rising slightly from 5.8
to 6.5 barrels per $1000 since 1953, as cement has gradually
displaced other building products with which it competes in
some applications. This has been due both to the widening
price advantage of concrete relative to steel and to its
suitability for factory prefabricating methods, as in the
case of pre-cast and pre-stressed building components.
Overall demand growth has been low; about 2.8 percent
per annum in volume for 1953-1969. A projected higher growth
in construction activity will accelerate the growth somewhat
to 3.4-4.1 percent per annum in the 1971-1980 period. Shifts
in end use and customer type will be very moderate, although
the trend to increased shipments to ready-mix dealers will
continue.
THE INDUSTRY
There are about 180 cement plants owned by 51 com-
panies in the U.S., located in 40 states. Fifty percent of
industry capacity is owned by multiplant companies, the re-
mainder by companies with only one plant. Ownership patterns
vary and include divisions of diversified companies, large
cement users, and independent companies. The largest com-
pany accounts for about eight percent of U.S. capacity, the
leading eight companies together about 47 percent. There is
a trend toward increasing concentration in medium-sized cement
producers, with small one-plant companies slowly disappearing.
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Due to high transportation charges (typically one-
eighth to one-fourth of delivered price), the prevailing
industry pattern has been regional. Some sparsely populated,
relatively isolated parts of the U.S., such as in the South-
west and Mountain states, are served by smaller plants of
up to two million barrels annual capacity. Larger metro-
politan areas of the East, California, and the Midwest are
served by a combination of older, small plants of one to
three million barrels capacity and some larger, newer plants
generally with capacities of five million barrels or more.
Small plants tend to ship direct to customers, whereas larger
plants, requiring wider market areas, often ship through dis-
tribution terminals located in major consuming centers. There
has been a steady increase in the proportion of cement shipped
to terminals, as a result of favorable bulk shipping costs
from plant to terminal, a demand for faster service, and as
a result of efforts of larger plants to increase their share
of regional markets.
Cement manufacture is highly capital intensive, with
a typical sales-to-fixed-assets ratio for a new plant of
about 1:2. Construction of a major new cement plant today
could easily cost $50 million to $100 million. Investment
time horizons are long, with two to three years of design
and construction time and possibly five to eight years for
a new plant to show an operating profit. The practical oper-
ating life of a cement plant may be thirty to fifty years,
with obsolescence due to size being the chief factor leading
to most plant closings. The need for costly pollution control
devices has caused a number of older, small plants to close
in the past few years, and will cause additional closings by
1975 .
PRICES, OPERATING RATES, AND PROFITABILITY
Cement prices vary regionally, largely as a function
of the ratio between current installed capacity and current
cement consumption in each region. Slow demand growth and
some overbuilding in the past have resulted in lower mill
net prices in New York and Pennsylvania than in the more
rapidly growing areas of the South and West. In 1969 the
industry operated at about 82 percent of its stated capacity
of 511 million barrels, and in 1970 at about 80 percent of
rated capacity, which are about typical of the industry oper-
ating rates for the past 30 years.
Partly due to the low operating rates of the industry,
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prices and profitability have been low in recent years.
Several companies operated at a loss in 1969 and 1970, and
few have the 9-11 percent after-tax return on equity gen-
erally characteristic of large companies in the United States.
The outlook is for demand and utilization rates to improve
in 1971 and 1972, with somewhat better prices and profits
for the industry.
The overall level of prices improved by about five
percent in 1971 prior to the price freeze. Prices will in-
crease further in 1972 if permitted by Phase II controls of
the new economic program. Even in this situation, older
less efficient plants will be fortunate to recover substan-
tial labor and fuel costs which will occur, while the larger,
newer plants with lower unit labor and fuel costs will show
satisfactory profitability.
INDUSTRY TRENDS AND PROBLEMS
Cement industry executives are unhappy. Overall
demand growth has been and will be slow. Overly optimistic
demand forecasts have in the past led to periodic cycles of
excess capacity and low prices and profitability. Older,
less efficient plants have not been closed rapidly enough-,
holding down prices in the face of capacity growth. The
most recent plant building spree occurred in the late 1950' s.
It has taken a decade of declining prices (in real terms),
unsatisfactory operating rates, and eroding profitability to
encourage a balance between new plant building and old plant
closings sufficient to achieve a more satisfactory ratio of
supply and demand.
In addition to these already severe problems, the
impact of the price freeze and increasing public concern
over the industry impact on pollution must now be added.
The cost of assuring low levels of air pollution, and to a
lesser extent water pollution, has recently emerged as an
additional financial burden to the industry.
Despite the foregoing, the industry is most emphati-
cally not homogeneous. Individual plants and companies have
faced the problems and pursued the opportunities in substan-
tially different ways. Prior to 1960 there were few plants
with rated capacity in excess of three million barrels annu-
ally. Now there are 18 plants of greater than five million
barrels annual capacity. These large plants are attractive
primarily because of the significant reductions in unit labor
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costs (and to a smaller extent fuel costs) that they permit.
Some aggressive firms have chosen to add large increments
of new capacity in an effort to offset rising operating costs
and price pressures, despite the long investment time horizons
and the capital costs involved. Other firms have chosen to
continue the operation of existing plants until the industry
situation improves, reflecting their different perceptions
and perhaps their different financial resources.
An analysis of the size distribution of cement plants
in the U.S. for 1950 to 1970 shows that
as a result of substantial earlier closings,
there are now almost no U.S. plants under
one million barrels annual capacity {except
those for white cement, a low-volume spe-
cialty product);
the number of plants between one and two
million barrels has declined steadily from
85 to 48, and is continuing downward;
there was a rapid increase in plants of
two to three million barrels through 1962,
but recent closings or expansions have
reduced this number from the peak of 64
to 47;
- plants of three to four million barrels
have been increasing steadily, to a current
total of 42, with a strong continuing trend;
larger plants, particularly those over five
million barrels, have increased steadily
and now number 18.
As a result, the average plant size in the industry
has risen from 1.78 million barrels in 1950 to 2.86 million
barrels in 1970. This trend is expected to continue indefi-
nitely .
Since incremental investment costs are often lower
at an existing plant site because of already existing quarry,
finished product silos, roads, and buildings, the foregoing
changes reflect an increasing trend toward expansion and
rebuilding of old plants as well as construction of entirely
new plant facilities. The increasing average plant size has
allowed the industry to offset largely the sharp rise in
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operating labor and fuel costs, and to some extent the rising
costs of Dlant construction.
COMPANY PATTERNS
Despite the attractiveness of large new plants n
terms of their operating economics, companies have differed
in their willingness (and ability) to build them. Of the
18 facilities above five million barrels in the U.S. today,
only one is owned by a company which was among the eight
largest in 1950. The others have been built by companies
who were not in the cement industry at all then, or were
considerably less important than they are today. As a
result only two of the leading U.S. cement manufacturers
in 1950 hold approximately the same relative position today.
Several companies have fallen considerably in market share
in that period.
In general, the profitability of a cement plant is
a function of its age and size, and its share of the regional
market in which it is located. Naturally plants in sparsely
populated areas are smaller than those near major metro-
politan markets. The plants in the weakest competitive
position today are generally those of under three million
barrels capacity built in the 1950's or earlier, in a large
consumption area. They generally operate at little or no
accounting profit over full costs, although they do provide
some net cash generation through depreciation and depletion
charges. Some of these plants therefore continue to operate
even though no one would build another plant of those char-
acteristics today.
As time passes costs continue to rise in these old
plants, while prices (which are more closely related to the
cost trends of newer, larger plants) rise more slowly.
Eventually the owner must decide whether the plant should be
closed or substantially rebuilt to obtain the cost advantages
of increased scale and automation. This is a difficult invest-
ment decision, and is usually faced in terms of
anticipated demand growth in the area,
expectations about price levels,
the value and usability of existing quarry,
storage, and other facilities,
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the convenience and economy of the distri-
bution location,
perceptions of how the increase in capacity
would affect competitive responses in the
tributary market area,
ability to finance the required invest-
ment, and
attitudes toward risk, the time value of
money, and the attractiveness of diver-
sification investment alternatives.
As demonstrated by an analysis of the investment
patterns, profitability, and financial policies of eight
leading and probably representative cement companies, major
companies have reached significantly different conclusions
about the advisability of these relatively large investments.
Several large companies appear to be embarked on a policy of
steady disinvestment, as low rates of investment, high divi-
dend payouts, and modest debt/equity ratios attest. The
result has been steady erosion in market position, a port-
folio of older and smaller plants, and a declining rate
of profitability. Some are at or near overall loss positions.
In some cases this strategy has been accompanied by diver-
sification into unrelated business areas. However, the record
shows that the results of diversification have generally been
unsatisfactory profits, as companies have often exchanged
leading positions in cement markets for marginal positions
in new business areas. The Boston Consulting Group believes
that share of market is the principal determinant of long
term profitability, and that sacrifice of market share is
rarely a wise investment choice.
Some of the established companies have continued to
invest to maintain or increase relative market position.
This has required higher investment, higher debt/equity
ratios, and lower dividend payouts. It has generally resulted
in higher growth and less erosion in profitability. Some of
those companies have also diversified to lessen dependence
on the slow and cyclical growth in cement. The result of
diversification by this group is also evidently unsatisfac-
tory, for the same reasons as above.
At the same time newcomers have entered the field.
These have included
large ready-mix contractors who have
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integrated backwards into cement,
gypsum and other building products manu-
facturers ,
foreign cement companies, and
new companies organized by mining com-
panies and a gas utility.
Several factors may account for the differing perceptions
of these newcomers, who invested heavily while many tradi-
tional cement companies were minimizing their investment
rates. Initially, they may have felt a greater confidence
in the cost advantages of large automated plants, and may
have been more optimistic about future prices. In addition,
however, most of these newcomers have shown a willingness
to finance proportionately more heavily with debt funds,
using return on shareholders' equity as the principal deter-
minant of investment appeal instead of return on invested
assets. They probably also have a longer time horizon, both
in terms of initial profits and payoff period. To some ex-
tent, these firms may also have been in lower risk businesses
(such as the ready-mix companies), and have been dissatis-
fied with the growth and profit trends in those businesses.
THE CEMENT INDUSTRY AND POLLUTION
The growing national concern about the effects of
air and water pollution has led cement companies to increas-
ing levels of spending to hold down emission of pollutants.
The main pollutants from cement plants are dust, which con-
sists of very fine particles of cement-like material carried
aloft from plant stacks, and water-borne alkalies which are
leached from the dust. Pollution control devices generally
consist of fabric bag dust collectors (known generally as
"bag houses") or electrostatic precipitators. These systems
trap the cement dust particles, which arise primarily from
the kiln and from the clinker coder associated with the
kiln. In the ten years through 1971, the industry estimates
that it has spent approximately $216 million on capital equip-
ment, or about 44 cents per barrel of installed capacity to
improve air and water quality.
While these expenditures have done much to improve
the overall level of emissions industry-wide, and some
plants are now virtually emission-free, more spending is re-
quired to clean up existing plants. The Environmental Protection
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Agency (EPA), which funded this industry analysis, has esti-
mated that the U.S. cement industry will have to make capital
expenditures of an additional $96.6 million for air pollution
control, and $25.3 million for water pollution control, to
further upgrade facilities built prior to 1967. These amounts
are over and above the sums which the EPA projects the industry
would have spent anyway, to meet standards existing before those
promulgated by the EPA in November of 1971. Moreover, these
amounts do not include costs of operation.
Plants built subsequent to 1967 were assumed by the
EPA to meet all existing and newly-issued pollution control,
standards. New plants built after 1971 must meet federal
emission standards, which are generally more stringent than
previous state standards. The EPA has estimated that th'e
increased cost of meeting these more stringent standards
will be about 30 cents per barrel of new capacity installed,
again over and above the amounts which would have been spent
for pollution controls in any event.
The industry has disputed this argument, generally
on the following grounds:
1.	Industry leaders do not recognize the dis-
tinction between sunk and still-to-be-
expended capital costs, and think in terms
of "total costs to depollute".
2.	The industry projects harsher future
state-by-state regulation of existing
plants than is contemplated by the EPA,
and consequently higher investment costs.
3.	They recognize that improved air pollution
control increases the disposal problem
substantially, especially of particulate
material high in alkalies which lead to
water pollution, and will add significantly
to total control costs.
As a result, many leading cement company executives
estimate total capital costs of approximately 88 cents per
barrel to depollute. Individual estimates naturally span
a fairly wide range, but the average is close to this figure.
Of that amount, half or about 44 cents per barrel will have
to be expended in the next few years if all existing plants
are required to be brought up to projected standards.
Annual operating costs, including depreciation, of air
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pollution control facilities are estimated by the EPA at
8-10 cents per barrel; industry estimates would raise the
upper figure to perhaps 20 cents per barrel annually.
Based on the EPA estimates, The Boston Consulting
Group projects the incremental investment and operating
costs will have the following major impacts on the industry:
1.	Cement prices will average about two
percent higher than would have prevailed
in the absence of the additional invest-
ments.
2.	Total future U.S. cement consumption will
not be reduced significantly, since little
or no substitution will take place due
to higher costs resulting from pollution
control expenditures.
3.	Imports, which currently represent about
three percent of U.S. consumption, will
increase; precise estimates of import
growth would require a more complete
analysis of production, transportation,
and depollution costs in key foreign
countries.
4.	The additional impact on cement industry
employment, which has already trended
steadily downward in this industry, will
be minimal and not concentrated geo-
graphically; the Lehigh Valley of Penn-
sylvania, however, v/ill suffer somewhat
more than other areas. Most such dis-
placed employees will have transferable
skills (electricians, maintenance, etc.)
which will lessen the impact.
5.	Closings of already marginal plants will
accelerate substantially, as both the
capital and the operating costs of de-
pollution will fall more heavily (on a
per-barrel basis) on the older, less
efficient plants. Approximately 25
cement plant closings can be anticipated
in the five years ending 1975, continuing
past trends caused by the combined effects
of age, competition, and pollution control
costs.
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6.	The relative advantages of larger, newer
plants will increase, and virtually all
plants of greater than three million
barrels will install the required controls.
Most plants of greater than 1.8 million
barrels located in remote and isolated
markets will depollute rather than expand
or shut down.
7.	The combined effects of plant size advan-
tage, required pollution control expendi-
tures on existing plants, and labor cost
pressure will motivate a rate of plant
construction in excess of the rate of
demand growth, which itself will exceed
that of the past decade. The consequence
will be a substantial increase in plant
construction, virtually all of which
will be in plants with kiln sizes of 2.5
million barrels and above.
8.	To finance the added investment, the in-
dustry will tend to reduce dividends to
about one-half of earnings; increase
debt/equity ratios, nearly doubling pre-
sent industry debt in the next five years;
and increase prices wherever possible,
with overall prices perhaps five percent
above their otherwise probable levels.
Increased prices will be used to finance
growth in preference to increased debt,
where allowed, but both foreign and
domestic competition will hold back
the rates of price increase.
9.	The differentiating effects of alternative
strategies will become rapidly more appar-
ent, as those companies with withdrawal
patterns accelerate their retirements and
the more aggressive investors (and prob-
ably new companies as well) continue to
expand both market coverage and market
share.
If the industry estimates of total and anticipated
pollution control costs were used, instead of the EPA figures,
the foregoing conclusions would not be changed, but would be
intensified. In particular, the threshold limit for unpro-
fitably small plant size would be increased, and a larger
number of plants would be closed. The rate of plant closings
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would be only moderately affected, however, due to the lead
time to bring new capacity into being.
INVESTMENT OPPORTUNITY IN THE CEMENT INDUSTRY
The economics of the cement industry appear to be
changing with some rapidity. In part, pollution control
costs give this trend more impetus. But the economics of
cement manufacture are being changed as well by the rising
costs of labor versus the declining costs of automation;
the improving technology in operation of giant kilns; the
changing costs of distribution resulting from terminals
and deep-water transport; and the investment economics of
large plants, especially those which replace small plants
at an existing site.
The cement industry has characteristically been con-
servative in its financial policies. Dividend payouts have
been high, debt ratios low, and prices kept sufficiently
high to provide profits even with substantial unused capa-
city. Yet there is evidence of a new school of thought
among some executives in traditional cement companies and
companies not historically in this business. New and much
more aggressive financial policies are being adopted which
place severe pressure on those companies who continue to
operate with the traditional patterns.
Foreign competition has become a significant factor,
particularly in coastal and border markets. The rate of
import growth is accelerating, even as prices soften in re-
sponse to the increased supply.
Some technological change has taken place in recent
years, and a more rapid rate of introducing new technologies
seems to be occurring. Up to now, most new technological
development has focused on the automated operation of large
plants, and in the determination of efficient distribution
patterns. Now the focus of technology seems to be on the
cement manufacturing process itself, in finding more efficient
ways to use fuel and raw materials. It is unlikely that the
rotary kiln will be displaced in the foreseeable future, but
new technologies may significantly lower process costs.
The combination of these and other factors means that
investment opportunities of great magnitude are being created
in the cement industry. New forms of competition will continue
to force traditional producers out of the business, while those
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who capitalize on the opportunities in this pattern of change
will be rewarded with substantial profits.
There is no question that the price of competition in
the cement industry is rising. Not only are the initial capital
costs higher, but the time horizons for profitable operations
are lengthening. Only those firms with substantial capital
resources and long staying power can afford to participate
in most major cement markets. Yet in some ways the critical
resources—well-positioned quarries, customer relationships,
and experienced labor forces, among others—are possessed by
smaller firms with inadequate plants. They do not have the
financial resources required to grow and compete. That situ-
ation seems likely to lead to a good deal of acquisition and
merger activity. This, associated with some withdrawals,
will lead to a much more concentrated cement industry, at
least in terms of plant ownership.
The potential for high return investments is not
lost on many industry leaders and many prospective investors
outside the industry. That potential will attract a good
deal of investment into this industry during the next decade.
The critical controls over success can be identified in
advance, but the specifics of each investment opportunity
require very sophisticated analysis. They differ a great
deal from market to market, because of the wide range of
market and competitive characteristics throughout the United
States. Some companies will be unwilling or unable to pro-
vide that level of planning insight, which will lead to
some spectacular losses while other competitors are reaping
large rewards.
The upshot of this is that the cement industry'may
be one of the more exciting industries during the decade
of the 1970's—not so much as a result of high growth, but
due to high rates of change within the industry. The invest-
ment opportunity exists here, as always, in terms of the
ability to change competitive positions by the exercise of
new and energetic corporate strategies.
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ELECTRIC POWER GENERATORS
Prepared by
National Economic Research Associates, Inc.
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EXECUTIVE SUMMARY
This report is one of a series of twelve, covering
different industries, being submitted by different contractors
to the Council on Environmental Quality under parallel con-
tracts. It should be understood that, because of fundamental
differences in the characteristics of the electric utility
industry, which provides a service, and those of the other
industries, which are producers of manufactured products much
Of the standardized topical outline and scope specified by the
Council is inapplicable or irrelevant to this report.
Discussion of the impact of pollution controls on
the electric utility industry requires a general understanding
Df the demand-supply relationships in the industry, the charac-
teristics peculiar to the generation, sale and use of electric-
ity, and the regulatory aspects of the industry. In the
unregulated sectors of the economy we rely on competition to
Eliminate supernormal profits and to force firms to be efficient
in serving customers. In the electric utility industry, in
contrast governmental regulation aims to accomplish these same
results by focusing on certain variables such as the. rate of
return on invested capital and customer service quality. This
regulation falls into six different areas:
1. "Utility type" regulation done through public
Service commissions at state or local levels.
468-471 O - 72 - 7
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2.	Federal Power Commission regulation of the whole-
sale rates charged by private utilities and of interconnections,
provision of wholesale services and reliability standards.
3.	Atomic Energy Commission regulation through the
licensing of nuclear power plants and the monitoring of health
and safety standards for radiation levels.
4.	Antitrust regulation by the Justice Department
and by the Securities and Exchange Commission under the Public
Utility Holding Company Act.
5.	Federal Power Commission and Securities and
Exchange Commission regulation of the industry's financing
activities.
6.	Environmental regulation, a new area since the
1/	. —
Calvert Cliffs decision,"" which requires the Atomic Energy
Commission to insure that the letter and spirit of the Environ
mental Protection Act is carried out in the construction of
nuclear power plants.
The significance of this comprehensive governmental
regulation of the electric utility industry in the present
context is that cost impacts, such as those arising from
pollution controls, do not depend on the free play of economic
forces but on administraitive decision making. In the philosophy
of utility regulation, justified cost increases are passed on
Calvert Cliffs' Coordinating Committee, Inc. et. al. v.
United States Atomic Energy Commission and United States
of America, No. 24,839 (D.C. Cir., July 23, 1971).
94

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to the consumer. It may well be, however, that in a given
instance the regulator may determine that the increased costs
should be in some measure shared by the stockholder and rate-
Payer, in which case the cost increase is not wholly passed
on. And even if all costs are passed on, the customer groups
affected will vary from one jurisdiction to the next. The
Passing on, moreover, whether in whole or in part, is likely
to occur some time after the initial incurrence of the costs
because of the delay inherent in the regulatory system. We
toish to emphasize, therefore, that administrative judgment
^nd regulatory lag are major determinants of both the size,
and nature of the ultimate impact of higher electricity costs.
Demand Characteristics
The aggregate demand for energy in the United States
^creased at a compounded annual rate of 4.4 per cent during
the 1960s, whereas aggregate demand for energy in the form of
Electricity increased at a rate of 7.3 per cent. A determina-
tion of projected growth .rates for the future is a. most
difficult chore to which we have devoted our attention in other
®tudies. It is made even more difficult by the changing rela-
tionship of energy growth to economic growth, as measured by
G^oss National Product, in recent years. The ratio of aggregate
Energy consumption to Gross National Product (the energy/GNP
^atio)" underwent a long-term secular decline; during the period
1947-1966, following a trend that began in the 1920s. Since
^66, however, the trend has reversed, and the ratio has shown
uninterrupted increase. If the trend prior to 1966.had
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persisted, energy consumption in 1970 would have been lower by
an amount greater than the total electric utility consumption
of coal in that year. An analysis of the possible reasons
for this trend reversal indicates that it cannot be ascribed
to any single cause but that a major part of it is apparently
the result of: (1) the increasing relative importance of
nonenergy uses of the fuels, (2) a tapering off in the year-
to-year improvement in thermal efficiency at central power
stations, and (3) the increasing relative importance of air
conditioning and electric heating. The net result of these
factors is a tendency toward a sustained high growth rate in
aggregate energy consumption and a consequent increase in the
energy/GNP ratio except in years of high GNP growth rate (i.e.,
when GNP growth is sufficiently high to exceed the growth in
energy consumption).
These considerations plus others too numerous to
mention here lead us to the conclusion that there is no reason
to think that the recent growth rates will be altered in the
next five years or so. We therefore feel it is reasonable for
present purposes to concur in the Federal Power Commission
forecast that electricity consumption will continue to grow
at a doubling rate of ten years (i.e., at 7.2 per cent per
year) during the 1970s.
B* Elasticity of Demand for Electricity
Several studies have been made of the elasticity of
electricity demand. We had occasion within the past two
years to review them critically and concluded that because of
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deficiencies in the underlying data, none of the studies could
be considered to have yielded a satisfactory measurement. We
assume for purposes of this report that the demand for elec-
tricity is relatively inelastic, despite the possibilities for
substitution between electricity and the fuels, for the follow-
ing reasons: (1) natural gas supply will be insufficient
relative to potential demand throughout the period of the study
(1972-1976), and (2) pollution controls will be applied to other
energy sources as well, affecting their costs.
C. Assumptions Used in Calculating Costs
The following assumptions were used in computing the
cost of controlling thermal pollution by mechanical draft cool-
ing towers and the cost of controlling air pollution by wet
limestone scrubbers.
1.	Sulfur emission problems are restricted to coal-
and oil-fired power plants.
2.	As given by EPA, all coal- and oil-fired plants
of less than 200-megawatt capacity and all those which operate
at a 30 per cent or lower plant factor will meet pollution
standards using low-sulfur fuel.
3.	Plants which generate less than 50 per cent of
their output from coal or oil will also meet pollution standards
through the use of low-sulfur fuel.
4.	As given by EPA, all coal- and oil-fired plants
of greater than 200-megawatt capacity and operating at more
than 30 per cent plant factor will install wet limestone scrub-
bing processes.
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5.	As given by EPA, investment costs for wet lime-
y
stone scrubbing are $30 per kilowatt. EPA assumes that
costs of retrofitting and new installations will be the. same.
Our modified assumption, which we believe to be more realis-
tic, is that investment costs for retrofitting will be more
1/
on the order of twice that of new installations.
6.	We assume that operating costs of .35 mills per
kilowatt-hour for the limestone scrubbing represent a bare
£/
minimum which can be used for these purposes.
7.	As given by EPA, existing facilities will be
brought up to standards through the following phasing: 1972 -
5 per cent; 1973 - 10 per cent; 1974 - 35 per cent; 1975 - 40
per cent and 1976 - 10 per cent.
8.	We assumed that installed new generating, capac-
ity for the 1972-1976 period will be according to the listing
in the National Coal Association's Steam Electric Plant Factorsi
1970 Edition.
9.	We also assumed that any addition with coal- or
oil-burning capability will require installation of air pollu-
tion control devices.
y
y
y
We believe that this figure represents an underestimate.
This does not mean that we deem the other assumptions,
e.g., 7, to be realistic; appraisal of,each would be a
study in itself.
This excludes costs of calcium sulfate disposal which
may well equal the total cost of sulfur removal itself.
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10.	As given by EPA, all thermal capacity will
require cooling towers by the end of 19 76.
11.	As given by EPA, cooling tower costs are:
a.	investment costs--$7 per kilowatt
b.	operating costs--.05 mills per kilowatt-hour
c.	thermal loss cost—150 Btu per kilowatt-hour
12.	As given by EPA, the costs of retrofitting an
existing plant or modifying a new plant are the same. As in
assumption 5, we believe this is unrealistic and here, too,
assumed a doubling of investment costs for retrofitting.
D" Cost Increases as a Per Cent of 1970 Average
Revenues
In Part III, Table XIII, we present the end result
O.L our computations, by region, concerning the cost of air
and water pollution control equipment. On the basis of the
above assumptions, by 1976 the costs of installing wet lime-
stone scrubbing equipment and mechanical draft cooling towers
will amount to about 7 per cent of current average revenue
levels. There are, however, wide regional variations around
this figure.
E. Effect on Consumer Industries
We cannot emphasize too strongly that the effects
of increased costs in electricity generation are highly
indeterminate. The pass-through of these increased costs
depends, as noted above, on how the costs are treated by
regulatory commissions. And, even if the costs are passed
through promptly and in their entirety, the impact of the
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pass-through will depend on the rate structure and the manner
in which increases are treated in that structure.. For example,
the regulatory commission could approve a rate structure which
passed through the cost increases entirely to commercial and
residential customers, in which case industrial customers
would feel no impact whatsoever.
Because of (1) this uncertainty surrounding the
manner in which aggregate cost increases will be translated
into specific prices, (2) the above-described unsatisfactory
nature of our knowledge of demand elasticity for electric use,
and (3) the limited scope of our assignment, we do not present
a specific, industry-by-indus.try analysis of the effect of the
cost increase on consumer industries. We do note, however,
that our own studies indicate that the impact of these costs
on consumption is likely to be sitiall. This stems from the
fact that very few industries have electricity costs that
amount to more than a few percentage points of the total
value of their products. In fact, in only six industries does
electricity cost account for more than 5 per cent of the total
y
value of shipments. Because of the small place of electric-
ity costs in total industrial costs, the elasticity of demand
for final products would have to be extremely high in order to
These six industries are: primary aluminum, industrial
gases, hydraulic cement, chloralkalies, electromatullur-
gical products, and gaseous diffusion (uranium enrichment).
(U.S. Bureau of the Census, 1967 Census of Manufactures).
The power intensities of these industries are given in
Part III, Table XV.
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yield an elastic demand for electricity by industry. Thus,
the presumption is that industrial demand is generally inelas-
tic , which is the same as saying that the results of passing
through to industry cost increases in electricity generation
would be small.
Whatever the size of the impact, it will tend to
vary regionally, since industrial demands for electricity
vary by region, with the most power intensive industries
located in the Far West (excluding California) and the area
serviced by the Tennessee Valley Authority. The former has
relatively cheap electric power because of its large hydro
facilities and the latter because of the subsidized nature
of TVA. Hydropower in the West will not be affected by air
and water pollution standards, but since TVA is now using
coal in almost 80 per cent of its generating facilities, it
will be affected by these standards. Moreover, since its
rates are among the lowest in the Unitesd States, its customers
will experience one of the largest percentage increases.
F. Employment Effect of Pollution Controls
The electric utility industry and the six industries
which are most power intensive are all extremely capital inten-
sive. As shown in Part II, Table XI, in 1970 investor-owned
utilities employed 384,900 workers, which constituted only
0.4 per cent of the United States labor force. Of these
384,900 workers, 94,700, or almost 25 per cent, are construc-
tion workers who would not be affected by any plant dislocation
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(if this were possible in the electric utility industry). The
six large user industries employed only 177,500 workers in
1967, or slightly more than 0.2 per cent of the total United
States labor force in that year. On a national level, there-
fore, even if there were dislocations caused by increased
cost of electricity due to pollution controls, there would be
no significant changes in total United States employment.
G.	Conclusions
We conclude, under the assumptions listed above,
including our modifications thereto, that the price of elec-
tricity would rise for the reasons above by about 7 per
cent by 1976, There would be no significant dislocation
within the electric utility industry and such dislocation
within the industry at large would be unlikely. Even if
there were to be dislocations among the six most energy
intensive industries the employment effects would be -minimal
in terms of total United States employment.
H.	Further Pollution Abatement Costs That Have Not
Been Discussed
Elimination of thermal pollution and sulfur oxide
pollution are not the only areas of pollution abatement that
may be required of the electric utility industry in the
future. There is a body of opinion which holds that the truly
important air pollutants are the nitrogen oxides. Comparatively
little work has been done to date on the parameters governing
NOx formation in combustion, and even less oh means of avoiding
NOx production.
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A second area is radiation release. Current stand-
ards are a subject of controversy, and it is possible that
more severe standards could require larger investment costs
for nuclear power plants.
103

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FRUIT AND VEGETABLE CANNING AND FREEZING
Prepared by
Agri Division, Dunlap and Associates, Inc.
105

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EXECUTIVE SUMMARY
ECONOMIC IMPACT OF ENVIRONMENTAL CONTROLS ON THE
FRUIT AND VEGETABLE CANNING AND FREEZING INDUSTRIES
I. INTRODUCTION
In an effort to reverse the progressive deterioration of the environment,
currently available pollution abatement technology is being improved with
intensified research and development efforts. The impact of such intensi-
fication of environmental management is being seen in terms of reduction
of environmental degredation associated with the disposal of industrial
wastes throughout the nation.
However, the implementation of environmental controls normally results
in added costs and may result in economic and locational adjustments
within these industries. It is the purpose of this study to examine these
adjustments as they relate to the fruit and vegetable processing industries
in terms of costs, capital requirements, profits, industry structure and
location, employment, product prices and regional and national economic
impacts.
The general approach used in this study was to initially analyze and describe
the characteristics of supply, demand, price and operating requirements
of these industries and given this base, evaluate the microeconomic re-
lationships among representative firms within the fruit and vegetable pro-
cessing industries as a first step; and, second to then project macroeconomic
impacts at the industry level based on the resulting microeconomic impact
relationships which were developed.
Throughout this study, excellent cooperation and assistance was obtained
from Contract Representatives of the Environmental Protection Agency and
from industry trade associations, particularly the National Canners Associ-
ation and the Frozen Food Institute who contributed detailed information
concerning these industries.
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II. DEMAND CHARACTERISTICS
The demand for canned and frozen fruits and vegetables centers on a nation-
wide market served mainly through retail food stores with secondary outlets
being institutional food purveyers and further processors who manufacture
prepared dinners and other convenience foods.
A.	Products and Substitute Products
This study was restricted to a consideration of basic fruit and vegetable canning
and freezing. Preserves, jams, jellies and frozen specialty products were not
included. The specific products selected for study account for over 80 percent
of the total volume processed.
The principal substitutes for canned and frozen fruits and vegetables are fresh
fruits and vegetables. Overall, the degree of substitutability between fresh
and processed fruit and vegetables is not close.
B.	Size, Location and Relative Importance of Markets
Although there is some carryover of the pack of canned and frozen fruits and
vegetables from one packing season to the next, total volume packed is ,the best
indicator of aggregate demand for these products.
Total pack of canned vegetables in 1970-71 was approximately 325, 596, 000 cas^s
(24/303 can equivalent). Volume packed has remained relatively stable during
the past 10 years. Four products (tomato products, sweet corn, green beans
and green peas) account for over 70 percent of the total pack.
Canned fruits and fruit juices pack, 1970-71, was approximately 208, 113, 000
actual cases. Volume has increased slightly during the past ten years, up
from approximately 138,000,000 cases in 1961-62. Four fruits (peaches, apple
sauce, pineapple and fruit cocktail) accounted for over 50 percent of the total
pack.
The pack of frozen vegetables has risen steadily since 1961, from 2. 1 billion
pounds in that year to nearly 4.5 billion pounds in 1970-71. Potato products
represented over half of the total tonnage frozen with peas, corn and green gea*1®
accounting for an additional 17 percent of the total pack.
Frozen fruits and fruit juices do not show the consistent upward trend which
characterizes the pack of frozen vegetables. Pack of frozen fruits has been
relatively stable near 700 million pounds.
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Demand changes - specific products - Although there have been substantial
shifts in the demand for specific canned and frozen fruits and vegetables in
the last 10 years, analysis of these relationships show certain identifiable
patte rns .
*	There is a trend, in both canned and frozen fruits and vegetables, for
increased demand for convenience products, e.g., canned and frozen
potato products, etc.
*	There is a definite trend toward increased consumption of fruit
juices, both canned and frozen.
*	Tomato catsup and chile sauce are gaining rapidly in demand.
Per capita consumption - Some very distinct changes have occurred in patterns
of consumption of fruits and vegetables by the American consumer in the past
two decades.
*	Fruits and juices - Per capita consumption of canned and frozen fruits
and juices increased steadily from 43 pounds in 1950 to 67 pounds in
1970 and is expected to reach approximately 75 pounds by 1980.
*	Vegetables - Percapita consumption of canned and frozen vegetables
has increased gradually over the past 20 years, from about 83 pounds in
1950 to 115 in 1970 and further increases to approximately 128 pounds
per capita are projected by 1980.
International trade - Exports of canned vegetables from the United States are
not of significant volume, in relation to total pack, for any item. However, the
export market accounts for 9 to 15% of canned fruit cocktail, cherries, peaches
and pineapple. Export markets take 41.5 percent of the U. S. hot pack orange
juice volume, 18.5 percent of the canned grapefruit juice pack. Frozen con-
centrated orange juice is the principal frozen product exported. Exports of
frozen vegetables are of little importance.
Canada and Western Europe are the principal export markets.
Imports of processed fruits, vegetables and juices are primarily tropical or
subtropical products not produced in the United States. However, imports of
canned apple juice and pear juice, canned pineapples and juices, frozen straw-
berries and blueberries, tomato products and mushrooms are imported in sub-
stantial quantities and do compete with similar products processed in the United
States.
458-«l O - 72 -
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Government purchases are an important element of total demand for canned
products and account for 4 to 6 percent of the total pack of canned fruits and
vegetables and 10 to 12 percent of the total canned juice pack. Governmental
use accounts for 2-3 percent of the total pack of frozen fruits and vegetables
and slightly over one percent of the frozen juice pack.
C.	Recent Trends in Demand and Price
Demand trends - A more detailed examination of total industry demand shows
that the demand for certain specific products is advancing while for others
demand is declining. With the exception of tomato juice, apples, lima beans
and strawberries, the demand trend for processed fruits and vegetables has
been either constant or increasing over the past ten years.
Price trends - Prices of canned and frozen fruit and vegetable products vary
from year to year in response to current year pack and year-end carryover
stocks. In addition, they are subject to exogenous economic pressures related
to production and processing costs and purchasing power of consumers. During
the past five years prices have generally trended upward with the exception of
corn, lima beans, tomato juice and cherries.
D.	Distribution Systems
Eighty-four percent of the canned fruits and vegetables move into use through
retail food stores. Retail chains handle 49 percent directly and wholesale or
cooperative buying groups 35 percent. Sixteen percent move through insti-
tutions, government, and to further processing.
Frozen products follow a similar pattern except a lesser percentage moves
directly to the consumer while 28 percent goes to further processing and 15
percent to government and institutions.
E.	Market Competition
Although the fruit and vegetable canning and freezing industries are character-
ized by the existence of large, multi-plant, multi-product firms, the industry
is, nevertheless, highly competitive. There are a large number of small
canners and freezers and the industry is faced with the necessity of selling a
high proportion of its total pack to large, national food chains. Plants and
firms located in any region are potential competitors to those producing the
same product lines in all other regions.
F.	Governmental Influences
The principal governmental influences relating to the fruit and vegetable in-
dustries are concerned with product and container standards, plant and product
inspection and labeling requirements. There is little direct governmental
influence over the marketing of these products.
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III. SUPPLY CHARACTERISTICS OF THE FRUIT AND
VEGETABLE INDUSTRY
The fruit and vegetable canning and freezing industries are supply-oriented
in that, because of the perishable nature of the raw products, location of pro-
cessing plants is largely dictated by the location of raw product production.
The diversity of products processed and seasonality of production of basic
fruit and vegetable crops results in a nation-wide network of canning and
freezing plants. However, major areas of processing are found as certain
areas offer the greatest potentials for fruit and vegetable production.
A.	Types and Locations of Raw Materials
Vegetables for Processing - Production of vegetables for processing is widely
dispersed throughout the United States and commercial production is found in
every state. However, production is concentrated (51% of total) in the West,
mainly in California and the Pacific Northwest, with the North Central Region
(31%) being the other major producing area.
Fruit Production - Nearly every state is a commercial producer of some kind
of fruit, but production is concentrated in relatively few states. Seven states
(California, Florida, Washington, New York, Michigan, Oregon and Penn-
sylvania) accounted for 88 percent of the total U. S. fruit tonnage, 1967-1969.
B.	Number and Location of Firms/Plants
Fruit and Vegetable Canning Plants - The number of canning plants in the United
States decreased from 1630 in 1958 to 1223 in 1967, a decline of 25 percent.
There has been some slight shift in relative regional importance with the West
and South gaining slightly over the East and Midwest. The leading states are
California, 170; New York, 106; Wisconsin, 91; Florida, 69; and Maryland,
65. Based on historical trend, 800 plants are projected for 1980.
Fruit and Vegetable Freezing Plants - In contrast to fruit and vegetable
canneries, the number of freezing plants increased from 303 in 1958 to 650 in
1963 but decreased to 607 in 1967 -- down 6.5 percent and is projected to de-
crease to 505 by 1980. The greatest number is in the West (32.6%) and the
remainder are evenly distributed throughout the United States. California has
the most plants (85), followed by New York (47), Washington (46), Illinois (36),
Michigan (34) and Oregon and Pennsylvania.
C.	Characteristics of Fruit and Vegetable Canning and Freezing Plants
Size of firms - A detailed analysis was made of the volume packed of a selected
sample of 598 canners and 231 fruit and vegetable freezing firms.
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Canners - Over a third of the firms analyzed (35.7%) would be considered as
small canners, with an annual pack of less than 250, 000 cases. At the other
end of the range, 28. 6 percent packed over 1, 000, 000 cases and 19 percent
packed over 5, 000,000 cases each.
Freezers - Approximately 30 percent of all freezers analyzed would be classed
as small, with annual volumes of less than 5 million pounds. However, 46.6
percent would be considered large (annual volume in excess of 20 million pounds)
and 22. 9 percent had annual packs of over 100 million pounds.
Concentration of Processing Operations - The canning industry is characterized
by a large number of firms, but a few major canners pack a high percentage of
the total volume. Consequently a large number of small canners share a small
segment of the total market. For the major canned commodities the largest
third process approximately 80% of the product; the middle third processes
approximately 15% of the product; and the smallest third processes approxi-
mately 5% of the product.
Although similar data were not available for freezing, it is believed that similar
concentration exists in that industry.
Single Plant vs. Multiplant Firms - Over 85 percent of the canners in the United
States are single plant firms. Of the remainder (14.9%), the two largest firms
operated 31 plants each, one firm had 24 plants, two had 17 plants and one had
16 plants.
Eighty-two percent of the freezers were single plant firms. The largest firm
had 9 plants, the second largest 8, third 7 and the other two large firms had
6 plants each.
Single Product vs. Multiple Product Plants - Most canners were multiple pro-
duct plants, 64.4 percent packing more than one product.
The same situation existed for freezers, where 57.5 percent were multiple pro'
duct operations and 20 percent packed 4 or more products.
Diversified vs. Specialized Plants - Primary products (basic fruits, vegetables
and juices) represented 90 percent of the total value of gross sales of fruit and
vegetable freezing plants.
Stage in Production Process - All plants considered in this analysis were primal
canners or freezers of fruits and vegetables. No secondary (reprocessing)
activities were considered.
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Degree of Integration - There is only a small degree of vertical integration
(either forward or backward) in the fruit and vegetable processing industries.
Only about 8 percent of canned fruits and vegetables and 9 percent of the frozen
products were produced on land owned or rented by processors.
D.	Employment
Fruit and vegetable canners and freezers are major employers of labor in the
areas in which they operate. Further, they employ a high proportion of low-
skilled workers in relation to total employment in the industry.
Employment by canners dropped from 108, 400 in 1958 to 100, 000 in 1967, a
decline of 7.7 percent. At the same time, employment per plant increased
from 66 to 82.
Employment by freezers in the 1958-67 period increased from 39, 500 to 64, 500,
a gain of 63 percent. Average number of employers per plant increased from
93 in 1958 to 106 in 1967.
E.	Capacity and Utilization of Capacity
It is recognized that appreciable excess capacity normally exists in both the
canning and freezing industry. Utilization of capacity is generally higher in
larger plants and in intensive, commercial production areas. Due to the fact
that there is substantial year-to-year variation in the production of fruits and
vegetables, 10-20 percent standby capacity is desirable. However, the only
definitive study made showed utilization rates in Southern plants at 57 percent
by canners and 74 percent for freezers.
F.	Industry Segmentation
For the purposes of this study the canning and freezing industries were seg-
mented by size. A "large" plant represents the average size in the largest
third of the industry and approximately 80 percent of total volume; the "medium"
size plant, the middle third and 15 percent of total volume; and the "small"
plant, the smallest third and 5 percent of the volume.
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IV. METHODOLOGY
The economic impact of pollution abatement costs on the fruit and vegetable
canning and freezing industry can affect different sized plants in different
ways. Economies of scale in processing costs as well as pollution abatement
cost will lead to a differential impact on individual firms. A microeconomic
evaluation of plants within the fruit and vegetable processing industry was con-
ducted to assess probable impacts within the industry. From this base of in-
formation, overall impacts on the industry were projected.
A.	Analytical Approach
For this study an economic-engineering approach was used to provide costs
and revenue situations for representative processing plants. A 20-year planning
horizon was used to simulate operations, both with and without internalized
pollution abatement controls.
A series of operating situations for representative plants were simulated based
on volume of operation, level of technology, level of capacity utilization, numbef
of products and length of operating season. All these assumed operating con-
ditions will affect the profitability of a processing plant and its ability to with-
stand pollution abatement costs.
The economic performance of individual plant operations was evaluated using
the technique of discounted economic cash flows and internal rate of return
analysis. This analytical technique is widely used in investment feasibility
analyses and is appropriate for purposes of this study to assess economic im-
pacts of proposed additional investments in pollution abatement facilities.
The internal rate of return, as a measure of investment feasibility, provides a
"present value" comparison of current and future costs and income streams
resulting from a plant operation. In essence, the internal rate of return is the
discount rate which makes the "present value" of money invested in a given
project over a period to time equal to the "present value" of money received
over the length of the project.
This analytical technique by-passes the many problems of depreciation
assumptions, etc. that would be necessary in an analysis of present unit cost
of processing operations both with and without pollution abatement controls.
B.	Water Pollution Abatement Costs
Water pollution abatement costs used in this study were provided by the CEQ.
They were calculated with a computer based model developed to estimate both
investment capital and operating capital required by the nation's industries
114

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to attain water pollution control standards- These "standards" are defined as
equivalent of secondary treatment.
The configuration for a water plant to serve a fruit and vegetable processing
plant is based on the following technology:
The actual flow of waste water was calculated by the kind of product processed
and the number of cases processed per day. The actual flow of waste water
was "adjusted" by a scaling factor of 2 to the .6 power to account for level of
pollutants in waste water from the fruit and vegetable industry.
The adjusted flow was used to derive the appropriate capital investment and
operation and maintenance cost from the relationship shown in Exhibit 1. The
Council on Environmental Quality recognizes these costs are subject to vari-
ation under alternative conditions and established a reasonable range of -30
percent to + 30 percent.
Method
Percent of
Wasteflow Processed
Equalization
Flotation
Sedimentation
Biological stabilization
50
100
100
140
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INVESTMENT
COST
($1000)
10,000 .
3,000
2,000
1,000 _
CD
400
300
200
100
Exhibit 1. Estimated Pollution Abatement Costs by Unit of Water Flow (adjusted)
for Fruit and Vegetable Processing Plants.
(Full .Logarithmic Scale)
INVESTMENT
OPERATIONS
&
MAINTENANCE
OPERATING &
MAINTENANCE
COSTS
($1000)
ADJUSTED FLOW
1,000 Gal/Day

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v. INDUSTRY ANALYSIS
i ~a for maior product lines under alternative
Economic cash flows were develop	flows were developed for ^pre-
conditions. Wherever data would a^ , ^ |||e indastry average for the
sentative plants with an annual volum q	„-rrmmnes Average volumes
largest thfrd, middle third and smallest thrrd plant group.ngs.^A ^ ^
for the representative plants amounted to 80 to 2	^ ^ ^
plants, 170 to 400 cases per hour for the midd
•»	nlants.
cases per hour for the large plants.
A. Size of Firms
A. Size of Firms
d to be a major factor in the level
Volume of production by type of plant	tQ have higher returns than
of returns. Large plants consis en y p	the internal rate of return or
medium, or small size plants. For ex^	^ag calcuiated at 50 percent for
the multiproduct pea and corn canning p	ent for the small. Data used
the large" 18 percent for the medxum	thus the rates of return
for different product lines came from i	second. The relative
should not be used to compare one pr	however, comparable,
impact of size on various product lines was, howev
Impact of Other Variables
*->* impact, oi wuici »			, ¦ „
	 		• industry is currently operating
Capacity - The fruit and vegetable	utilization rate was estimate^ ^
mTT^I less than capacity. X- the So*, h	for the freezing lndu*try-
at 57 percent for the canning indus ry and 74 I.	nt_ The rate of
Nation-wide the capacity is	capacity is reduced -- on the^
return drops sharply as the leve o	ating capacity was reduce
average from 25 to 50 percent when ope
percent to 75.	^
*i Viilitv is lirnitcd
ryTperTe for as	months.
specific short seasons, a smgl	operate for as long as
months while other multiproduct firms m y P	ting at tw0 or even three
The effect of a longer season may be gainedL y ^ analysis shows, the more
shifts. The longer season a plant can op
efficient it becomes.
« in the fruit and vegetable industry.
Level of technology is difficult to ass throughout their useful life new
Many of the plants are relative y o »	which is old or technologica y
equipment is added or used to rep ac ^ same site for 20 to 40 years. ^
obsolete. Many plants have been oc	^ combination of old and new equip
As a result, most plants in the in us r	a^e
-------
Even though capital investment costs are considerably lower in the older plant6'
higher operating cost generally offsets the advantage and results in a lower r^e
of return than newer plants. For a large plant with no pollution abatement fa-
cilities, returns are reduced from 42 percent to 33 percent for prevalent tech'
nology and 29 percent for old technology. A similar pattern exists for medium
size plants, but older small plants perform at about the same level as the neV
plants. In other words, the older small plants are able to compete reasonably
well with the newer ones.
C. Sensitivity Analysis of Pollution Abatement Cost
The impacts of pollution abatement costs at the micro level were evaluated,
in part, by increasing revenues for the firm with abatement costs, to the level
where the firm was operating with the same internal rate of return as ex-
perienced before pollution control. In effect this demonstrates the percent in'
crease in revenues (or prices) required to cover the pollution abatement costs
for a given firm.
The impact of pollution abatement costs were analyzed for each product group'
ing and a sensitivity analysis conducted for each. The analysis conducted on
the corn and pea canning plants is shown on Exhibit 2 for illustrative purposes* ,
Various increases in revenue were developed, then the rates of return were i*1
polated to identify the new price level which would provide sufficient revenue
offset the abatement cost. For the large corn and peas plant a 6.3 percent in'
crease in product revenue is required, 8.6 for the medium plant and 11.0 per'
cent for the small.
For the sensitivity analysis the pollution abatement costs were altered by 130
for the upper bound and 7 0 for the lower bound. This was for both investment
cost and operation and maintenance cost. The revenue increase for the large
plant under these conditions ranges from 4.4 to 8. 1 percent. For the mediui#
size plant the range is 6. 1 to 10.3 percent and for the small the range is 7.7
to 12.6.
For those plants that must provide their own facilities, the following maybe
considered representative:
Percent Required
Percent of	Price Increase
Plant Grouping	Total Volume
Large	80
Medium	15
Small	5
Weighted average increase required
Low
Average
High
3.9
5.5
7.5
4.6
6.4
8. 1
7.2
9.6
11. 6
4.8
5.8
7.8
118
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Internal
Rate of Return
50
Rate of Return Without Pollution
Control Costs
45
Large Plant
40
Medium Plant
35
Small Plant
30
25
20
6
3
5
7
8
9
2
4
10
11
1
12
Exhibit 2. Price Increases Required by Various Sized Pea and Corn Canning Plants to Offset
the Estimated Cost of Pollution Abatement Facilities (Plus or minus 30 percent)
-------
Assuming that 50 percent of the individual plants will use municipal facilities
and that they will not be subsidized by local communities, but must pay the
incremental cost for use of a small city system, this will amount to the following
Plant Grouping
Large
Medium
Small
Percent of
Total Volume
~ 80
15
5
Required
Price Increase
Low
Average
High
1.6
2. 5
3. 1
2.4
3. 1
3.9
2.5
3. 2
4.2
1.8
2.6
3. 3
3.3
4. 2
5.5
Weighted average increase required
Average plant and municipal treatment
According to information received from CEQ, about 58 percent of the abatement
technology is installed and is currently being paid for under present operating
conditions and present price levels. Thus the overall price increase necessary
to recover costs in pollution abatement facilities would amount to 1.8 percent
with a range from 1.4 to 2.3 percent.
VI. OVERALL'IMPACT ON THE INDUSTRY
Because of the unique structure and competitiveness of the fruit and vegetable
processing industry, pollution abatement facilities will have very serious con-
sequences orv the industry itself. Unless some lower cost pollution abatement
alternative such as municipal treatment can be found the smaller third -- and
to some extent the middle third --of the plants will be seriously impacted.
They most likely will not be able to recover the cost of installing and operating
the abatement facilities and will most likely be forced to shut down. Little im-
pact, however, will be felt by the ultimate consumer of the fruit and vegetable
products.
A. Price Increase
With an overall expected price increase of 1.4 to 2. 3 percent, the less efficient
medium sized plants and especially the small plants can not be expected to re-
cover the costs expended for pollution abatement facilities unless they can de-
velop lower cost alternatives. In addition, many of the small and medium size
plants are currently operating in a marginal position and would not be able to
cover the abatement costs from their current profit level. Larger plants appeal
to be in a stronger position. If the small and medium size firms would attempt
to raise prices to the level where they could recover the costs of their pollution
abatement facilities, they would be quickly undersold by the larger firm.
It should be remembered that the estimated level of capacity at which the in-
dustry is operating is approximately 75 percent or less. At that rate the large
firms could quickly step up production to fill the void of the small and medium
size plants that may be forced out of business.
120
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Little impact of pollution abatement will be felt by the ultimate consumer.
Because of the relative inelastic demand for fruits and vegetables, the re-
sultant decrease in per capita consumption of fruits and vegetables is estim-
ated at 0.5 to 1.0 percent or approximately 1 to 2 pounds per capita. This
Ax/ould be less than the total annual increase in consumption resulting from
population expansion and projected increases in per capita consumption.
B.	Impact on Profitability and Financial Position of the Industry
profitability in the fruit and vegetable industry is generally considered low.
With pollution abatement standards imposed on the industry profit margins
will be further reduced because of the structure and competitive nature of
the industry. While average incremental costs for pollution abatement are
expected to be passed through to consumers, the smaller firms are expected
to have much higher than average per unit costs of abatement.
Capital requirements for the fruit and vegetable industry are obtained pri-
marily from standard commercial sources outside the industry. A firm must
compete in the capital markets along with all other firms seeking capital. The
primary requirement then is a demonstrated record of good performance and
the individual firm's ability to project adequate net returns following an expanded
investment program. Consequently, capital availability is directly related to
profitability -- and the smaller, inefficient firms have difficulty raising the
needed capital to stay in business.
It is anticipated that additional capital requirements for financing pollution
abatement measures will also principally be sought from standard commercial
sources. When smaller firms are not able to present evidence that they can
increase prices to offset the abatement costs -- and when abatement financing
requirements amount to 50 to 100 percent of their total capital investment --
small firms will simply not be able to compete in commercial financial markets
for capital necessary to install pollution abatement facilities. The larger-more
efficient plants, in a good position to recover a portion of their costs, will be
in a much stronger position.
C.	Industry Dislocations
——I I M	1	l|	—	I	.11	I
The fruit and vegetable processing industry is comprised of many firms differ-
ing in process (canning, freezing), products processed (multi-single), size
(rate per hour), length of season (long/short), capacity and utilization of capacity,
level of technology (new/old) and other factors.
It is therefore extremely difficult to make broad generalizations for the industry.
Jt would appear, however, from our analysis that the major variable is size of
operation. From our analysis then, we can conclude that the small firm pro-
ducing 5 percent of the total product and the medium size firm producing 15
121
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percent of the product are faced with very serious difficulties should they
be forced to add pollution abatement facilities to their operations. Other
studies and our informal survey of key states indicates that roughly half of the
plants will be able to utilize municipal facilities or possibly other low cost
operations. This means that roughly one-third of the plants in the industry
will be forced to shut down unless other low cost pollution abatement facilities
can be developed. With approximately 1,200 plants in the canning and freezing
industry this could mean the shut down of 400 plants.
Location - Many of the marginal processing plants likely to be affected ad-
versely by pollution abatement controls are located in areas or regions of the
country that are already relatively economically depressed. Processor,
grower and associated businesses are generally a major component of local
economic development in these areas; and, consequently, any appreciable
impact on these businesses will also impact the entire local economy via
indirect multiplier effects on area incomes, employment, sales, level of
trade, etc. Such effects are likely to be far more consequential in aggre-
gate than the direct impacts of pollution abatement on the industry itself.
Specific locational effects are discussed in Part III.
D.	Employment
Since many fruit and vegetable processing plants are located in relatively
small urban centers and rural areas, the potential impact of dislocations may
be born disproportionately by areas which already lag the nation in economic
health. Approximately 90 percent of the employees of processing plants are
relatively unskilled and only part-time employed. This large segment of the
total labor force required is not generally mobil^and would have difficulty
relocating. The remaining 10 percent of management and higher-skilled pro-
duction worker labor force would be more mobil, but many would not likely
be needed or absorbed for some time by the remaining industry given current
widespread underutilization of capacity in the industry.
The potential for individuals to shift from small plants that might be dislocate^
to larger plants is of limited significance. For example, the sweet potato
canning plants analysed in this report had a production worker labor force of
55 people for the small (80 cases per hour), 90 for the medium (280 cases pet
hour), and 190 for the large (760 cases per hour). If 400 small and medium
size plants were forced to shut down this would directly result in the loss of
jobs by 28, 000 employees.
E.	Raw Product Suppliers
The impact of economic dislocations in the canning and freezing industries
be felt quite strongly by raw product producers. The industry, as pointed out
earlier, is supply oriented. The locational pattern of processing plants is
directly linked to the raw product production pattern. A majority of the
122
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processing firms procure their raw product supplies from an area within 50
miles of the plant. Again, the opportunity to produce for larger processors is
given little significance.
F.	Supplies and Customer Impacts
Supplier Impacts - Suppliers of inputs will be affected mostly on an ared-by-
area basis due to expected plant dislocations rather than in aggregate. This
follows in that industry-wide supply requirements, while perhaps depressed
in the short-run, will soon return to and exceed previous levels. On the
other hand, area-by-area dislocations will probably be long term.
Customer Impacts - Wholesale and retail customers can expect higher prices
for products with consequent higher retail prices to final consumers. Given
probable "pass-through" of prices, the net affect on the customer industries
if expected to be relatively minor. An overall expected price increase of
1.4 to 2.3 percent and the generally inelastic nature of demands for fruits
and vegetables, plus normal growth in demand, suggest that total volume of
demand will not decrease drastically given the expected increase in price.
A possible decrease of 1 to 2 pounds per capita can be expected.
G.	International Trade
Imports of Processed Fruits and Vegetables - The impact of increased imports
of processed fruits and vegetables associated with anticipated increased costs
of domestic processed products, is generally expected to be limited.
Exports are significant for selected products and higher processing costs
will affect the U. S. competitive position in foreign markets. If sales are
reduced, a deterioration of U. S. balance of payments will result. The
extent of this deterioration will depend on how effectively the particular
segment of the industry can control pollution at a minimum cost.
Balance of Payments - The overall tendency of pollution abatement controls
in the fruit and vegetable processing industry, because of relatively higher
domestic prices, will be toward an adverse balance of payments: export sales
volume will tend to be less, while import purchases will tend to be higher.
However, loss in sales volume will be partially off-set in terms of balance of
payments via higher prices. The net impact will not likely be substantial,
however.
123
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VII. SPECIFIC ECONOMIC DISLOCATIONS
A. Regional Impacts
A major effort was placed on determining expected differential region/area
impacts of pollution abatement costs on the canning and freezing industries.
The method used was to identify all known plants by location and other
key attributes, particularly size. C ros s-tabulation analyses were then
completed with emphasis on size distribution patterns of all processing
plants among regions, states, and counties within the continental United
State s.
A total of 1188 canners, freezers and combination canner/freezers were
included in the analysis. A summary of results are illustrated in Exhibit 3,
which is presented in four parts as follows:
Part A: Number, Type and Size Distributions of All Canning and Freezing
Plants by Census Region, 1970.
Basic numbers of various type plants are presented by census region.
For the U.S. as a whole, about 70 percent of all plants are canners,
and approximately 15 percent are freezers and, also, combination
canner/freezers.
A key distribution, however, is the size distribution of all plants among
regions. Each type of plant was coded into three groupings: 'small,'
'medium,' and 'large,' so that approximately one-third would be in each
for the U.S. as a whole. Hence, of primary interest is to identify those
regions/areas which deviate from the overall average. Furthermore, on
the premise that small plants will be most adversely impacted, concern
is focused on region/areas containing above average levels of 'small'
plants.
Part B: Percentages of Small Plants in Total and in EDA Qualified
Counties Only
This bar graph of regional percentages of 'small' plants relative to total
plants illustrates a wide variability in percentage levels among regions.
Also, four of the nine census regions are shown to be above the U.S.
average percentage: (1) New England, (2) South Atlantic, (3) Middle
Atlantic, and (4) Mountain. These regions are expected to be more
severely impacted relative to the remainder due to the higher concen-
trations of small plants. (See Part C for location of regions.)
124
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PART A
Number, Type and Site Distributions of All Canning and Freezing Plants,
by Census Region, 1970
•a
0
1
Census Region




All Plant
s


Totals
Number by Type
Plant

Percent by
Size
No.
Pet.
Canner
F reezer
Both
Small
Medium
Large
to
i
New England
32
3
19
9
4
53
34
9

Middle Atlantic
179
15
121
28
30
42
30
27

E. North Central
278
23
221
17
40
35
28
37

W. North Central
45
4
41
2
2
24
24
51

S. Atlantic
205
17
152
25
28
52
30
18

E. South Central
25
2
18
6
1
20
32
48

W. South Central
81
7
70
4
7
32
31
37

Mountain
49
4
33
8
8
39
27
33

Pacific
294
25
166
77
51
26
30
44

Total U.S.
1188
100
841
176
171
36
29
34

Source; Agri Division, Dunlap and Associates.
Inc.




to
Cn
40%
20%
Re gion:
Total Plants:
	
~
~
* 'Small* Plants in EDA Co.
% Total 'Small' Plants
U.S. Ave. Total 'Small*
U.S. Ave. EDA - Small'
E.NC
278
W.NC	SA E.SC W.SC	MT.
45	205	25	81	49
Percentages of 'Small' Canning and Freezing Plants in Total and in
EDA Qualified Counties Only, by U.S. Census Region, 1970
9
PAC.
294
EXHIBIT
PART C
Major Fegions with Above U.S. Average Percentage of 'Small' Canning and Freezing Plants,
{Plus Other States with Mure than 5 'Small Plants and Above Average
Percentage of Small Plants). 1970
65«* (11)
66% (35)
v m
States with five (5) or
mor? small plants
States with less than
live (5) small plants
States with Above U.S. Average Percentage of 'Small' Canning and Freezing Plants. 1970
-------
A secondary measurement depicted in this graph in the percentage of
'small' plants which are also located in Economic Development Admin-
istration (EDA) qualified counties. Overall community impacts are ex-
pected to be especially critical should plants in these areas be shut down.
Part C. Major Regions with Above U.S. Average Percentage of
'Small" Plants
The four census regions with higher than average concentrations of small
plants, as described in Part B, are shaded on the U.S. map shown. In
general, the East, South and Rocky Mountain areas of the country are
expected to be most seriously affected with the adoption of pollution
controls.
Part D. States with Above U.S. Average Percentage of 'Small'
Canning and Freezing Plants
Cross-tabulation analyses were also completed on location bases smaller
than census regions, e.g., states, economic regions and sub regions and
counties. This part of the exhibit shows state's having percentages of small
plants above average.
On this less-aggregate basis, a. more precise identification of probable
•problem areas' is obtained.
B. Local Impacts
The above overview of small plant distributions by region and state
represents relative differences among these areas. However, all
regions do have 'small' plants -- ranging from 20 to 53% as shown in
Part A above. Thus, no region will be completely unaffected. (Also
marginal 'medium1 plants are expected to be impacted adversely. Note
that 'medium' plants are rather uniformly distributed by region, however.)
A separate analysis on a county-by-county basis was also made to ascertain
probable absolute impacts on local areas. A summary of all counties within
the U.S. which have two or more small plants (regardless of the relative
criteria above) is as shown in Exhibit 4.
While many counties with only single 'small' plants are not shown (about
60 percent of all small plants are in the counties depicted), those shown
are representative of local areas which will be impacted. Special note
126
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WO**
S. OAK
WYO.
coio.
ARIZ.
H.MEX
in\c*-

,A«*
r^ysS
•	Non-EDA County
~	EDA County
Exhibit 1-4. Counties with Two or More 'Small' Canning or Freezing Plants
(Approximate Actual County Locations), 1970.
-------
is made of those areas, particularly in the West and North Central
states, which will be impacted even though the affected plants are
relatively few in comparison to total plants in their respective areas.
Note again the distinction of EDA vs. Non-EDA counties. More ad-
verse associated economic dislocations are projected for 'small' plants
in EDA counties which are likely to be shutdown.
Further local area analyses are presented in Part III of this report.
Also, individual plant data by county are provided in the Part IV
Statistical Supplement.
128
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IRON FOUNDRIES
Prepared by
A.T. Kearney & Company, Inc.
129
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PART I - EXECUTIVE SUMMARY
A - STRUCTURE OF THE INDUSTRY
DESCRIPTION OF THE
IRON FOUNDRY INDUSTRY
For the purposes of this study the iron foundry industry
vas defined as those shops that melt iron in furnaces, pour
the molten iron into molds, and alloy and/or treat the iron in
either the molten or cast state, with processes limited to
making gray, malleable and ductile iron castings.
The industry is composed of some 1,670 foundries (in 1969)
of which 717o were small, 25"L medium and only 47« large-sized.
The foundries are widely distributed, located in every state,
although about half are in the states bordering on the Great
Lakes. Approximately 257o of all iron foundries are captive
with the remainder being independent, largely producing jobbing
type castings.
Most of the foundries are relatively old, although many
have been modernized by installing new equipment. Melting is
still principally by cupolas, but with output from electric
arc and induction furnaces increasing in importance and tonnage.
The pollution problems of the industry are principally in
the area of air pollution, largely from melting operations.
131
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Water pollution is principally related to the use of wet
scrubbers for air pollution control on cupolas, and for slag
quenching on cupolas. Air pollution problems from non-melting
operations are more easily controlled, and the emissions are
considered to be more of an in-plant environmental problem
than an air pollution problem.
DEMAND FOR
IRON CASTINGS
Iron castings production has varied widely during the
past 10 years, from about 10 million to 15 million tons per
year. Although the yearly figures have fluctuated up and
down, the general trend has been moderately upward, with a
continuing growth projected at 2% per year by weight. Malle-
able iron output has remained at about one million tons per
year, while ductile iron production has shown a steady growth
and now exceeds malleable production.
The principal production categories have been cast iron
pipe and fittings—representing 23% of product cast; ingot
molds with 11%; and miscellaneous castings covering the remain-
ing 66%. However, only 65 foundries produce pipe and molds,
resulting in 4% of the foundries producing 34% of tonnage.
The miscellaneous category of iron castings includes all
of the malleable and most of the ductile iron output as well as
132
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gray iron castings. The principal users are the automotive
and agricultural equipment industries, which account for about
25% of all castings produced.
Markets for iron castings have been projected to increase
to approximately 17 million tons per year by 1980. The only
area in which competition by other products is expected to be
a major consideration is in cast iron pressure and soil pipe.
Export markets for iron castings are expected to diminish, and
imports are expected to increase, but these represent only a
minor factor in the total market.
SUPPLY OF IRON
CASTINGS
Iron foundry production processes can be divided into
two broad categories: melting and non-melting. The melting
operations involve cupolas, electric arc, induction, and
reverberatory furnaces, and account for the more important pol-
lution control problems in the iron foundry. The non-melting
operations include molding, pouring, shakeout, sand preparation,
cleaning, finishing and coremaking. The emissions from these
operations are more readily controlled with lower cost, avail-
able equipment.
Principal iron foundry raw materials include pig iron,
iron and steel scrap, coke, limestone, sand and ferroalloys.
133
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These are all sold through distributors and dealers, and with
the exception of pig iron, coke and ferroalloys, are obtained
from local sources near foundries. Pig iron, coke and ferro-
alloys are produced by iron and steel plants located in various
parts of the country.
Iron foundry population has declined steadily from 3,200
in 1947, to 1,670 in 1969, and is projected to continue to
decline to under 1,000 by 1980. The foundries which have closed,
and which are expected to close in the next decade, are primarily
the small ones, with the rate of closing increasing as the size
declines. The reason for closing is principally lack of capital
to modernize and mechanize. The necessity for high capital
expenditures for pollution control has been a contributing fac-
tor, but has not been the principal reason for the closures.
Iron foundries are located in all states, with greatest
concentration in the Great Lakes states. With the exception
of the pipe and mold foundries, the vast majority of iron
foundries produce a variety of iron castings, mostly on a job-
bing basis. Seventy-one percent of the foundries employ fewer
than 100, and 50% under 50 employees. The smaller foundries
are almost all privately owned. Total employment was about
230,000 in 1968, with average labor input being 23 man-hours
per ton of castings. Although almost all levels of skills are
134
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-utilized in iron foundries, most of the production labor can be
classified as unskilled or semi-skilled.
The very high percentage of iron foundries which are
either privately owned, or captive, has resulted in an unavail-
ability of actual financial information regarding costs,
capitalization and earnings. The financial analysis was there-
fore based on data obtained during the 1968 Study of Economic
Impact of Air Pollution Controls on the Gray Iron Foundry
Industry. Costs of installing and operating emissions controls
were also based on the 1970 Systems Analysis of Emissions and
Emissions Controls in the Iron Foundry Industry.
The costs of emission control, measured against such factors
as sales, total assets, and cost per ton of castings, generally
show a declining percentage as the foundry size increases.
This puts a greater impact on the smaller foundries, which also
accounts for their inability to cope with this cost. The
effect on cost of castings varies widely from more than $14 per
ton for the smallest foundries, to under $2 per ton for the
largest foundries. Except for the smallest foundries, these
cost increases are not a significantly high percentage of the
castings cost. However, the profit structure of the industry
is not sufficiently great enough to permit absorbing of this
added cost. Therefore, the cost will have to be passed on to
135
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the castings customers as a price increase. Since the entire
industry is faced with the same problem, this should not affect
the competitive relationship between foundries. However, it
will probably result in some losses to competitive materials in
pipe products, and to imported castings.
Technological changes which are taking place in the iron
foundry industry involve almost every area of activity, but are
primarily concentrated in three general directions: melting;
mechanization and automations; and pollution and environmental
control. Although the first two result in lower labor costs
and higher productivity, the high capital costs involved in
all areas have resulted in an acceleration of the rate of
closing of small foundries.
The effect of government influence, both federal and
local, on iron castings purchases is minimal, since very few
iron castings are bought directly by governments. The one
exception to this is in cast iron pipe, where government
specifications and cost control tend to promote lower cost,
competitive products.
B - OVERALL IMPACT ON INDUSTRY
PRICE INCREASES
Price increases, caused by need to cover the costs of
installing and operating pollution controls in iron foundries,
will have some effect in promoting use of competitive products
136
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and materials over iron castings, particularly in pressure
and soil pipe. It will also, at least temporarily, have an
adverse effect on the foreign balance of trade, by reducing
exports and increasing imports of iron castings.
Competition within the iron foundry industry will be
affected to only a limited degree since all foundries are faced
¦with the same need for installing pollution controls. However,
the need for higher increases among the very small foundries
will undoubtedly adversely affect their competitive position,
and will result in increased closings among small shops.
FACTOR DISLOCATIONS
WITHIN INDUSTRY
The rate of closing of small foundries, which has been
undiminished for the past 25 years, is expected to continue
at least for the next 10 years. The reasons have been economic-
principally the need for capital expenditures to replace equip-
ment, reduce labor costs, and increase productivity. The
added need for high cost pollution controls, which yield no
return on investment and, in fact, actually increase operating
costs, has resulted in an acceleration in the rate of closing
of the smaller foundries. The number of foundries with fewer
than 20 employees which manage to survive by 1980 will be very
small, probably under 100, compared with over 700 only 10 years
137
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ago. The older foundries, and those which are still manually
operated, will also experience a high percentage of closures.
The high rate of closings among the small foundries is
expected to be about the same for both captive and independent
shops, since the economics are generally the same for both.
The closings will be primarily among the jobbing type foundries
producing miscellaneous iron castings.
EFFECTS ON
RELATED INDUSTRIES
For the most part, the closings of the small, jobbing
type iron foundries will have relatively little effect on
castings buyers, other than the nuisance of having to change
source of supply. Generally, other foundries will be found
within trucking distances of the closed shops. Although iso-
lated cases may arise where another foundry will not be located
nearby, or where capacity of the neighboring foundries will
not be adequate to pick up the business of the closed shops,
the overall iron foundry capacity has been found to be double
the total castings production. Since the foundries which are
expected to close are primarily small ones with low capacity,
the total displaced tonnage is not expected to be great in
relation to the total available capacity. The principal prob-
lems will be caused by the fact that as the very small jobbing
foundries disappear, there will be few foundries left which are
138
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willing to take small orders for one or two special castings.
Most foundries obtain their metallic and non-metallic raw
materials from suppliers and dealers located in their general
areas. These in turn get their materials from steel plants,
refractory firms, quarries and similar companies. The principal
exceptions are the scrap dealers who are located in every
community, and who buy local scrap, process it and sell it to
foundries. Since the total foundry tonnage is expected to
continue to grow, the closing down of individual foundries is
not expected to have any national effect on suppliers. Local
dealers and supply firms may be affected if the only foundry
in an area closes down, but most of them will continue to sup-
ply the same materials to other foundries in the area.
INDUSTRY DISLOCATIONS
The net effect of the continuing decrease in the number
of iron foundries, while the total castings tonnage has con-
tinued to grow, has been to increase the average output per
foundry from 3,800 tons per year in 1947 to 8,700 tons in 1969,
and project to 16,500 tons in 1980. This further illustrates
the rapid disappearance of the small foundries.
The effect of adding pollution control costs to other
foundry costs has been estimated to result in price increases
from $2 per ton of castings for large, specialty foundries
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to $14 for small, jobbing foundries. In products such as
pipe and molds, which are sold as finished products directly
to consumers, this increase is a direct raise in cost of final
product. However, for most jobbing castings, which constitute
only a small percentage of the weight of the product in which
they are used, the overall effect on the final product cost
is relatively minor.
The principal effect of the closing of foundries is ex-
pected to be in local employment, and to a lesser degree on
national employment. An estimated distribution of foundry
closures has been made, resulting in a state-by-state analysis
of the effect on employment. The total number of employees
estimated to be in the foundries which are projected to close
in the next 10 years is 26,630 or about 11% of total foundry
employment. Approximately half of this number, or their equiv-
alent, are estimated will be re-employed in other iron foundries,
which will increase their business to replace that given up by
the closed foundries. The net unemployment is therefore esti-
mated to be approximately 13,300. However, it is noted that
most of these foundries were expected to close for other reasons
than need for installing pollution controls, and that this factor
only accelerated the rate of closings. The skilled workers who
are dislocated can probably find employment in other industries.
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However, since the majority of foundry workers are semi-skilled
or unskilled, a need will exist for retraining and, in some
cases, relocation to new areas.
The estimated expenditures for air pollution control in
iron foundries are $24 million in 1972, increasing annually to
$131 million in 1975, after which the controls are assumed to
have been largely installed and annual expenditures will drop
off. The major problem facing foundries has been identified
as the raising of capital funds for installation of controls,
a nonproductive expense. This is not caused by the lack of
total investment capital, since foundry control expenditures
are only a small fraction of one percent of the total public
capital market. It represents, instead, a problem of financing
nonproductive expense in companies where the earnings history
has always been marginal.
It is likely, therefore, that special inducements may
have to be provided by various levels of government to assist
and encourage foundries to make the necessary expenditures
rather than closing their doors„ Of the many alternates which
have been considered, those which are most likely to be success
ful have been identified as subsidiaries or grants covering
large portions of the capital investment for pollution control,
and/or large direct offset charges against income taxes.
458-471 O - 72 - 10
141
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LOCATIONS OF
DISLOCATIONS
Estimates of closures of iron foundries were made by
size of foundry, and by location in the U.S. As the size
decreases, the percentage of the foundries in the size category
is expected to increase from zero in the largest size group
to as high as 80% in the smallest. These closings will be in
all areas of the country, but will be highest in the industrial
areas where the greatest concentrations of foundries now exist.
For example, the Great Lakes states are expected to account for
almost half of the total foundry closings, and resulting un-
employment. The other principal areas to be affected are expected
to be Birmingham and Los Angeles, both of which have high iron
foundry concentrations.
COMPENSATORY
FACTORS
Because iron castings output is expected to continue to
grow, even though many iron foundries will close, the overall
effect on the industry will not be as catastrophic as might
otherwise be expected. Raw materials will continue to be re-
quired in undiminished quantities, and castings customers will
continue to be supplied in spite of some local inconveniences.
Even the unemployment, created by closing of many small foundries*
will be partially compensated for by the need for many surviving
foundries to expand to pick up the displaced castings tonnage;
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therefore, they will hire additional workers. About half of
the labor force in the closed foundries, or their equivalent,
is expected to be re-employed by other iron foundries. A por-
tion of the balance will undoubtedly be re-employed by other
industries in the same localities.
NET EMPLOYMENT
IMPACT	
It has been estimated that of the 13,300 workers who are
projected to be unemployed as a result of iron foundry closures
in the next decade, those having skills which are also used in
other industries will become employed again. However, the major-
ity of foundry workers are either so specialized or unskilled
that retraining will be necessary to provide employment for them.
IMPACT ON LOCAL
ECONOMY	
The widespread distribution of iron foundries, and the
location of foundries in almost every community, are expected
to create a local, rather than a national, problem; this will
be particularly true where a small foundry is practically the
only industry in a community. In these cases, relocation of
some workers to other communities will be necessary. With the
possible exception of some scrap yards serving isolated com-
munities where a foundry closes, the effect of iron foundry
closures on supplier industries in most areas is expected to
be very minor.
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C - SOURCES OF DATA
The principal sources from which the data for this economic
impact study were taken are given in the following tabulation.
Sources of Data and Acknowledgements
1.	American Foundrymen's Society, unpublished data.
2.	BDSA-NAPCA Gray Iron Foundry Air Pollution
BSDAF-807, 1968.
3.	Cooperative Wage Bureau, Benchmark and Specimen Example
Job Descriptions and Classifications.
4.	Gray and Ductile Iron Founders' Society, unpublished data.
5.	A. T. Kearney & Company, Systems Analysis of Emissions
and Emissions Control in the Iron Foundry Industry"!
6.	National Foundry Association, National Survey of Wages
and Fringe Benefits in the Foundry Industry. January,
19 71.
7. Penton Publishing Co., Foundry Magazine. Statistical
Inventory and Marketing Data.
,8. U.S. Department of HEW, Public Health Service, Economic
Impact of Air Pollution Controls on Gray Iron Foundry
Industry. AP-74.
9o U.S. Department of Commerce, Bureau of the Census,
Current Industrial Reports. Census of Manufactures.
Import-Export Data, and Industry Profiles.
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LEATHER TANNING
Prepared by-
Urban Systems Research & Engineering, Inc.
145
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1.0 Introduction
This report summarizes a review made in October
and November, 1971, of the impact of pollution control
costs on the leather tanning and finishing industry
(SIC 3111) in the United States.
Recent trends in production, employment, and pro-
duct acceptability have been reviewed along with cur-
rent and planned pollution control expenditures. Exec-
utives of eighteen of the firms were interviewed for
an impressionistic description of trends in the indus
try and their expectations as to the impact of pollu-
tion control costs.
The Executive Summary presents an overview of the
total study highlighting the industry trends and the
relative importance of pollution control costs to the
future of the industry.
The essential conclusions of this study are first
that the cost of controlling the industry's water pol-
lution at least to the level of secondary treatment
will represent an additional cost of production equal
to one percent or less of annual sales for most of the
firms in the industry. A small number of firms could
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face costs of 3 percent though no such firms were found.
The second conclusion follows from the industry's
frequent experiences with large increases and decreases
in the cost of its basic raw material-hides-by as much
as 50 percent to 100 percent in a one to two year
period. The selling price of leather correspondingly
has changed from ten percent to 2 5 percent in the same
period with no apparent affect on production. In the
aggregate the industry would not have any difficulty
passing on a one percent or even three percent price
increase deriving from pollution control costs.
The third major conclusion is that the future of
the industry will be determined by the health of the
American shoe industry, not by pollution control costs
even though the industry is a major pollutor. In the
last three years, domestic shoe production has begun
to decline due to competition from imports and thus
leather production has also begun to decline. There is
also strong pressure toward the substitution of synthetics
for leather which has ended most leather sole usages and
made large inroadn in lower priced shoes. The future
148
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trends are very hard to predict.
The fourth and final conclusion regards the abili-
ty of individual firms to raise the necessary capital
to pay for control equipment and to pay financing and
operating costs. Financial information" is very dif-
ficult to obtain for leather firms because they are
almost exclusively privately owned. Reviewing the
financial data which was obtained one would have to
conclude that the average firm could absorb a one per-
cent yearly charge for pollution control. Most
companies interviewed did not seem very concerned—
probably because of their confidence in their ability
to increase prices to cover the costs. The ability
of the firms to raise large amounts of capital is
not evident from their financial statement. They have
very little convertible plant and equipment and there
is little convertibility in the pollution control
equipment which may need to be purchased. However the
industries' current ratios average around two. There
is also strong evidence that the owners of the firms
hold assets related to the tannery which are not shown
on the tanneries accounts. The owners interviewed
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were completely confident that they could either raise
the capital required from banks or they were willing
to put up the capital themselves. Thus marginal firms
have been closing and will continue to close. But
this phenomena results from a contracting market for
leather not from the inability of firms to live with
pollution control costs.
In the worst case where a firm is facing severe
control costs, tanneries now have the option of closing
what is called their "beam house" and subcontracting
the preliminary tanning operations and thus eliminating
90 percent of the BOD waste. Companies now provide
this service at a cost equal to what it costs the
average firm to perform the work in house. The em-
ployment reduction is about 20 percent. This option
has been taken by a number of firms. Thus only in
very unusual circumstances might a tannery actually
have to close because of pollution control costs.
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2. Description of Tanning Industry
The tanning industry is one of the oldest manu-
facturing industries in the United States. It has
declined secularly since the turn of the century a
decline temporarily arrested in the mid 60's. The
number of plants has declined by about 25 since 1967 to
496 in 1970 with half of the firms employing less than
20 persons.
The industry is characterized as technically
stagnant, small scale and highly price competitive.
No new tannery has been constructed in fifteen years
and the average age of machinery is close to 25 years.
Even the class of firms with more than 20 employees
average only 100 employees, with the four firm concen-
tration of about ten percent.
Price competitiveness is very much fostered by
the industry's prime customer, the shoe industry,
which purchases 80 percent of the leather produced.
Shoe manufacturers use a number of suppliers of any
one time, with little concern for ties of tradition or
region.
There are only a few publicly owned companies in
the industry. About 25 plants are divisions of non
151
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tanning corporations, but the vast bulk of the com-
panies are privately held, with family ownership-
management. This has important consequences for de-
cision making in the industry. Management which has
owned a company for many years has a psychological
stake in the continued existence of the company which
often leads to decisions not consistent with pure
profit maximizing behavior. Both because of the firm
sizes and their ownership, the tanning industry has
invested very little in research and development and
is secretive about technology and trends.
Tanneries have traditionally been regarded as
major pollutors. The basic process is chemical treat-
ment of hides, which produces substantial liquid ef-
fluent. Air pollution is a much smaller problem,
though not negligible. Most air pollution expenditures
have involved purchases of new boilers though there is
some buffing waste control equipment.
Certain parts of the tanning and finishing pro-
cess are responsible for a disproportionate part of
the effluent production. in particular the "beam
house" operations, defleshing and tanning, produce the
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bulk of BOD, though they involve only a small part of
the value added of the industry. It is perfectly
feasible for a tannery to continue operations using
hides processed elsewhere, where effluent treatment
costs are lower, rather than starting with the raw
hides. There is in fact a noticeable trend towards
this separation, so that in the future there may be a
number of firms in hide producing regions which spec-
ialize in beam house operations and ship the much
lighter hides to finishing firms in the North and East.
The basic raw materials for leather production are
animal hides, predominantly cattle. Every animal com-
mercially slaughtered in the United States provides a
hide for tanning, though hide production is only a
function of meat demand. The United States is a major
exporter of cattle hides, along with Argentina. Hide
purchases represent about 30 percent of the production
costs of United States' leather.
Hide prices have been characterized by an extra-
ordinary variability rising as much as 46 percent in a
single year for which no obvious explanation is avail-
able. Aggregate supply and demand do not seem to have
been particularly volatile, even within years.
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Tanners, despite large inventories, do not stock pile
for speculative purposes, inventories being perceived
as determined by essentially technical needs. Clearly
there must be highly volatile price expectations which
lead to variable bidding. Prices are set by auction
and no big buyers exert significant influence.
The shoe industry takes 80 percent, by value, of
the tanning industry's output. Being a very low capi-
tal intensive industry with a small optimal size,
there is a very high rate of corporate birth and death
amongst shoe firms. The industry has been seriously
affected by the sudden increase in the market share of
imports, with the number of establishments declining
from 1100 in 1968 to 950 ir^ 1970.
In reaction to this change, the domestic shoe
industry has shown increasing interest in the use of
synthetics. The potential reduction in production
costs come from both a lower price and more automated
output processes, such as machine molding. The latter
component represents the more important factor for the
domestic leather industry, since synthetics of a
quality comparable to leather, at the moment, cost
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approximately the same, per square foot, as leather.
The leather industry's long run future is heavily de-
pendent on technological changes in leather shoe pro-
duction and the level of domestic shoe production.
The other traditional customer for the leather
industry has been the garment industry. Here fashion
changes are the most crucial variable and cost or
technical factors are unlikely to be significant.
The industry is well aware of this and has attempted
to promote an image of quality for leather clothes.
Some success, though possibly temporary, has been
achieved.
One consequence of the predominance of closely
held firms in the leather industry is a lack of fi-
nancial information on individual firms. Census data
are aggregative and available only for scattered
years. Nevertheless, through the use of an analysis
of financial statement by Robert Morris Associates,
Dunand Bradstreet reports, and interviews with tan-
ning executives, we have developed a fairly clear
picture of the industry's financial position.
The largest item appearing in the capital balance
155
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sheet is inventories ($135 million), together with
bank, loans to cover them. There is only $200 million
in plant and equipment at max'ket prices reflecting the
very old age of equipment. On the other hand, there
is an adequate ratio of current assets to current
liabilities, averaging about two but rising as high as
4.9 for one company with 275 employees. One can infer
that there are funds available for investment or
credit available for loans for waste treatment
facilities. The inference is clearly reflected by the
statement of tanners that they have been meeting and
will continue to meet pollution control costs.
It would seem, in fact, that capital is used
very poorly in this industry. Substantial funds are
tied up in low yield short term assets or self-finan-
cing of inventories. This again reflects the nature
of control in the industry; family ownership-manage-
ment with no interest in diversification of assets.
The Morris Associates study showed that the fi-
nancially weakest firms were the small firms in the
lowest quartile of financial strength. These firms
are also the ones with the oldest technologies and
are the ones most likely to close in a contracting
market.
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3.0 Pollution Control Costs in the Tanning Industry
This study has taken a different approach to the
control cost aspect than originally planned. Considerable
effort has been devoted to obtaining actual cost data
because it turns out that the costs vary widely within
the industry and is at times at great variance with
the cost data supplied by EPA. In addition, the
important differential impact of the costs is between
firms within the industry and not between the tanning
industry and other industries or imports. As a whole
there is almost a zero elasticity of demand for leather.
Therefore, the important question is what happens within
the industry, and the study of cost data focused on* this
aspect. It seems clear that the industry as a whole
can pass on the two to three percent price increase which
would result in the worst case from pollution control
costs.
Present state and federal water pollution control
programs and regulations have significant differential
impact on the firms within the tanning industry. Firms
in Milwaukee, Newark, Peabody and Salem, Mass., and
Gloversville-Johnston, New York, for example are now
paying little or no direct sewer charges and there are
458-471 O - 7S - 11
157
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currently no plans to impose any charges. These firms,
which make up a large percentage of the tanning industry,
•will probably experience little or no increased cost of
production due to pollution control costs in the next
two or three years.
Firms in Chicago have experienced relatively heavy
charges because of new sewer regulations which require
pretreatment and charge firms in proportion to their
waste flow and its composition. The typical costs for
these firms for waste control is somewhat over one
percent of sales.
There are a smaller but important number of
firms which are in small towns and are required to
put up joint town-tannery treatment plants. These
firms have had to raise large amounts of capital as
their share of the construction costs. A New Hampshire
company with annual sales of $10,000,000 contributed
$700,000 toward the cost of constructing the treatment
plant. The annual added cost of production for these
firms including operation costs and debt maintenance
is approximately one percent of yearly sales. These
joint projects are all receiving state and federal
financing for 80 to 85 percent of the construction
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costs. In a study done by Camp, Dresser and McKee1
of one of the joint projects, the cost to the tannery
without state and federal capital assistance would be
about three percent of sales.
The final group of firms consists of those
in rural areas where they cannot tie into a muncipal
treatment system. While it may seem that these firms
face the most severe control costs because they can
receive no public funds for constructing treatment
facilities, interviews with 20 percent of the firms
showed this not to be the case. All of the firms inter-
viewed were undertaking much less expensive treatment
projects using large amounts of land area. The companies
reported that they were achieving secondary treatment
with these methods.
It is difficult to generalize for these firms
because each one is a special case, but it seems they
are now experiencing less cost impact than the firms
in municipal systems like Chicago. As noted above
the cost of building and operating a treatment plant
. _
Activated Sludge Treatment of Chrome Tannery Wastes,
U. S. Department of the Interior, Water Pollution Control
Research Series, ORD-5.
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similar to those built for municipalities would be
three percent of sales.
Upon reviewing the present pattern of pollution
control costs on the tanning industry, it becomes clear
that the present federal and state enforcement and par-
ticularly the treatment plant grant programs benefit
some firms and not others. The costs for different
classes of firms sighted above are expressed as a
percentage of annual sales. The firms in municipalities
and joint projects are only being charged to recover
20 percent of the capital costs, if that much. The
maximum annual charges for these firms is one percent
of annual sales instead of three percent. The difference
is the federal and state subsidy of construction costs
which rural firms do not get.
In terms of whether a firm continues in business
or not, it is equally important whether the firm
must finance the treatment facilities or merely pay off
its share of municipal bonds. Rural tanneries and those
in joint projects are having to raise the largest amounts
of their own capital.
As far as the tanning industry is concerned present
federal regulations would continue to differentially
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impact firms in the industry. The proposed Federal
Water Pollution Control Act of 1971 would at least
eliminate the disparity resulting from the federal
subsidies of capital costs.
All of the costs discussed so far have concerned
water pollution control because this is the major
problem for the industry. Some data is reported on
air pollution but this mostly represents the cost of
replacing coal burners in furnaces. Tanning includes
polishing and buffing and there are some odor problems,
but these are all small compared to the water pollution
problems.
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4. Impact of Control Costs
The impact of pollution control costs on the tan-
ning industry can be summarized very briefly because
the effects are minimal. This is not to say that the
costs are not a major concern to the industry or that
the period of adjustment will be easy. Tanneries which
are attempting to define and control their waste prob-
lems for the first time are experiencing a period of
major expenditures and a major problem solving period
which is taking up a considerable amount of the firms'
management time. But for almost all tanneries pollu-
tion can be controlled within manageable expenditure
levels.
In the aggregate pollution control costs will
equal about one percent of yearly sales. These costs
will easily be passed on by the industry as a whole.
The one percent cost number is taken from the actual
cost experience of many tanneries ranging from .5 per-
cent to 1.5 percent. It must be understood that these
costs reflected the state and federal capital subsidy
program for treatment plant construction. Without this
program the one percent cost number would go to about
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three percent.
It is possible that some plants could face a three
percent cost now. .But no such plants have been identi-
fied. Firms have closed down their beam house to keep
the costs more in line with the one percent figure.
In total the control costs will result in higher
leather prices of about one percent and the differential
between firms will range from zero percent to
1.5 percent. In time these differences will diminish
as municipalities institute sewer charge schemes
more nearly reflecting the cost of treating indus-
trial waste.
There will be no aggregate effects on employment
or production as a result of waste control costs. The
closing of "beam houses" will redistribute employment
somewhat but should allow the affected tanneries to
stay open with a ten percent to 15 percent employment
reduction rather than closing. No specific plants were
identified which were likely to close as a result of
control costs. The most vulnerable types of plants
are small firms with older technologies particularly
vegetable tanners or those producing sole leather.
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But none of these would have significant impact on local
unemployment rates.
Because tanneries are price competitive, some
firms may have to temporarily absorb part or all of the
one percent waste control cost since their competition may
not face the costs at the same time. The before tax
profit margins for tanneries are about 5.5 percent
according to the Morris Associate study. The one to
one and a half control cost could be absorbed for a short
period ouch as six months before prices were increased.
It is relatively easy to pass on the cost because leather
prices regularly change substantially as a result of
hide price changes.
The essential attitude of tanners is that what
ever expenditures are necessary to keep the plants open
will be made. The managers and owners who had not
already faced large waste control costs did not seem to
know what expenditures they would have to make. Their
estimates were usually higher than the actual costs
reported here. But there was almost a universal confi-
dence that the necessary capital could be raised and the
yearly costs could be lived with.
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Firms which were already experiencing the one
percent to one and a half percent control costs were
unhappy about it but they had invested the capital
and were continuing operations. This will be the
trend for the near future.
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NONFERROUS METALS SMELTING AND REFINING
Prepared by
Charles River Associates Incorporated
167
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ALUMINUM
Chapter 1
INTRODUCTION AND EXECUTIVE SUMMARY
Overview of the Aluminum Market
The aluminum market throughout the twentieth century
has been characterized by spectacular, steady growth,
and the postwar period has been no exception. For
example, between 1947 and 1970, U.S. primary production
grew almost seven-fold (from 572,00.0 short tons to
3,976,000 short tons) and total noncoxnmunist production
grew almost nine-fold (from 1,053,000 short tons to
8,822,000 short tons).
As Figure 1-1 shows, aluminum passes through three
stages from ore to metal: bauxite, alumina, and pri-
mary aluminum. Shipments to consumers include ingot
and mill products produced from both primary and secon-
dary aluminum. Secondary smelters purchase new and old
scrap as their principal source of supply and produce
ingot for foundries and other applications. In 1970,
U.S. primary production was 3,950,000 tons and
secondary production was 950,000 tons (773,000 tons
from old scrap and 177,000 tons from new scrap).
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Raw Materials
Figure 1-1
FLOW CHART OF THE ALUMINUM MARKET1
Ingot	Mill Products
Final Products
Baux i te
A Iumlna
Old Scrap
(177)
New Scrap
(773)
-*	*—
Gove rnment
Stocks (25)
A Iumi num
Virgin and A I Ioy
Ingot (3,976)
Seconda ry
Aluminum (950)
Ingot (1278)
Sheet and Plate (1844)
Foil (274)
Rod and Bar (69)
Ba re W i re (47)
ACSR2 and Bare
Cable (250)
Insulated or Covered
^ i re and Cab Ie ( I 30)
Extruded Shapes (706)
Extruded rod and
Bar (28)
Extruded Pipe and
Tube (88)
Tubing (88)
Powder (102)
Forcings and impacts
(60)
Building and
Construct ion (1125)
Transportation (766)
Consumer Durables
(467)
Electrical (679)
Machinery and
Equipment (302)
Conta i ne rs and
Packaging (734)
Other (402)
Exports (581)
xNumbers in parentheses are U.S. value *cr 1969 in thousands of short tons.
2Aluminum Cable, steel reinforced.
SOURCE: Data fror. tre Aluminum Assoc i a t * q- , Aluminum Statistical Review 1969,
Me* 'for k, N.Y . , 1969.
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Aluminum ingot is either sold for direct use
in foundries or is fabricated into mill products, such
as sheet and plate (1,844,000 tons in 1970), foil (279,000
tons) and wire (427,000 tons). The major markets for
aluminum in the United States are building and construc-
tion (1,125,000 tons), transportation (766,000 tons),
electrical (679,000 tons), containers and packaging
(734,000 tons), consumer durables (467,000 tons), ma-
chinery and equipment (302,000 tons).
Chapters 2 through 7 of this report present in
detail those aspects of the aluminum market that are
summarized below.
Technology of Production
Primary aluminum production is divided into three
stages: bauxite mining, alumina production, and the
reduction of alumina to aluminum. The last stage accounts
for about two-thirds of the average cost per ton of pri-
mary aluminum. The three stages tend to occur in dif-
ferent locations and have different technologies and
cost functions.
The most important bauxite-producing nations are
Jamaica, Surinam, Australia, and Guyana, with only small
quantities produced in the United States. While bauxite
is widely dispersed in the earth's crust, rich bauxite
deposits are relatively scarce. For most integrated
producers, bauxite represents about 5 to 10 percent of
the total costs of producing aluminum.
Although there has been a steady increase in pro-
ductivity over the past two decades in alumina and
aluminum production, the basic processes used for manu-
facturing these products have been unchanged since the
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19th Century. The probable outlook for the next decade
is that the prevailing raw materials and processes for
producing aluminum ingot will continue to be used, with
gradual improvements in efficiency.
Alumina is produced from bauxite by the Bayer pro-
cess, Because of the over 50 percent weight reduction
in producing alumina from bauxite, there has been a
marked trend to locate alumina facilities near the
bauxite mines. The minimal efficient scale of such an
operation may be as much as 600,000 tons per year (of
alumina), with an initial capital investment of as much
as $200-300 million. Average production costs
at an efficient plant are about $72 per ton (in 1970
dollars, assuming normal capacity utilization), of which
about two-thirds are variable costs and one-third are
fixed costs.1
Aluminum plants tend to be located near major mar-
kets and low-cost power supplies. The major producing
countries in 1970 were the United States (45 percent
°f total noncommunist production), Canada (12 percent),
Japan (9 percent) , Norway (7 percent) , France (5 per-
cent) , and West Germany (4 percent).
Aluminum is produced from alumina by electrolytic
reduction, using either the prebaked or the Soderberg
anode system. There are substantial economies of scale
in aluminum production/ with the most efficient scale
1Pull data on these costs are presented in Chapter
2 of this report.
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being in the range of 75,000-100,000 tons per year. Ini-
tial capital costs are usually over $100 million. Average
coats of production of an efficient aluminum smelter were
QSLimatod in 1966 to be about $418 per ton or $0.21 per
pound, assuming normal capacity utilization, in 1970 dollars
average costs would be about $507 per ton or about $0.25-
0.26 per pound. Short-run variable costs (including
alumina) were estimated to be almost $300 per ton (or
$0.15 per pound); in 1970 dollars these costs would be
about $0.18-0.19 per pound.
The minimal initial capital cost of an integrated
bauxite-alumina-aluminum operation is at least $150
million, and may be as much as $1 billion* For inte-
grated producers, average variable costs and marginal
costs are fairly constant up to capacity, but increase
rapidly as rated capacity is approached; in the long run
average and marginal costs are relatively constant for
a firm with access to commercial bauxite deposits.
Capital costs constitute a high percentage of average
production costs of an integrated producer — the capital
charges for one ton of aluminum are over one-third of
long-run average production costs.
Demand for Aluminum
Aluminum has a variety of properties that make it
a very versatile material. Its distinguishing charac-
teristics are its light weight# strength, and natural
attractive appearance. In addition, many aluminum
alloys possess the tensile strength of steel while re-
taining the light weight of aluminum.
Consumption of aluminum in the noncommunist world
grew very rapidly in the postwar period, increasing
O . 7J - 13
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from 1.484 million short tons in 1949 to 9.513 million
short tons by 1968.1 Aluminum consumption, particularly
in the United States, is characterized by rapid growth
in years of economic growth and substantial declines
in consumption in years in which economic growth declines
(such as 1956-1957, 1958-1959, 1965^1966, and 1969-1970).
Between 1960 and 1969 world consumption grew at a rate
of about 10 percent per year. The largest consuming
nations in the world are the United States (49 percent
of total noncommunist consumption in 1968), Japan (10
percent), West Germany (9 percent) and the United Kingdom
(7 percent).
In 1946 the largest single end-use market for
aluminum in the United States was building and construc-
tion, which accounted for 29 percent of total U.S. con-
sumption. "Other" applications (including defense)
accounted for 28 percent of the total, followed by
consumer durables (13 percent), transportation (9
percent), electrical (8 percent), and containers and
packaging (3 percent). The fastest growing end-use
markets in the postwar period have been transportation,
electrical applications, and containers and packaging.
The end-use consumption patterns in foreign countries
are substantially different from those in the United
States. In particular, transportation has a much
bigger share of the market, while building and construc-
tion has a much smaller share of the market than in the
United States.
The characteristics of the demand for aluminum
vary substantially in the different end-use markets.
1These data measure mill product shipments to con-
sumers, and therefore include aluminum recovered from
scrap.
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In building and construction, aluminum competes with
a wide variety of materials, including steel, wood,
copper (for plumbing, tubing, roofing, and gutters),
and plastics. In the automotive market (which accounts
for 40 percent of aluminum usage in transportation)
aluminum competes with copper, iron and steel, plated
zinc die castings, and plastics, while in aircraft
(which accounts for 25 percent of the transportation
market) aluminum competes to some extent with steel and
titanium. In electrical and communications equipment
aluminum competes actively with copper and steel (in
towers and support structures). In containers and
packaging, aluminum competes with tin plate, plastics,
and tin-free steel. In consumer durables aluminum com-
petes with copper, steel, fiberglass reinforced plastics
and magnesium. Finally, in machinery and equipment
aluminum competes with copper, nickel, steel, and plastics.
It appears that within realistic price ranges
aluminum will neither gain nor lose any important mar-
kets in the next 5 to 10 years. Aluminum will probably
continue to increase its market share in the "traditional"
applications, particularly construction and electrical
applications. The most important potential new markets
for aluminum are in automobile engine blocks, automobile
radiators, desalination plants, and cryogenics. However,
none of these applications are imminent and none would
represent a revolutionary increase in aluminum sales.
An econometric analysis of the aluminum industry
performed by Charles River Associates reveals that the
U.S. long-run demand elasticity for aluminum with respect
to price is about -1.6, indicating that a 10 percent
increase in aluminum prices will lead to a 16 percent
decrease in aluminum consumption. (See Table 3-2 and
the accompanying text.) The dec Line in consumption would
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be greatest in transportation, electrical applications,
building and construction, and machinery and equipment and
least in consumer durables, containers and packaging, and
"other applications (including defense). The short-run
elasticity is only about -0.30, indicating that a 10 per-
cent increase in aluminum prices would lead to only a 3
percent reduction in consumption in the first year.
The long-run elasticity of demand with respect to copper
is about -0.36, indicating that a 10 percent increase in
copper prices will lead to a 3.6 percent increase in
aluminum consumption. Virtually all of this substitution
occurs in electrical applications.
The econometric results also suggest that in the
absence of changes in aluminum and copper prices, alu-
minum consumption over the next 3 to 5 years should grow
at higher rates than the economy as a whole.
Industrial Organization
The aluminum industry is highly concentrated at
each of the three principal stages of production. Six
vertically integrated firms account for almost four-
fifths of noncamnrunist aluminum capacity. These firms
are Alcan (19.2 percent), Alcoa (19.0 percent), Reynolds
(11.3 percent), Kaiser (10.9 percent), P^chiney (9.1
percent), and Alusuisse (5.0 percent). If the capaci-
ties of several large additional firms (such as Ormet
and Harvey) are included this figure approaches five-
sixths of total aluminum capacity. In addition govern-
ment-owned firms in protected markets account for about
4 to 5 percent of total capacity. If the capacities
of these firms are excluded from the total, the combined
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aluminum capacity of the top seven or eight firms in the
industry is about 90 percent of total noncommunist capa-
city serving international markets. Bauxite mining and
aluminum production are even more concentrated than
aluminum production.
The most important entry barriers for integrated
production are probably economies of scale (the minimal
efficient scale of an integrated operation is currently
over 3 percent of the noncommunist market), access to
a high-quality bauxite deposit, and the large initial cap-
ital investment necessary for low-cost production.
Although a number of new firms have announced their
intention of entering the aluminum industry in the next
few years (a full list can be found in Chapter 4 of this
report), the only important new entrant is American
Metal Climax (AMAX), which has recently acquired large
commercial bauxite reserves in Australia. If all of
the planned capacity construction by new firms occurs
on schedule and if no major new projects are initiated
by the established producers, the market share of the
six principal integrated firms would decline from 76.6
percent in 1970 to 61.9 percent in 1971. The actual
decline in industry concentration will of course be
much less than this.
The profit rates of the major aluminum companies
have been relatively low in recent years. However, in
absolute terms the major integrated firms are all huge
by almost any standards; in 1970 the combined after-tax
earnings of Alcoa, Kaiser, Reynolds, Anaconda, and
Harvey was $256 million, while the combined stockholder's
equity Was $3,904 billion. It should also be noted
that without exception the smaller aluminum producers
are all owned by large, well-established firms.
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Aluminum Prices
Very little elemental aluminum is sold in the form
of bauxite and alumina. Somewhat less than one-tenth of
U.S. sales of primary aluminum are in the form of hot
metal (primarily to the automobile industry), about one-
third of U.S. sales are in the form of primary ingot#
and the balance is in the form of fabricated and semi-
fabricated products. An examination of the available
data on mill product prices suggests that these prices
follow the general movements in the price of ingot.
The list price of primary ingot is changed on the
average about twice a year. The general pattern in the
postwar period has been for one firm (usually Alcoa,
Alcan, or Kaiser) to initiate a change in the list price
and for the other firms to follow within a few days.
Frequently the list price does not represent actual
transaction prices for much of the market. In times of
shortage (such as most of the period from 1948 to 1956)
the primary producers ration aluminum. In these times
the prices of black market aluminum and of scrap aluminum
(a close substitute for primary aluminum in some appli-
cations) rise sharply. During times of surplus (such as
from 1958 to 1960 and from 1969 to the present) the
primary producers discount from list price.
Between 1947 and 1957 both list and transaction
prices of aluminum increased, with the list price going
from $0.15 per pound in 1947 to $0,281 in August 1957.
The list price fell to $0,225 by 1963 and then increased
to its present level of $0.29. Transaction prices, as
represented by scrap prices, have fallen significantly
178
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during the past two years and are currently reported to
be as low as $0.22 per pound.
A comparison of the list price data with CRA's
index of aluminum costs of production shows that the
markup between list price and long-run average cost has
remained remarkably stable in the postwar period. Trans-
action prices in the long run tend to follow closely the
list price, but in the short run there is a very signifi-
cant correlation between the extent of discounting in the
primary market and the capacity-utilization of the primary
producers.
Thus, the processes generating list prices and trans-
action prices in the aluminum market are different. The
list price is determined primarily by trends in long-run
average costs and by other long-run factors, although it is
also influenced by short-run factors. Marginal transaction
prices are determined during times of surplus by the extent
to which the primary producers discount ingot. The extent
of discounting is in turn determined by the extent of
excess capacity in the market. In times of shortage, mar-
ginal transaction prices are determined by competitive
forces — the price increases until the supply from secondary
producers and marginal primary suppliers equals the excess
demand of consumers being rationed by the primary producers.
Government Policies
At the present time the most important government
policies affecting the aluminum market are those con-
cerned with the wage-price freeze, trade policies, and
the stockpile disposal program.
Slightly over 830,000 tons of aluminum are currently
available for disposal by the government. This material
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is currently being sold under four-year contracts with
primary producers. The producers must purchase about
379,000 tons during the next two years. The remaining
aluminum (about 452,000 tons) will probably be sold
over the next six years. These government sales, while
large in absolute value, are not likely to have a signi-
ficant effect on the aluminum market. The average sale
rate over this period, even if all the stockpile excess
is sold, will be only about 3 percent of U.S. consump-
tion and less than 2 percent of world consumption.
Most countries impose low or zero tariff rates on
bauxite, alumina, and aluminum ingot — the products
that represent the bulk of international trade in alu-
minum. Prior to the surcharge, U.S. duties on unpro-
cessed aluminum tended to be quite low (e.g., the tariff
on aluminum ingot was $0.01 per pound). The 10 percent
surcharge announced on August 15, 1971 represents addi-
tional duties of about $1 per ton on bauxite, $0.02-0.03
per pound on aluminum ingot and more than $0.03 per
pound on more processed forms of aluminum.
The wage-price freeze of August 15, 1971 set
ceilings on the actual transaction prices at which
aluminum may be sold. The Treasury ruled, however, that
prices could not be frozen at levels lower than those
prevailing on May 25, 1970. As the transaction prices
of virtually all aluminum products were substantially
greater on that date than in August 1971# the price
freeze had little effect on the aluminum market. The
wage freeze also had little effect, as the new aluminum
labor contract had already taken effect before the
freeze was announced. Similarly, the current system of
wage-price controls will not have any significant direct
effects on the aluminum market.
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The Aluminum Industry in the United States
Most of the bauxite and much of the alumina consumed
in the United States is imported, while only a relatively
small percentage of aluminum is imported. Even smaller
quantities of mill products are imported. As the value
added in aluminum production is substantially greater
than in bauxite and alumina production, the aluminum
stage of the manufacturing process has the greatest im-
pact on the U.S. economy.
In 1970, U.S. production of bauxite was only about
2.2 million tons, or less than 4 percent of total non-
communist production. .Virtually all of this production
was in two counties in Arkansas. Bauxite mining in the
United States has been a relatively stagnant industry
in recent years.
U.S. alumina capacity in 1969 was 6.8 million tons,
while imports (primarily from Australia and Surinam)
totalled 1.9 million tons. There are only nine alumina
plants in the United States: three in Louisiana, two
in Arkansas, two in Texas, one in Alabama, and one in
the Virgin Islands. There has been a pronounced trend
in recent years to locate alumina facilities near bauxite
mines.
In 1970 total U.S. primary aluminum ingot produc-
tion was 7.592 million pounds; primary ingot imports
(primarily from Canada) were 0.700 million pounds and
primary ingot exports primarily to Europe and Japan
were 0.817 million pounds.
Aluminum reduction plants are located in two broad
areas in the United States: a cluster in the Pacific
181
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Northwest and a band from Southwest Texas to northern New York
State. The smelters in the Pacific Northwest are located
near cheap sources of hydroelectric power. The smelters
in Arkansas, Texas, and Louisiana are located in areas
that are accessible to either domestic or imported bauxite
and to sources of natural gas. The remaining plants are
largely located in the Tennessee Valley, the Ohio River
Valley, and near the St. Lawrence Seaway, all of which
have low-cost power and easy access to major industrial
markets.
There does not seem to be any marked variation among
different firms or plants in costs of production. Of the
29 aluminum smelters in the United States, 10 were con-
structed during or before World War II; however, most of
these smelters have been modernized over the years, as
there is no way of knowing how out-dated any particular
smelter is, A few of these 10 smelters may be approaching
the end of their economic lives and the pollution controls
may cause these smelters to be prematurely closed down.
The smelters in question are owned by the three major
integrated producers in the United States but no one firm
is dependent on these old, possibly high-cost smelters for
all of its output. Five of these smelters are located in
the Pacific Northwest and the rest are scattered throughout
the South and the Midwest.
Effects of Pollution Controls
on the Aluminum Market
i
As Table 8-1 and 8-2 in Chapter 8 of this report indicate,
it is estimated by EPA that between 1972 and 1977 the invest-
ment costs of air pollution controls at aluminum smelters will
Reproduced here for convenience.
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Table 8-1
COST OF CONTROLLING PARTICULATE EMISSIONS
AT ALUMINUM SMELTERS
(Millions of August 1971 Dollars)
Investment Outlavs
1972
1973
1974
1975
1976
Existing facilties
35.7
71 .3
245.5
258.2
71.3
New fac i1i t i es
42.0
42.0
42.0
42.0
42.0
Tota 1
77.7
113.3
291 .5
327.2
I 13.3
Annual Costs





Operating and maintenance
8.6
21.0
53. 1
89. 1
101.5
1nterest
4.0
1 jS . 0
46.2
a3.o
92.3
Dep rec1 at i on
4.2
9.7
42. 1
i>/.7
04 .2
Tota 1
16.4
44.5
133.4
229.8
258.0
"Total" Costs





Total cash costs1
90.0
148. 1
390.8
499.3
307. 1
Total deductions2
86.3
134.3
344. 6
416.3
214.8
1 Investment costs plus annual costs minus depreciation.
2Total cash costs minus Interest.
SOURCE: Council on Environmental Quality.
NOTE: The fol lowing assumptions were made In deriving the
cost es+lmates:
1.	Only particulate fluorides are controlled.
2.	All control equipment will have to be replaced.
3.	The Interest rate Is 10 percent.
4.	Capacity will grow at 5.25 percent per year.
5.	Production will grow at 5.8 percent per year.
6.	The depreciation rate is 7 percent.
7.	There is no down time.
8.	Costs of controlling power emmisslon and costs
of auxiliary facilities may Increase costs by
25 percent.
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Table 8-2
COSTS OF WATER POLLUTION ABATEMENT
AT U.S. ALUMINA FACILITIES
(Millions of August 1971 Dollars)
1nvestment Out l avs
1972
1973
1974
1975
1976
Existing facilities
26.42
28.03
29.68
31 .37
33. 1 1
New facl1 111es
12.50
13.23
14.03
14.84
15.72
Tota 1
38.92
41 .26
43.71
46.2 1
48.83
Annual Costs
Operating and maintenance
<
.87
1 .78
2.70
3.66
4.
,63
1nterest
3,
> 14
6.38
9.68
1 3.06
16.
,54
Deprec f at ion
1 .
,57
3.18
4.84
6.53
8.
,27
Tota J
5,
,58
i 1 .34
J 7.22
23.25
29.
,44
"Total" Costs







Total cash costs1
42,
.93
49.42
56.09
62.93
70,
.00
Total Direct Costs2
39,
.79
43.04
46.41
49.87
53,
.46
investment costs plus annual costs minus depreciation.
2Total cosh costs minus Interest.
SOURCE: Council on Environmental Quality.
NOTE: The following assumptions were made In deriving
these cost estimates;
1.	In 1971 the industry had invested approximately
$117 million (In August 1971 dollars) of the
$212 million required to attain water pollution
control standards.
2.	The Interest rate Is 10 percent.
3.	The growth rate Is 5,8 percent.
4.	The depreciation rate Is 5 percent.
5.	For down-time, the installation multiple is
184
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total $713 million and the investment costs at alumina
plants will total $219 million. These outlays are huge
in absolute terms by almost any standards, and an
expenditure of this magnitude by the industry will
adversely affect the already low rates of return of
aluminum producers. However, the aluminum producers
appear to have the financial resources to raise capital
sums of this amount. In addition the actual reduction
in obi	will b<: 1 obb than the actual control
costs, as some of these costs will be recouped through
higher prices to consumers, as reduced gross profits
will result in lower tax liabilities, and as special tax
incentives will further reduce after-tax costs (see
Chapter 8).
The annual cost of abatement# defined to equal opera-
ting and maintenance costs of abatement equipment, in-
terest and depreciation, represents the relevant long-run
costs to producers of installing and maintaining a given
level of abatement facilities. It is this cost that
producers would have to recover (per pound of ingot)
if their profits were to be unaffected.
The combined annual costs per pound of both air
and water pollution abatement reach a maximum of
$287.44 million dollars by 1977, or $0,025 per pound
in the base estimate, although these costs may be as
low as $0,020 or as high as $0,032 per pound.
The current weak conditions of the aluminum market
are caused by the joint effects of a decline in demand
caused by the U.S. economic recession and a simultaneous
increase in capacity induced by the rapid growth of
186
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demand during the 1960's. In the absence of pollution
controls, U.S. aluminum consumption over the next 5 to
10 years can probably be expected to grow at a rate of
6-10 percent per year, assuming that U.S. industrial
production recovers to a growth rate of 4-5 percent per
year. The list price over this period can be expected
to remain fairly stable in real terms. Transaction
prices of aluminum, which are now as much as 25 percent
below the list price, can be expected to approach the
list price over the next two to three years and there-
after should follow the list price fairly closely.
The effects of controls on the aluminum market depend
on the assumptions made about controls on other industries#
the timing of the controls, and U.S. trade policies.
Assuming for the moment that the timing of the controls
is as estimated by EPA and that there is no 10 percent
import surcharge or equivalent trade protection, the list
price of aluminum will increase in proportion to the cost
increase. Under the middle cost assumption, if controls
are imposed only on the aluminum industry U.S. consumption
of aluminum in 1977 would be about 4-5 percent below what
it otherwise would be and transaction prices would be
about 6-7 percent above what they otherwise would be.1
In the long run, transaction prices would be about 10
percent higher and U.S. consumption would be about 16
percent lower than the levels they would otherwise attain.
xUsing the range of costs estimated by EPA, the effect
on U.S. consumption is between 3 and 6 percent and the
effect on transaction prices is between 5 percent and 8
percent.
186
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In absolute terms, if we assume an 8 percent growth
rate for aluminum consumption without controls, consump-
tion would grow from 8.9 billion pounds in 1970 to 15.3
billion pounds in 1977 and 22.5 billion pounds by 1982.
With controls, consumption in 1977 and 1982 would be 14.6
and 18.9 billion pounds, representing declines of 0.7 and
3.6 billion pounds respectively.
Controls on other industries will alter these results
to some extent. The effects of copper industry controls
on the aluminum market would be negligible over the next
five to six years. By 1982, however, controls on copper
would have the effect of increasing aluminum consumption
by 2.9 percent. That is, with controls on the aluminum
industry alone, consumption of aluminum would be 16 per-
cent lower than it would be with no controls, but if the
copper industry is also controlled aluminum consumption
would be only 13.1 percent lower.
Controls on power costs would increase aluminum pro-
duction costs by as much as one-sixth as much as the
direct controls on aluminum. If this occurs, the results
of our calculations would also be increased by as much as
one-sixth. It should be pointed out, however, that the
higher end of the range of the estimated control costs is
supposed to include the possible uffects of controls on
power. Finally, controls on other competing materials
will reduce the adverse effect of the controls on aluminum,
it is unlikely, however, that the prices of steel, plastics,
zinc, wood, and all other competing materials would increase
by as much as aluminum costs as a result of pollution con-
trols. These issues are discussed at greater length in
Chapter 8 of this report.
187
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Even with controls, U.S. aluminum production will
in the future probably grow at about the same rate as
U.S. consumption, although this conclusion is by no
means certain. The controls will probably not cause
any existing smelters to be shut down, although some
of the older prewar smelters, which are nearing the end
of their economic life, might be shut down prematurely.
The estimated control costs, however, are just high
enough to offset the transportation and tariff costs
of locating new smelters abroad and exporting to the
United States. If this occurs, U.S. production would
not decline from its current rate but within the next
10 years the share of U.S. production in the U.S. mar-
ket would begin to decline.
Pollution controls will probably have little effect
on U.S. alumina and bauxite production. Even without
controls, new alumina facilities would probably be
located near foreign bauxite mines. U.S. bauxite pro-
duction accounts for only a small percentage of U.S.
bauxite consumption and has been declining gradually
during the postwar period.
The effects of the controls on employment will be
roughly proportional to the effects on production.
Employment will not decline as a result of controls,
but it will grow more slowly than it would without con-
trols. Rough calculations indicate that 10 years after
the controls are imposed, aluminum employment would be
about 10,000 persons less than if there were no controls.
The net cost to producers of the controls is less
than the direct costs of the controls, as some of these
costs will be recouped through higher prices. We
188
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estimate that the before-tax net cost, defined as the
reduction in before-tax net revenues of aluminum pro-
duction, will be approximately $100 million per year.
The after-tax net cost will be approximately in the
range of $40-50 million per year.
As a result of the controls, we would expect some
decline in U.S. exports of ingot and mill products,
currently worth over $300 million per year, and some
increase in U.S. imports of mill products, currently
worth about $50 million per year. The exact extent of
this effect depends on whether the control costs are
great enough to induce new smelters serving the U.S.
market to be located abroad. If this does not occur,
the balance of payments effect will primarily consist
of an eventual substantial decline (say $100-200 million)
in the value of aluminum exports. If this does occur,
we would expect the value of U.S. aluminum imports even-
tually to increase substantially as well, although this
effect would probably not be felt until 5 to 10 years
after the imposition of the controls.
The effects of the controls on different regions of
the country will primarily consist of a slower rate of
growth in investment in aluminum facilities than would
otherwise occur; there will probably not be an actual
decline in aluminum production or employment in any
region. The impact of slower growth rates will occur
primarily in those regions that traditionally have
accounted for most U.S. aluminum production: the
Pacific Northwest and the Midwest (including the Gulf
Coast, the Ohio River Valley, and areas served by the
Tennessee Valley Authority).
«l*«l 0- 7J - 18
189
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The major impact of the controls will clearly be
on the domestic aluminum smelting industry. Production
of aluminum mill products will also be adversely
affected, as the total market for aluminum mill pro-
ducts will grow more slowly as a result of the controls.
The remaining effects on suppliers and consumers are too
diffuse to be isolated.
The foregoing results are completely dependent on
the assumptions that the timing and level of the control
costs will be as estimated by EPA and that there will be
no compensating trade protection. If the control expendi-
tures are greater than forecast, or if the bulk of the
expenditures must be made during the next two or three
years, the effects on the industry may be much more
severe than we have estimated.
The analysis of the effects of the controls was
made on the assumption that the 10 percent surcharge
would not continue and that there would be no equivalent
revaluation of currencies. The current 10 percent
tariff surcharge on imports of aluminum almost exactly
offsets the increase in production costs resulting from
pollution controls. Maintenance of the surcharge would
therefore eliminate the incentive to locate smelter
capacity abroad and would substantially moderate the
adverse effects of controls on the balance of payments.
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COPPER
Chapter 1
INTRODUCTION AND EXECUTIVE SUMMARY
Overview of the Copper Market
World production of copper in 1970 was 6.9 mil
short tons, an increase of 51 percent over 1960 pre
tion. U.S. mine production was 1.7 million short tons
in 1970, an increase of 50 percent over 1960. In 1970,
U.S. mine production amounted to 25 percent of world
production and 30 percent of production in the noncommu-
nist world. After the United States, the leading
producing countries are the Soviet Union with 14.5
percent of world production and Zambia with 11.2 per-
cent. Chile, Canada and the Democratic Republic of the
Congo are also major producers.
The United States is the largest consumer of copper,
consuming in 1970 more than 1.8 million tons out of a
total world consumption of 7.3 million tons. Japan,
the Soviet Union, and West Germany were the next largest
191
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consumers, consuming about one-half of the U.S. amount.
Figure 2-1 shows the flow of copper-containing
products in the copper market.1 The primary industry,
shown on the left, includes 7 integrated producers in
the United States and about 30 in the noncommunist
world, but is dominated by a few integrated firms inclu-
ding Anaconda, Kennecott, and Phelps Dodge in the United
States.
Trends in Production and Technology
Chapter 2 of this report describes the primary and
secondary copper industries, the geographic distribution
of world copper production, production in the United
States, and the technology of copper production. There
are three main stages in the production of primary
copper — mining and milling, smelting, and refining*
Ores are mined, usually by open-pit methods, and concen-
trated usually close to or at the mine site. Concentrates
are transported to smelters and processed to produce
impure copper metal which is known as "blister". There
is a tendency in the United States and throughout the
world for smelters to be located close to a mining
area. The final stage is refining of the blister,
usually by electrolytic deposition. Refineries tend
to be located in areas where fabricators are concentrated.
Secondary copper is produced from scrap. Where the
scrap is wholly copper secondary refined copper may be
*This figure from Chapter 2 of this report is repro-
duced here for convenience.
102
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Figure 2-1
FLOWS OF COPPER PRODUCTS
Priaarv Industry
Secondary Industry
Mi ne	¦
~ ¦
Mil I	»-»
-8
Sme I ter — —J
I	i
Refinery *
Custom
Ref i ners
r
1
Vt rgi n Ref i ned
Copper, Secondary
Refined Copper
I	
Total Supply
t I
Collection - Packaging
1
811 ster
I
Secondary
Ref i ned
Copper
Copper
AI I oy
I ngot
Brass Mills
Mi re Mil Is
Foundri es
Powder Plants
Building
Construct ion
Transportation
Consumer and
General Products
ndustrial Machinery
and Equipment
Electrical and
EIectron i c
Products
-------
produced; secondary copper is indistinguishable from
primary refined copper. Copper alloy scrap is not re-
fined but is used in the production of alloy ingots.
Scrap, depending on its form, may or may not require
smelting.
The principal source of air pollution in copper
production is sulfur dioxide emitted in the smelting
of sulfide concentrates. Water pollution problems
arise in electrolytic refining.
Consumption of Copper
During the 1950's, U.S. copper consumption fluc-
tuated considerably from year to year and, on the
average, tended to increase slowly. From 1962 to
1966 consumption increased rapidly, and although it
has declined from its 1966 peak consumption is still
far above the trend indicated by the 1950's. Copper
consumption has tended to move in step with the Index
of Durable Manufacturers, which represents the level
of activity in some of copper's major end uses.
The principal markets for copper in the United
States are electrical and electronic products (758,000
short tons in 1970), building and construction (574,000
tons), consumer and general products (546,000 tons),
industrial machinery and equipment (439,000 tons), and
transportation (303,000 tons). Bare wire and insulated
wire are primarily consumed in electrical applications,
while brass mill products and castings are distributed
fairly evenly across user industries.
194
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Copper is susceptible to a certain amount of short-
run substitutions by ingot makers who can alter the
proportions for metals in alloys, and certain users of
small quantities of copper. However, the significant
competition from other materials, especially aluminum,
occurs over the long run, primarily as a result of
investment decisions affected by long-run price expect-
ations for copper and its substitutes.
During the past several decades the closest com-
petition to copper has been aluminum, which has re-
placed copper in many electrical applications. The
primary reason for this substitution has been the
increasing price of copper relative to the price of
aluminum.
In 1969 shipments from aluminum wire products
amounted to 410,000 tons, an increase of more than
200 percent over a period of 12 years. In the same
period, shipments of copper wire products increased to
1,294,000 tons, an increase of only 80 percent.
The most important area of substitution has been
in power transmission and distribution. For example,
aluminum has increased its share of the overhead distri-
bution market from near 0 percent in the early 1950's
to well over 90 percent in recent years.
Structure of the Copper Industry
Chapter 4 of this report examines concentration in
each phase of the industry, the degree of verticle inte-
gration, the organization of physical distribution, and
conditions for entry into the industry.
105
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Five companies control about 90 percent of domestic
refining capacity? the remainder is controlled by another
five firms. The two major custom refineries -- ASARCO
and AMAX — are among the five largest domestic refiner-
ies. The other major refineries are also the three major
primary producers, Kennecott, Anaconda, and Phelps Dodge.
The highly concentrated refined copper industry
accounts for about 85 percent of total domestic copper
supply (measured in cuprous content), with the relatively
unconcentrated secondary industry accounting for moat of
the remainder. Secondary sources of supply include both
secondary alloy ingot produced from copper scrap and
scrap suitable for direct use by fabricators.
The noncommunist copper industry is fairly concen-
trated at the refinery stage. The eight-firm concentra-
tion ratio for the entire noncommunist world (including
the United States) was recently measured to be about 63
percent; seven more firms account for an additional 17
percent. However, control of much of the capacity in-
cluded in these figures has been altered as a result of
nationalization and increased controls on foreign, firms
by several major foreign producing countries — Congo,
Chile, Peru and Zambia. Thus, the world primary copper
industry is highly concentrated, although control of
the facilities is currently in a state of flux.
The U.S. copper industry is characterized by a
high degree of vertical integration, from ore miaing
through refining and frequently through fabrication
and production of final products. Five primary produ-
cers, accounting for about 63 percent of U.S. ore
106
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production, are fully integrated through at least the
refining stage. Two custom refineries control the
remaining 37 percent of refining capacity, 27 percent
of smelting capacity and 5 percent of mine production.
Two partially integrated primary producers control 7
percent of smelter capacity and 10 percent of mine pro-
duction. Except for 11 percent of mine production,
these 12 firms control the entire domestic primary
industry.
The degree of vertical integration in foreign
countries is similar to that of the United States, but
is less complete. Most foreign ore producers are inte-
grated through the refining stage, but a much smaller
percentage than in the United States is integrated
through fabrication.
Physical distribution is performed, by the most
part, by the refineries. Roughly 80 to 85 percent of
primary refined products are transferred by producers
to their own fabricators. The remaining production is
marketed primarily by merchants, who purchase scrap and
ore from small copper mines and smelters and have it
refined on a "toll" basis, although small quantities
are sold on the Commodity Exchange (COMEX) and the
London Metal Exchange (LME).
Copper Prices
There is no single price which can clearly be
labelled "the" prevailing world price of refined cop-
per. There are several "producer prices", two important
197
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average prices, the merchant or "outside price*, and the
LME and the COMEX prices. The most important U.S. prices
are the domestic producer price and the custom smelter
price, while the most important foreign price is the LME
price. The custom smelter and LME prices are transaction
prices at which any consumer can purchase copper; in the
frequent domestic rationing periods the domestic producer
price represents the price at which favored consumers can
purchase copper from the domestic producers.
In general, during the past 20 years copper prices
have not increased substantially relative to other indus-
trial materials (although they have increased relative
to aluminum price). The LME price rose to a peak of
$0.52 in 1956, fell to a low of $0.21 in 1958, was steady
at about $0.30 from 1959 through 1963 then rose to about
$0.82 in 1966. Since then it has fluctuated between
$0.35 and $0.77 and is currently at about $0.48.
The domestic producer price has followed the same
overall trends as the LME, but has been more stable.
It has tended to lag behind the LME price during periods
of rising prices; prior to 1963 it was generally not
more than $0.08 above or below the LME price. However,
in 1964 when the LME price began its rise towards the
1966 peak of over $0.80 the producer price rose only
moderately and wide differences between the two prices
existed for most of the 1964 to 1970 period. The high-
est level reached by the producer price was $0.60 in
1970.
It is quite obvious that U.S. producers believe it
to be in their interests to keep copper prices low and
198
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stable. Their principal concern has apparently been
that high prices of copper will induce substitution of
aluminum and other materials for copper in the long run
and that their lost markets will not be regained by a
future decline in copper prices.
During periods in which producer capacity is insuf-
ficient to meet demand at the producers' price, the pro-
ducers have chosen to ration copper instead of to raise
the price to the short-run market-clearing level. Of
course, rationing at low prices may be just as strong a
stimulus for long-run substitution as unlimited sales
at high prices.
The LME price is determined in an open auction market-
place, and in this sense is clearly a free market price.
However, the foreign copper market is fairly concentrated,
although less so than in the United States, and there is
evidence that the foreign producers recognize their mutual
interdependence in the market. As a result, in some per-
iods of weak demand the foreign producers have supported
the LME price by mutual output reductions. There is also
evidence that the foreign producers may share the domestic
producers' concern over long-run substitution away from
copper that might be induced by high prices.
Government Policies
The U.S. government has directly affected the copper
industry through stockpile purchases and sales, price con-
trols, trade policies, and subsidization of exploration.
As of September 1971, the government had 252,000 tons
of copper in its stockpile, only about one-third of the
objective. During the decade after World War II the
199
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stockpile grew to levels substantially above the govern-
ment's objective, but the stockpile has been drawn down
during the years of short supply.
The tariffs on primary copper have generally been
low in the United States as they have been in most major
copper-consuming countries. Domestic tariffs on crude
copper, blister, and scrap were suspended in 1966, and
the materials are therefore exempt from the 10 percent
import surcharge. The suspension expires in June 1972.
Tariffs are in effect on refined copper, but the full
amount of the import surcharge is not applied since an
international agreement limits the total duty to not
more than the 1930 tariff.
The U.S. government has at times placed severe
quota restrictions on the export of refined copper and
scrap. These restrictions explain in part why it is
possible for large differences to exist between the
domestic producer price and the LME price.
The recent price freeze has not affected refined
copper prices. The price ceilings determined by the
Economic Stabilization Act of 1970 are the prices of
May 25, 1970, which are considerably above current
levels.
The Copper Industry in the United States
The principal copper producing states are Arizona,
Utah, New Mexico, Montana, Nevada, and Michigan. These
states produce 97*5 percent of domestic production.
Arizona produces 53 percent and Utah 17 percent. Copper
200
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mining employed 37,000 in 1970 including 29,500 produc-
tion workers.
Total U.S. smelter capacity is 9.2 million tons of
charge. Smelting is concentrated in Arizona, which has
49 percent of capacity and 8 of the 19 smelters. Utah
and Montana each have 11 percent of capacity. Other
states having smelters are Washington, Texas, Michigan,
New Mexico, Nevada, New Jersey, and Tennessee.
Refining capacity in the United States is 2.7 million
tons per year, of which 2.3 million tons is electrolytic.
Refining is less regionally concentrated than mining and
smelting. Maryland has 26 percent of tank capacity, New
Jersey has 21 percent and Texas has 18 percent. Other
states having electrolytic refineries are Montana, Utah,
Washington, New York, Arizona, and Missouri. Coke and
fire refineries are located in Michigan, New Mexico,
Texas, New York, and New Jersey.
Chapter 7 of this report presents data on employment,
general input cost statistics, value added and value of
shipments for the aggregate production of U.S. smelters
and refineries.
The state most likely to be affected adversely by
pollution abatement costs is Arizona. The mining indus-
try is the state's second largest source of income and
copper contributes over 90 percent of mining income.
The income for copper in 1969 was $860 million.
Arizona smelters employ between 2,500 to 3,500
people in Arizona. Wages paid to mining and smelting
employees in 1970 amounted to $202 million. The copper
industry is one of the largest consumers of the
201
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construction and transportation industries' outputs in
the state and supports much of the state's retail trade
and services.
Three smelters, accounting for 21 percent of U.S.
smelter capacity, are located in Gila County — two in
Hayden and one in Miami. Two smelters are located in
Pinal County which adjoins Gila, one at San Manual, the
other at Superior. There are plans for closing the
Superior smelters and enlarging the San Manual smelter.
A mine-mill-smelter complex at Morenci is the principal
employer in Greenlee County. A smelter at Douglas in
Cochise County may shut down? pollution controls may be
a factor in determining whether or not this occurs.
The Douglas smelter employs 645 persons and has a pay-
roll of $6 million. The population of Douglas is 12,300.
An eighth smelter is located at Ajo in Pima County, the
county in which Tucson is situated.
Copper mining is extensive throughout Arizona, and
the economies of four counties rely greatly on it —
Graham, Mojavi, Yavapai, and Yuma.
The primary copper smelters in other states are
generally not crucial elements in their state's econo-
mies, although they are important to the cities where they
are located (except possibly for Tacoma, Washington and
El Paso, Texas, which are large cities with employment
distributed among several industries. The Tacoma smelter
may be closed if the owners and the local air pollution
control authority cannot reach agreement on control
standards. Closing the Tacoma smelter would affect
mining employment in Arizona ),
202
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A smelter in White Pine, Michigan is in the peculiar
position of having too little sulfur in its feed. Appar-
ently the result is that satisfying the 90 percent
emission standard is more difficult than for most smelt-
ers and may be infeasible.
A table in Chapter 7 shows summary statistics on the
financial performance of major domestic producers. Gen-
erally the firms have annual sales on the order of $0.5
to $1.0 billion. Most report net income of considerably
above 10 percent of stockholders' equity, but two firms
reported net 1970 income of only 5.4 percent of equity.
Economic Effects of Pollution
Controls on the Copper Industry
According to CEQ estimates the additional capital costs
of meeting air quality at copper smelters by 1976 will be $313
million and $28.1 million will be required to meet water
quality standards at electrolytic refineries. The CEQ
data are presented in Tables 8-1 and 8-2 from Chapter 8
of this report.1 CEQ states that under reasonable assump-
tions the air pollution abatement costs could be 10 per-
cent lower or 100 percent higher than the estimates, and
water pollution costs could range from 25 percent below
the estimate to 130 percent above. The CEQ estimates
of capital costs for air pollution abatement are lower
than industry estimates and estimates reported by the
Bureau of Mines. A comparison of these three estimates
is made in Chapter 8 of this report.
Reproduced here for convenience.
203
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Table 8-1
CEQ ESTIMATES OF COSTS OF CONTROLLING
S02 EMISSIONS AT COPPER SMELTERS
(Mi 111 oris of Dol 1 ars)
Costs of Controls
Cost to control
ex i st i ng facilities
Cost to control
new facilities
1972 1973 1974 1975 1976
13.3 26.6 93.2 106.5 26.6
9.3
9.4
9.4
9.4
9.4
TOTAL
22.6 36.0 102.6 115.9 36.0
Annual Costs
Operation & Maintenance
1 .7
5.2
17.3
31.0
34.5
1nterest
1 .6
4.7
15.6
28.0
31.3
DeprecI at i on
1 . 1
3.3
1 1 .0
19.8
22.0
TOTAL
4.4
13.2
43.9
78.8
87.8
SOURCE: CEQ
ASSUMPTIONS:
1.	Fifteen copper smelters were assumed to require control*
2.	The interest rate is 10^, Including 2% for taxes and
t nsurance.
3.	The growth rate of production is 2.6756 per year.
4.	The depreciation rate Is 7% per year.
5.	No downtime for Installation is envisaged.
6.	The Investment costs to control existing facilities ar0
phased over the five years — 5J&, lOjt, 35Jt, 40Jf, lOJf,
and the investment costs of controlling new facilities
are assumed to be linear.
7.	No credit for acid by-products was assumed.
(Assumptions continued on following page.)
204
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Table 8-1
CEQ ESTIMATES OF COSTS OF CONTROLLING
S02 EMISSIONS AT COPPER SMELTERS
(MlT1ions of Do!lars)
(contI nued )
8.	Three smel+er models were used:
Model Plant A (Configuration -- I Roaster, I
Reverberatory Furnace, and 2 Converters) with
production of 75,900 tons of copper per year
and 45% present sulfur control. The control
scheme involved is limestone scrubbing.
Model Plant B, with production of 75,900 tons
of copper per year, 6% present sulfur control,
and a control scheme Involving an acid plant
preceded by a dry precipitator.
Model Plant C. (Configuration I Reverberatory
Furnace, and 4 Converters) with production of
50,000 tons of copper per year and lOSt present
sulfur control, and a control scheme involving
an acid plant preceded by a dry precipitator.
9,	All plants were assumed to operate at 100% capa-
city, 24 hours a day for 330 days of the year.
«8-4ft O - T> - U
205
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Table 8-2
COSTS OF CONTROLLING WATER
POLLUTION IN COPPER REFINING
(Ml 1 Hons of Do! 1 ars)
Investment Costs
1972
1973
1974
1975
1976
Cost to control
ex Ist1ng fac11 111es
3.98
4.19
4.39
4.60
4.82
Cost to control
new fac11 111es
1.13
1.17
1.21
1 .26
1 .30
TOTAL
5.11
5.36
5.60
5.86
6.12
Annual Costs1





Operation &
Ma 1ntenance
0.78
1 .56
2.36
3.16
3.98
1nterest
0.41
0.84
1 .29
1 ,75
2.24
Deprec1 at 1 on
0.26
0.52
0.80
1 . 10
1 .40
TOTAL
1 .45
2.92
4.45
6.01
7.62
lAnnual costs have been adjusted to Include the annual
costs of the "new facilities" covered In "Investment".
SOURCE: CEQ
ASSUMPTIONS:
1.	Copper refineries would apply equalization, coagulation,
sedimentation, flotation, and neutralization to lOOJt
of process wastewater.
2.	The Interest rate Is 8jf.
3.	The growth rate of copper production (s
4.	The depreciation rate Is 5$ per year.
5.	Some downtime for Installation Is Included.
6.	The Investment costs ar« phased on a straight line best1
from 1971 to 1976.
206
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Using the CEQ data the following is the estimated
range of per-pound abatement costs for air and water
pollution.
ABATEMENT COSTS FOR PRODUCING REFINED COPPER
(Cents per Pound)

Low
Middle
High
1972
0. 1
0. 1
0. .5
1973
0.5
0.5
1 .0
1974
1 .3
1 .4
2.8
1975
2.0
2.2
4. 5
1976
2.2
2.5
5.0
In 1970 total U.S. industrial consumption of
copper was 2,971,000 short tons and net stock accu-
mulation and exports were 139,200 short tons. Total
U.S. primary copper production was 1,360,300 short tons.
A reasonable scenario for long-run trends in the copper
market without abatement costs is that consumption will
grow at about 3.8 percent per year, supply will grow at
about 3.6 percent per year, and price (in real terms)
will rise at about 1 percent per year. Projecting
supply and demand at these rates yields estimates that
in 1980 consumption will be 4,250,000 tons, supply
(including scrap supply) will be 4,169,000 short tons,
and the producer price will be about $0.64 per pound in
real terms.
We must eirphasize that these figures should not be
interpreted literally, but merely serve as a useful base
for the impact analysis. The copper market is extremely
207
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complex even under "normal" conditions. The behavior
of the domestic producers in rationing copper for long
periods of time at below-market prices is particularly
difficult to analyze. It is clear that if these con-
ditions persist in the future, the U.S. producers could
increase the price of copper without inducing substan-
tial foreign competition in the U.S. market. This con-
clusion would be obviously true during periods of
rationing in the United States; during these periods
U.S. producers could raise the list price of copper
without any loss in sales. This conclusion might also
be valid even during periods of nonrationing, as some
participants in the copper market (the Chilean govern-
ment for example) have in the past expressed strong
desires to increase the price of copper.
Unfortunately, it is impossible to forecast accu-
rately the extent to which the foreign market will inter-
act with the U.S. market. Even under "normal" market
conditions it is impossible to predict the extent to
which domestic producers will ration copper during the
next decade. In addition, the copper market is cur-
rently undergoing radical changes in its structure
caused by the increasing decision-making role of nation-
al governments in copper production. This factor could
completely alter the production behavior of foreign sup-
ply.
As a result of these considerations, in our impact
analysis we present a range of results, calculated under
two extreme assumptions: (1) that foreign copper does
not compete in the domestic market and an equilibrium
price is achieved, after imposition of abatement costs,
208
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which equates domestic demand and domestic supply; and
(2) that foreign competition prevents any increase in
price as a result of abatement costs. The first case
can arise if the two-tier price system is still in
effect in 1980, as in that case producers can increase
their price by the full amount of control costs without
stimulating an increase in imports. This case can also
arise even if the two-tier price system is not in effect
if foreign producers refrain from expanding their but-
put when the domestic producers raise prices. In the
second case we make the equally extreme assumption that
any increase in prices as a result of abatement costs
will cause such a flood of imports that the increased
price cannot be maintained. The actual impact of the
abatement costs should be somewhat in between these two
cases.
The analysis is also performed using both the mid-
dle- and the high-cost estimates provided by CEQ. No
analyses were performed using the low-cost estimates,
as these cost estimates are very close to the middle-
cost estimates and therefore would yield essentially
the same results in the impact analysis.
The Net Costs to Producers of the Controls
The net cost to producers of pollution controls
can usefully be defined to be the net reduction in
*fter-tax profits as a result of the controls. The
before-tax net cost has two components: the reduced
profits per unit on the copper that is actually sold
*nd the profits foregone on sales that are lost as a
Result of the higher prices.
209
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The reduction in domestic production in the various
scenarios we have considered above ranges from 87,000 to
332,000 short tons, as indicated below (short tons):
With the middle-cost assumption, if there is severe
foreign competition the increase in production costs
would not be offset by price increases and there would
be a resultant decline in supply in the long run of 6.9
percent. On the other hand, if there were no foreign
competition, prices could be increased with the result
that supply would increase. Assuming no increase in
imports, supply and demand would be equilibrated at a
price 4 percent above the no abatement cost case; under
our assumptions by 1980 the price would rise to about
$0.66 in 1970 dollars.
The effects on price, production, consumption, and
imports under the two assumptions about foreign compe-
tition can be summarized as follows:
Little Foreign Severe Foreign
Competi tion	Competiti on
Middle-Cost Assumption
High-Cost Assumption
84,000
I 73,000
162,000
332,000
210
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LONG-RUN EFFECTS ON THE COPPER MARKET
OF AN INCREASE IN COSTS OF $0,025 PER POUND
Little Foreign
Competi ti on
Producer Price of
Copper in 1980
(1970 do Jlars/lb.)	$0.66
U.S. Supply of Pr i -
toary Refined in I9801
(thousand short tons)	2251
U.S. Supply of Secondary
Refined and Scrap in 1980
(thousand short tons)	1768
Net Imports of
Copper in 1980
(thousand short tons)	36
U.S. Consumption
of Copper in 1980
(thousand short tons)	4055
Severe Foreign
Competi tion
$0.64
21 73
708
369
4250
*About 56 percent of total copper supply Is assumed
+o be primary copper, the remainder refined and unrefined
scrap.
According to the high-cost assumption the long-
run pollution abatement cost is $0,050 per pound of
copper. With severe foreign competition there would
be no price increase and the assumed supply rate would
be 14.2 percent below the no abatement cost supply rate.
Domestic consumption would not be affected and the
Undersupply would be made up by imports. In the case
in which there is no foreign competition the price of
°opper would rise by 8 percent, to about $0.69 per
Pound, at which point domestic demand would approxi-
*ft*teiy equal domestic supply. The effects on the market
in the high-cost case are summarized below.
211
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LONG-RUN EFFECTS ON THE COPPER MARKET
OF AN INCREASE IN COSTS OF $0.50 PER POUND
Little Foreign Severe Foreign
Competi ti on Competi tion
Producer Pri ce of
Copper In 1980
(1970 dollars/lb.)	$0.69	$0.64
U.S. Supply of Pri-
mary Refined In I 9 801
(thousand short tons)	2162	2003
U.S. Supply of Secondary
Refined and Scrap in 1980
(thousand short tons)	1698	1574
Net Imports of
Copper in 1980
(thousand short tons)	8	673
U.S. Cons ump11 on
of Copper in 1980
(thousand short tons)	3868	4250
1About 56 percent of total copper supply is assumed
to be primary copper, the remainder refined and unrefined
sc rap.
Effects of the Controls
An important effect of abatement costs may be to
induce U.S. concentrate to be shipped to foreign smel-
ters and re-imported as copper metal. A complete ana-
lysis of that possibility was beyond the scope of this
study, but it appears that this possibility may begin
to become attractive for abatement costs of $0.02-0.04
per pound or higher. As the CEQ cost estimates are in
the range of $0,022 to $0,050 per pound, this possi-
bility may well arise.
Even if U.S. abatement costs are high enough to
make exportation of U.S. concentrate attractive, these
212
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costs will probably not in general be great enough for
U.S. producers to shut down existing smelters, although
a few marginal smelters might be for 3d to close. There-
fore in the most extreme case there would be not expan-
sion in U.S. smelting capacity from its present level
of 1,730,000 short tons? once production reaches this
capacity all additional concentrates production would
be exported. Depending on the assumptions made about
control costs and foreign competition, we found earlier
that domestic copper production in 1980 with pollution
controls would be between 2,000,000 and 2,250,000 short
tons. In our most extreme scenario in which no new
domestic smelter capacity is constructed, between 270,000
and 520,000 short tons of copper would be exported in
1980 for processing by foreign smelters. We caution,
however, that with the available data we can make no
judgment about the likelihood of this scenario.
If the aluminum price increases as a result of
controls, the effects of controls on the copper indus-
try could be moderated. However, the actual impacts of
the controls could still conceivably be near the upper
end of the range estimated above. If copper control
costs are near the upper end of our assumed range they
would be substantially greater than the aluminum con-
trol costs. Further, the effects of foreign competition
could almost be as severe with higher aluminum prices
as they would with lower aluminum prices.
The pollution controls will probably not cause any
long-run decline in employment of the domestic copper
industry from its 1970 level of about 54,000 employees.
However, there may be some immediate, localized decline
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in employment if some marginal smelters or mines are
forced to close down. Depending on assumptions made,
the decline in employment from levels that would other-
wise be attained by 1980 ranges from 2,770 to 10,900
employees.
It appears that in general most existing smelters
in the United States will continue to operate after imposi-
tion of pollution controls. Nevertheless, one firm appears
likely to close a major custom smelter in the Pacific
Northwest if the local pollution control regulations are
implemented and another firm has already decided to close
a custom smelter at Douglas, Arizona.
The state most likely to be affected adversely by
pollution abatement costs is Arizona. The mining indus-
try is the state's second largest source of income and
copper contributes over 90 percent of mining income.
The income for copper in 1969 was $860 million. Copper
mining is extensive throughout Arizona and the economies
of four counties depend greatly on it. In addition,
there are 8 smelters in Arizona, located in 5 counties.
214
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LEAD
Chapter 1
INTRODUCTION AND EXECUTIVE SUMMARY
Overview of the Lead Market
The lead market has shown little growth over tne
past three decades, and U.S. consumption of lead has
lagged behind growth in the rest of the world. The
U.S. average annual rate of growth has been about 1
percent per year, and about 3.6 percent for the non-
communist world as a whole.
Lead is used predominantly as an input in the
production of other commodities. The major consumers
of lead are the storage battery manufacturers, for
starting, lighting, and ignition batteries, and the
petroleum refiners, for anti-knock additives for gaso-
line. Both of these consumption categories have demon-
strated strong and persistent growth, but the general
expectation of both producers and users is that the
Market for leaded gasoline additives will dwindle and
eventually disappear. Storage batteries accounted for
over 40 percent of U.S. consumption in 1970 and
215
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gasoline additives for about 20 percent. The remaining
uses — paints, plumbing, soldering, and cable coverings —
have been subject to long-term technological displacement
by other materials. In recent years producers have cooper
ated to sponsor research for new products and to increase
marketing efforts.
Technology of Production
Lead occurs in ores which vary considerably in
lead content and other recoverable metals such as zinc,
copper, and silver. Galena (lead sulfide) is the most
commonly found lead mineral. In the eastern United
States the mineral is high in zinc content, with lead
being a by-product. In the central states a higher
lead content is common, and in the western states
several minerals are generally found in coproduct pro-
portions. Lead mineral deposits throughout the world
may be similarly characterized.
There are generally four stages in the transfor-
mation of lead into commercial metal: mining, milling,
smelting, and refining. Mining and milling are per-
formed in close proximity to one another, and both
are much more widely scattered than smelting and re-
fining.
Most of the world's lead ores are extracted from
underground mines. Milling is the process of separating
the mined ore into concentrates, and is considered inte-
gral to the mining operation.
Lead mines give rise to relatively minor environ-
mental problems. Not much land surface area is required*
210
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and mine locations are generally remote. Most mine
wastes are either commercially utilized or returned
to the mine. Dust emission is relatively easily con-
trolled.
The level of costs varies considerably among
individual mining and milling establishments* but the
behavior of unit costs can be represented in a general
fashion. The typical mining company has a large pro-
portion of fixed costs, sharply increasing short-run
unit costs, and roughly constant average costs both
for moderate changes in intermediate term output and
for substantial changes in long-run output. The inter-
mediate term refers in this case to a period of one
or two years during which additional skilled workers
and specialized heavy mining equipment can be acquired
and new excavations in existing mining areas can be*
prepared. For decreases in output, the large fixed
cost component — roughly one-third of total intermed-
iate term costs -- imposes sharply rising costs.
The lead concentrates produced at the mills are
smelted to yield bullion and matte. Smelting has
two stages: roasting (or sintering) and reduction.
In the roasting stage* the lead concentrate is oxidized
to yield lead oxide in sinter form and gaseous sulfur
dioxide. The sinter is then reduced# most often by
a blast furnace. The resulting lead bullion usually
contains a number of valuable coproducts and deleterious
impurities. To separate these, the bullion is further
treated by a series of procedures collectively referred
to as refining. Host major lead metal producers locate
their smelter and refinery at the same site, though
217
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some ship the smelted bullion considerable distances
to refineries.
The major waste problem is the emission of sulfur
dioxide which occurs in the roasting (or sintering) stage
of the smelting process. Other dust and gaseous emissions
are relatively easily controlled. The sulfur dioxide
may also be captured relatively easily from a technolo-
gical point of view by means of an acid plant which
then produces sulfuric acid. However# the sulfur con-
tent of the lead concentrate may be quite low, which
results in high costs for the acid plant. These issues
are considered in detail in Chapter 8 of this report.
Smelting and refining costs account for about one-
third of total lead mining and refining costs, with
about two-thirds of the cost going to the acquisition
of lead concentrates. Of the smelting and refining
costs, roughly one-third may be regarded as fixed in
the intermediate term. Thus decreases in output are
likely to impose as sharply rising average costs on
refineries as on mining companies. Short-run output
increases in refining are probably attainable at
smaller cost increases than .in mining. Long-run average
costs are roughly constant for plants large enough to
achieve economies of scale, which appear to be from
about 80,000 to 200,000 tons of refined lead per year.
Demand for Lead
Lead is used predominantly as an input in the
production of other commodities, and in most of its
intermediate uses the cost of lead is a small proportion
218
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of the total costs of the final products in which it is
embodied.
DOMESTIC LEAD CONSUMPTION CLASSIFIED BY END USE
1960, 1969, 1970
(In Short Tons and as a Percentage of U.S. Total)
End Use 1960 1969	1970
Storage Batteries 353,200 (34.59) 582,546 (41.93)	569,741 (42.55)
Petroleum Refiner- 163,800 (16.04) 271,128 (19.51)	278,505 (20.80)
i es
Paints and Pigments 100,300 (9.82 103,969 (7.48)	98,906 (7.39)
Construction 115,200 (11.28) 90,082 (6.48)	67,094 (5.01)
Durable Manufactures 147,800 (14.48) 170,053 (12.24)	132,146 (9.87)
Final Goods 80,400 (7.87) 117,377 (8.45)	100,368 (7.50)
Cable Coverings 60,350 (5.91) 54,203 (3.90)	50,295 (3.76)
Estimated Unreported -- —	42,000 (3.13)
Cons umpti on
Total	1,021,050	1,389,358	1,339,100
SOURCE: Yearbooks of the American Bureau of Metal Statistics.
(The grouping of ABMS data into end uses is described in
the text.)
For some uses, including the two major uses which con-
stitute about 60 percent of total lead consumption, no
close substitutes are readily available. This appears to
be true also in the short or intermediate run for most
remaining uses. Consequently, the demand for lead is
generally insensitive to changes in its price, at least
for an intermediate term of perhaps several years. It
remains true, of course, that the longer-run technolo-
gical displacement of lead by other materials has been
induced in the main by the relative price of lead, and
when technological breakthrough occurs, displacement
can take place rapidly. Such was the case in replacement
of lead by plastic and aluminum in many cable coverings
in the late 1950's. There is a strong possibility that
use of lead in gasoline will be phased out within the coming
decade, although the issue is by no means settled. This will
be a result of regulation for environmental purposes rather
219
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than a response to a change in the price of lead. This sec-
tor of the market may experience a decline of about 40 percent
by 1975 and of about 10 percent per year from then until 1980.
The effect of this is likely to be a reduction in the rate of
growth of lead consumption by about 0.5 percent over the
decade/ but in absolute terms the tonnage lost in the gas-
oline market is likely to be more than offset by the normal
tonnage gains in the battery market.
Total U.S. consumption has grown slowly in the United States
and only slightly faster abroad. Foreign consumption patterns
also differ from those in the United States. In Europe
and Japan, the other major consumption regions, relatively
greater shares of total consumption are taken by pipe
and sheet, pigments and cable coverings, and smaller
shares by alloys and anti^knock gasoline additives.
Neither the faster growth nor the different composition
of foreign consumption has induced a substantial export
effort by the United States. Total U.S. lead metal
exports in 1970 were 7,700 tons, or 0.4 percent of total
U.S. supply. On the other hand, imports of* metal were
244,600 tons, or 14.4 percent of total U.S. supply.
LEAD
END USE CONSUMPTION PATTERN'S 19£3
Per Cent of Total
UNITED STATES
3 :: :c
EUROPE
0 '.3
JAPAN
30
O
2:

MSSC.
Ei~
I :
PIPE 4 SHEET Q
Z3
PIGMENTS
CASLE
ALLOYS
ANTI-KNOCK
BATTERIES

I
b
10
»
~




1








1








~



1
1 1 I
18
20

40
10 10
(0
REPRINTED FROM:
Lead Industries Association, Lead and Zina:
World Demand and Supply (April, 1968)
p. II.
220
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Prices in the Lead Industry
The two basic prices of lead are the New York pro-
ducers' price which applies to the United States, and the
London Metal Exchange (LME) price which applies to the
test of the world. There are other prices that apply to
local markets and sometimes deviate from the LME and New
*ork prices, but not for substantial time periods or for
large transactions. The price is for common grade lead.
The difference between the LME and New York prices has
generally been within a range determined by tariff and other
import costs, though exceptions to this can be found. At times
It appears that the LME price follows the New York price, but
on other occasions the reverse pattern is evident.
Both the LME and the New York prices have fluctuated
°onsiderably, the former more than the latter. Although
there is no formal control over price nor an established U.S.
Ptice leader, there have been periods of greater stability,
*nd more instances of parallel changes in domestic and
foreign prices, than can be explained by market prices and
government policies alone. During the rather lengthy per-
l°3s in which prices have been stable, the price has been
same for all domestic producers. The U.S. price has
Shaved as an administered price upon which the lower cost
Producers have dominant influence.
The evidence presented in Chapter 5 of this report indi-
ces that over the long run the real price of lead has been
closely related to long-term unit costs, which were fairly
Coftstant in real terms until the late 1960's. Since 1968
¦kv
Mlere appears to have been a significant decline in costs for
* substantial portion of the industry. Concentration in the
^fkat appears to have allowed the price to stand at a higher
^Sin over costs than would be the case in a purely com-
petitive market, though foreign competition, and perhaps
^°tential entry, have placed narrow limits on such a margin.
481-471 O - It . is
221
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A frequent cause of periodic breaks in the New York
price has been rising inventories associated with the
general business cycle or other sharp drop-offs in
demand. Periods of high and rising inventories, 1970
for example, have been associated with falling prices.
The current lead price is under pressure both from that
phenomena and from the unusually sharp increase in capa-
city since 1968 from the new Missouri operations.
Structure of the Lead Industry
Lead is marketed both as a concentrate and as re-
fined pig or alloy. Because about half the world's
concentrate production is carried on by integrated firms
and does not reach the market, our discussion of price
and output focuses on the market for refined lead*
For some purposes it is important to distinguish
between primary and secondary lead products. Of the
1970 total domestic supply of lead metal, primary pro-
ducers accounted for about 40 percent and secondary
producers contributed about 31 percent. Suppliers of
secondary products differ from suppliers of primary
products with respect to production costs, raw"materials
sources, entry conditions, scale of operations and con-
centration. The main cost to secondary producers is
the price of scrap lead. New scrap lead is generated
from the production of lead, and old scrap is reclaimed
from discarded lead products. Old scrap accounts for
about 85 percent of total scrap supply, and storage
batteries account for about 75 percent of old scrap.
222
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Entry into the secondary market is easier than
into the primary market, as access to secondary raw
materials (scrap lead) is much easier than access to
primary raw materials (mined lead), and the time horizon
for entry or capacity adjustment is shorter for the se-
condary than for the primary sector. The secondary lead
market is much less concentrated than is the primary
sector, and the scale of operations of a secondary pro-
ducer is typically very small relative to that of a
primary producer. Nearly 150 U.S. companies reported
some secondary production in 1969, whereas six major
primary lead refining companies produce essentially
all domestic primary refined lead in 1971. One of the
smaller producers will cease its operations at the end of
1971. Of all domestic refined lead, primary refineries
account for about 75 percent. Secondary producers contribute
about 90 percent of antimonial lead output and nearly all of
the remaining lead alloy output. The share of secondary pro-
ducers in U.S. consumption of lead has remained roughly con-
stant over the past decade. As the supply of secondary lead
is closely tied to past consumption, it is insensitive to the
Price of lead except perhaps in the short run.
COMPOSITION AND DISPOSITION OF
U.S. SUPPLY OF LEAD, 1970
(Thousands of Short Tons)
Components of U.S.
Supply (and % of Total)
Disposition of
Supply (and % of Total)
U.S. Primary Production
680.2 (39.8$)
U.S. Consumption
373.5 (80.556)
Imports of Metal
244.6 (I4.4J6)
Industry STocks
325.8 (19.156)
Secondary Metal
536.4 (31 .456)
Exports
7.7 (0.4J6)
Industry Stocks
245. 8 ( 14. 456)
223
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After primary and secondary production, imports
are the third largest contributor to domestic supply,
accounting for 14.4 percent in 1970. The share of
imports in total U.S. consumption varied between 20 and
25 percent over the 1960-1969 period, and has dropped
off to 18 percent in 1970 and about 15 percent from
January through July, 1971. It appears that the new
Missouri production since 1969 is contributing most
importantly to this import displacement. The major
exporters of lead to the United States are Canada, Aus-
tralia, Mexico, and Peru.
Although there seem to be substantial international
competitive pressures, national market structures vary.
In France production is carried on under practically
monopolistic conditions. Competitive forces in tne
United States appear to be much stronger, although the
market is concentrated. The geographic scope for compe-
tition in lead lies somewhere between the two extremes
of a national market subject to peripheral import com-
petition and a cohesive world market where economic and
political barriers are negligible.
The U.S. lead industry contains both integrated
and nonintegrated producers, with the latter including
independent mining firms and custom smelters and re-
finers. The integrated firms own mines and mills as
well as smelting and refining plants. The greatest
part of their lead output is refined from concentrates
produced by their own mines and mills. Custom smelters
purchase lead concentrates from other foreign or domes-
tic companies and either smelt or refine or both. The
distinction between custom refiners and independent
224
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producers is not absolute, as some custom refiners own
mines and integrated firms do some custom work.
Refining is a more concentrated activity than is
mining/ both in the United States and abroad. Integrated
domestic producers account for about 85 percent of total
U.S. primary and secondary refined lead, and from 55 to
60 percent of total U.S	of mined lead. In the
noncommunist world, the primary capacity of integrated
primary producers accounts for 70 to 75 percent of
world production. In world mining, integrated primary
producers contribute about 50 percent of mine production.
Secondary lead involves a much lower degree of inte-
gration than does the primary sector.
An indicator of the degree of concentration is
world concentration in primary lead refinery capacity.
In our 1969 report to GSA, we indicated that the top
four firms* refining capacity accounted for over 40
percent of the total noncommunist world production.
The top eight firms accounted for nearly 60 percent,
and the top 20 firms for nearly 90 percent. Domesti-
cally, the top four firms accounted for 64 percent of
the value of shipments of refined lead, and the top
eight firms accounted for about 73 percent. It appears
that the U.S. industry is becoming increasingly con-
centrated, and that U.S. producers will increase their
share of the domestic market at the expense of imports.
Both of these trends are attributable in large part
to the impact of the introduction of large low cost
ore reserves in Missouri.
225
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Government Policies
The most important policies that affect the lead
market are the import tariff and surcharge, the price
freeze, and stockpiling.
The level of the tariff from 1965 to August, 1971
was $0,075 per pound on lead ores and $0.010625 per
pound on metal. The statutory rates dating from 1930
on these items are $0,015 and $0.02125 per pound, res-
pectively. The statutory rate is the maximum rate
applicable. The actual rate will be lower if the pre-
August tariff plus 10 percent of the foreign invoice
value of the import is less than the statutory rate.
As of October, 1971, the London Metal Exchange price of
lead was about $0,101 to 0.10 3 cents per pound. The
tariff then applying should be $0.03075 to 0.020925
per pound. If another $0.01 to 0.0125 is added for
freight and delivery charges, foreign lead would be
currently available at $0,132 to 0.136 per pound. Such
a price would represent a substantial discount from the
October average domestic producers' price of slightly
more than $0.14 per pound. However, the foreign price
is temporarily depressed by the U.S. East Coast dock
strike which is causing supplies to accumulate abroad.
After the dock strike the domestic and foreign pries
should come back into closer alignment. It is im-
portant to note that the LME price quickly dropped
after the imposition of the surcharge, indicating that
foreign producers are at least temporarily absorbing
that surcharge so as to avoid a loss of markets. This
is likely to persist into the longer run.
226
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The price freeze will probably have little effect
on the lead industry, as the price of lead has declined
substantially from the $0,165 per pound prevailing on
May 25, 1970 and which represents the permitted ceiling.
As calculated in Chapter 6 of this report# there is room
for a 17 percent price rise above the October level/ should
producers feel that market or changed cost conditions
warranted it.
There are about 1.124 million tons of lead in the
strategic stockpile. In October 1971, GSA declared that
575,000 tons of lead were in excess of the stockpile
target. Letters of agreement have been signed by all U.S.
primary lead producers and GSA, providing for annual pro-
ducer purchase from the stockpile of up to 50,000 tons of
lead. Amounts are to be allocated to individual smelters
according to their 1970 production, subject to review
every three years. Terms of sale are to be negotiated
with individual producers to adjust the published price
for reworking, handling, and distribution coats. It is
expected that arrangements will be completed in time for
Congress to authorize sales in 1972. Because of the high
level of producer stocks of lead, it is possible that stock-
pile releases will be postponed for 1972. Eventual release
is not likely to affect the price of lead.
The Lead Industry in the United States
There are three lead mining regions in the United
States, distinguished by the recoverable metal of major
value in the regional ore: lead ores, lead-zinc ores,
Sine ores and all other ores from which some lead is
obtained. In the eastern states, ores are primarily
in the zinc category, with lead being mined as a by-
product. Lead ores in the central states are of the
227
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lead type, and in the western states lead-zinc and
more complicated ores are predominant. Lead or lead-
type ores, located primarily in Missouri, are the
source of about two-thirds of domestic ore production.
Although some 20 states are engaged in lead mining
activity, four states are clearly dominant. In 1970,
Missouri supplied nearly 75 percent of U.S. ore produc-
tion, followed by Idaho with 10 percent, Utah with 7.6
percent, and Colorado with 3.5 percent. The major U.S.
mining companies, in terms of share of U.S. mine output,
are St. Joe Minerals Corporation, Missouri Lead Operating
Company, Cominco American, Ozark Lead, and Bunker Hill.
Only Bunker Hill of Idaho is not located in Missouri.
There is a definite trend in Missouri1s growing
importance in the lead mining industry. More than 75
percent of the ore produced from Missouri mines in 1969
came from mines that have been opened since 1960. The
physical characteristics of these newly worked deposits
permit the use of highly mechanized equipment and auto-
mated processes on a large scale, resulting in labor
efficiencies and metal recovery substantially above those
of other mining areas. These capital intensive, low cost
ore removal methods are more important than ore grade
in giving the new Missouri mines a cost advantage over
the typical mines of Idaho, Utah, Colorado and other
states.
Ores from domestic mines provided domestic refiner-
ies with about 83 percent of 1970 requirements the remainde*
being imported. Thus the lead industry is considerably
dependent upon foreign ores than is the zinc industry,
which imports about 50 percent of its ores.
228
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PRODUCTION OF SOME LARGE U.S. LEAD MINERS
(PERCENT OF TOTAL U.S. LEAD MINE PRODUCTION)
Company
1962
1966
1970
St. Joe Minerals Corporation
25.9
40.6
36. 71
ASARCO
3. 1
2.2
0.9
Bunker Hi 11
19.6
10.4
5.5
Eagle Picher
1.7
1.5
0.4
Hec 1 a
10.9
9.3
4.7
Comlnco American*
—
mm
8.6
Ozark Lead (Subsidiary of


7.8
Kennecott)*



Missouri Lead Operating Company
tm

12. 1
(Subsidiary of Amax)*
SOURCE: ABMS Yearbook, 1970 and 1966 for all figures
except those marked by an asterisk, which are esti-
mates for new Missouri mine output based on Infor-
mation contained In the following sources: "Lead
and the Missouri Boom," Compreeaed Air Magazine,
January 1967; U.S. Bureau of Mines Mineral* Yearbook,
1968 and 1969.
*St. Joe's share In 1970 seems to be unrepresentative
of that company's growing importance in the Industry. Its
1969 share was 47.7 percent, and unusual circumstances
appear to have affected its 1970 production performance.
Of the mining companies listed above, it appears
that those operating primarily in Missouri have the
lowest cost operations. The major producers of refined
lead whose smelters draw upon these Missouri mines will
be characterized as comprising the low-cost sector of
the industry.
There are six major primary lead refining companies
which produce essentially all of the domestic primary
refined lead, and two of these companies treat all of
the imported ores and concentrates.
220
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PRODUCTION OF SOME LARGE U.S. LEAD REFINERS
(Percent of Primary & Secondary
Lead Refined in the U.S.)
Company
1962 1966 1970
AMAX-Homestake Lead Tollers
ASARCO
Bunker Hill
International Smelting & Refining
St. Joe Minerals Corporation
U.S. Smelting Refining & Mining
14.6
40.2	38.1	28.6
19.0	19.0	15.6
! .8	2.7	1.5
15.6	19.8	26.1
7.0	6.7	3.8
SOURCE: ABMS Yearbooks, 1966 and 1970.
These six companies operate seven smelters. The AMAX
and St. Joe smelters are located in Missouri, and each
has an accompanying sulfuric acid plant. Bunker Hill's
Idaho smelter also has an acid plant. ASARCO's smelters
are located in Texas, Montana, and Missouri. The Inter-
national Smelting and Refining Company operates a smel-
ter in Utah, which is scheduled to be closed in December,
1971. Most of the companies engaged in lead refining
have extensive operations in other activities, with net
sales and annual capital expenditures each ranging from
$60 to $110 million. Two companies are considerably
smaller and less diverse in their activities. Profits
as measured by net income as a percent of equity ranged
from about 5 to 16 percent in 1970.
The seven domestic primary lead smelters, soon to
be six, can be categorized according to high and low
production costs. The dominating factor determining a
smelter's placement in the low-cost category is access
to low-cost ores. The three Missouri smelters share
this advantage, as well as that of good waterway trans-
portation. As most Missouri lead is obtainable at
230
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roughly the same cost, and as smelter technology does
not vary widely among plants, the chief difference among
the three low-cost producers is probably pollution con-
trol costs. These are likely to be lower for the two
smelters in this category which currently operate acid
plants. The chief difference among high-cost producers
is evidently the availability of low-cost ores and trans-
portation, although one high-cost producer may have lower
pollution control costs than others within this category.
An examination of costs and profits in the lead
industry indicates that the low-cost producers have exper-
ienced significant declines in real average costs and
have a substantial cost advantage over high-cost producers.
It also appears that the excess of price over cost for
the low-cost producers is amply sufficient to bid competi-
tively with the rest of the economy for new capital.
This does not appear to be the case for high-cost pro-
ducers.
Chapter 7 of this report contains specific detail
on the issues outlined above.
The production side of the secondary metal market
is characterized by relatively easy entry, low concen-
tration, and a cost structure substantially different
from that of primary producers. The scale of operations
of a secondary producer is typically very small relative
to that of a primary producer. The secondary producers
are the chief sources of antimonial lead and practically
the exclusive source of other lead alloy output. They
produce only about 25 percent of all domestic refined lead.
231
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The Bureau of Mines Minerals Yearbook noted that nearly
150 plants reported some secondary production in 1969,
and the 1970 ABMS Yearbook listed 32 companies engaged in
secondary smelting and refining.
The Economic Effects of Pollution Control
on the Lead Market
The Environmental Protection Agency has proposed
standards governing both the emission into the air of
sulfur dioxide from lead smelters and the discharge of
wastes into water sources. In addition, the EPA has
estimated the costs of installing control equipment to
meet these standards.
Pollution Control Costs
Table 8-1, from Chapter 8 of this report,1 presents
data provided by the Council on Environmental Quality
showing costs that would have to be incurred by lead
smelters to attain the standard of 90 percent removal
of feed sulfur. Table 8-2 presents data for water
pollution control costs. Table 8-3 presents the combined
annual costs estimated for 1976. These can be regarded
as the level of costs persisting in the long run after
full installation of the required pollution abatement
equipment and which will affect the producers* profit
rates.
lTable 8-1, 8-2, and 8-3 are reproduced here for
convenience.
232
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Table 8-1
COSTS OF CONTROLLING SULPHUR DIOXIDE EMISSIONS
AT PRIMARY LEAD SMELTERS, RELATIVE TO THE STANDARD OF
90 PERCENT REMOVAL OF FEED SULPHUR
(Millions of August 1971 Dollars)
1972	1973	1974	1975	1976
Investment Outlays
Existing Facilities	3.25	6.50	22.75	26.00	6.50
Annual Costs
Operation & Maintenance 0.40	1.21	4.03	7.25	8.06
Interest	0.33	0.98	3.26	5.86	6.51
Depreciation	0.22	0.68	2.27	4.08	4.55
Total	0.95 2.87 9.56 17.19 19.12
"Total" Costs
Total Cash Costs1	3.98 8.69 30.04 39.11 21.07
Total Direct Costs2
1 Investment costs plus annual costs minus depreciation.
2Tofal cash costs minus interest.
SOURCE: Council on Environmental Quality.
ASSUMPTIONS: (I) An acid plant whose entering gas stream Is
cleaned is the proposed control method.
(2)	The Interest rate Is 10 percent.
(3)	The growth rate of production from existing
capacity Is 1.4 percent per year.
(4)	The depreication rate Is 7 percent per year.
(5)	No downtime for installation is envisaged.
(6)	A smelter model of zero current control, pro-
ducing 47,000 tons of lead per year and operating
at fuil capacity for 330 days a year, was used
for the cost calculations.
(7)	The S02 concentration of the gas stream enter
Ing the acta plant is assumed to be 5 percent.
(8)	Five lead smelters were assumed to require
controI.
233
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Table 8-2
COSTS OF WATER POLLUTION CONTROL FOR THE LEAD AND ZINC
INDUSTRY COMBINED, RELATIVE TO THE STANDARD
OF EQUIVALENT OF SECONDARY TREATMENT
(Millions of August 1971 Dollars)
1972 1973 1974 1975 1971
Investment Outlays
Existing Facilities 1.557 1.629 1.703 1.775 1.848
New Facilities	0.231 0.233 0.240 0.245 0.250
Total	1.788	1.864	1.943	2.020	1.098
Annual Costs
Maintenance	0.204	0.411	0.617	0.823	1.030
Interest	0.115	0.231	0.347	0.463	0.580
Depreciation	0.071	0.145	0.217	0.289	0.362
Total	0.340	0.783	I.181	1.575	1.972
"Total" Costs
Total Cash1	3.10?	2. 56(r	2 .c[0?
Total Direct2	J. sue	J.	3. •
Mnvestment costs plus annual cost, minus depreciation.
2Total cash costs minus Interest.
SOURCE: Council on Environmental Quality
ASSUMPTIONS: (I) Lead and Zinc smell-ers would apply coagu i at i o"'
sedimentation, and neufraIizat1 on to 100 percent
of process wastewater.
(2)	The interest rate is 8 percent.
(3)	The growth rate of lead production Is 1.4
percent and that of zln: production Is 2.2 percent
per year.
(4)	The depreciation rjte is 5 percent per year.
(5)	Some downtime for installation is Included.
234
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Table 8-3
ANNUAL COSTS OF SULPHUR DIOXIDE EMISSION
AND WATER POLLUTION CONTROL
AT PRIMARY LEAD SMELTERS IN 1976
U.S.	Total Annual Middle Estimate
Production2 Abatement Costs of Abatement Cost	Low Cost	High Cost
(Tons) ($ Million) Per Pound		Estimate3	Estimate1*
726,500 20.18 $0,014	$0,012	$0,017
1The annual costs of water pollution control are given for
the combined lead and zinc Industries. The figures In this
table are based on the arbitrary allocation of half that com-
bined figure to lead and half to zinc*
2The CEQ's estimated growth rate of lead — 1.4 percent per
year -- Is applied arithmetically to 1970 U.S. lead coutput
|Of 670,000 tons to yield the figure of 726,000 for output In
!l976. The 1976 figure appears quite reasonable In light of
our own studies of this market.
3The high and low cost estimates allowed the minus 10 to plus
25 percent error for air pollution control costs, and no error
for water pollution control costs.
SOURCE: Tables I and 2.
235
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Effect of Pollution Controls on the Lead industry
In the absence of pollution control costs, U.S.
lead consumption can be expected to continue its long-
term growth rate of slightly more than 1 percent per
year. The growth will occur primarily in the battery
market, which accounts for about 40 percent of domestic
lead consumption. The tetraethyl market is a source of
uncertainty, as the question of pollution control devices
for automotive emissions has not been settled. It appears
reasonable to expect approximately a 40 percent loss of
this market by about 1975 as the net result of new cars
using lead-free gasoline, reduced lead content of regular
grade gasoline, and probable state regulations. There-
after it is generally expected that further reductions
of 10 percent per year will occur. This will depress
the growth rate of consumption until about 1980, when
the long-term rate is likely to be regained, but will
have no effects on production costs of lead producers.
The total consumption trend is not likely to be altered
by the imposition of pollution control costs, for two
reasons. The first is that demand for lead is very
insensitive to price changes. Secondly, the price
changes that can be expected to follow the pollution
cost increases is very small.
The major trends on the supply side of the lead
market are a replacement of older mines and the smelters
that drew upon them for concentrates by newer mines and
the smelters that process their ores, and an increase in
market concentration. The major force behind this
rearrangement is the discovery and development of exten-
sive ore deposits in Missouri, which have relatively
236
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low mining costs and which are favorably situated with
respect to transportation. These trends form an impor-
tant part of the basis for our segmentation of the domes-
tic primary lead industry into high- and low-cost pro-
ducers. This development has also been largely responsible
for an additional change in the supply picture — a
reduction in the share of imports in U.S. lead consumption.
The major impact of abatement costs will be to accelerate
the trend of reallocating domestic supply from high- to
low-cost producers, and perhaps to retard somewhat the
trend toward a lower share of imports in U.S. consumption.
The price of lead is likely to remain constant or
decline in real terms in the absence of abatement costs,
due to similar trends in costs. The effects of abate-
ment costs on price will depend importantly upon their
incidence on high- and low-cost producers. It seems
likely that the abatement costs will fall much more
heavily upon the high-cost producers, in which case it
is likely that no price increase will occur. In the
less likely event that abatement costs fall equally
upon low- and high-cost producers, some small price rise
can be expected, limited by foreign competition and
accompanied in the long run by a retardation in the
trend towards a lower share of imports in U.S. consump-
tion.
In the absence of abatement costs, there will pro-
bably be a continuation of the trend toward less employ-
ment in mining and smelting. The impetus for this decline
arises both from increased mechanization and automation
through all stages of production and from the fact that
the newer Missouri mining operations are less labor
He-471 o - 73 - U
237
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intensive than the older mining operations. The effect
of abatement costs will be to accelerate the decline of
employment in the high-cost sector. This is likely to
have more severe impacts in the areas of Montana and
Idaho, which are rural and undiversified, than in Texas.
As the high-cost sector depends to a considerable
extent on imported ores, the relative decline of this
sector will to a small degree offset the effects of
increased lead metal imports. Because the expected
price increase resulting from abatement costs is small,
there will be only small increases in metal imports.
As the expected cost increase is less than transporta-
tion and tariff costs for imports, there is likely to
be no incentive to relocate smelters abroad. Thus the
net balance of payments impact is likely to be small.
238
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ZINC
Chapter 1
INTRODUCTION AND EXECUTIVE SUMMARY
Overview of the Zinc Market
The zinc market has shown moderate growth over the
Past two decades, with more rapid growth outside the
United States than within. World consumption rose in the
1950's by about 3 percent annually, then accelerated
through the first half of the 1960's to about a 6 percent
annual rate, and has tapered off somewhat, with annual
fluctuations, since 1965. As in the case of lead, Europe's
°°nsiimption of lead and zinc was in traditional uses until
Suite recently, when it began extensive use of the metals
in the automotive and appliance technologies developed
®*rlier in the United States. Japan's rapid postwar growth
***8 also created large markets for the more modern uses
of zinc.
Zinc is used predominantly as an input in the produc-
tion of other commodities. The major consumers of zinc
230
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are the die casting shops whose products are parts for
the automotive, home appliance and office machine indus-
try, the steel industry for galvanized protective coatings,
and the brass mills for various alloys with copper. Of
these markets, die casting is the main source of growth.
This is also the use of zinc most vulnerable to displace-
ment by substitute materials, particularly injection-
molded plastics and aluminum. The future growth rate
of zinc consumption will depand importantly upon the
extent of such substitution. Die casting accounted for
37 percent of 1970 U.S. consumption, while galvanizing
and brass contributed 24 and 14 percent, respectively.
Technology of Production
Zinc occurs in ores which vary considerably in zinc
content. The most common mineral is zinc sulfide, or
sphalerite. In the eastern United States the mineral is
high in zinc content, with lead being a by-product. In
the central states a higher lead content is common, and
in the western states several elements are generally
found in coproduct proportions.
There are four stages in the transformation of zinc
ore into commercial forms mining, milling, smelting, and
refining. Mining and milling take place in close proxi-
mity, whereas the trend for smelting and refining is to
locate near production centers. Slab zinc and zinc oxide
are the major product forms of this production sequence.
The major ore producing countries are Canada (1,211,000
short tons in 1970), the United States (547,000 short tons),
Australia (408,100 short tons), Peru (337,000 short tons),
240
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Mexico (294,000 short tons), and Japan (308,000 short
tons). Total noncommunist ore production in 1970 wis
4,343,000 short tons (zinc content).
Zinc mines give rise to relatively minor environ-
mental problems. Not much land surface area is required,
and mine locations are generally remote. Most mine
wastes are either commercially utilized or returned to
the mine. Dust emission is relatively easily controlled.
The level of costs varies considerably among indivi-
dual mining and milling establishments, but the behavior
of unit costs can be represented in a general fashion.
The typical mining company has a large proportion of
fixed costs (approximately one-fifth of total costs), and
roughly constant average costs both for moderate changes
in intermediate term output and for substantial changes
in long-run output.
Some concentrates produced at the mills are made
into zinc oxide, but most are subjected to further treat-
ment for recovery of zinc metal in slab form. Concen-
trates are roasted to drive off the sulfur as sulfur
dioxide and to obtain oxidized zinc. The reduction and
recovery of zinc is then achieved by one of a variety of
metallurgical processes. The horizontal retort process
is the oldest and most costly, and is being replaced world
wide by newer methods. The vertical retort and electro-
lytic processes are more efficient, each being better
suited for specific concentrate types and purity grades
of output. A fourth process, the imperial Smelting Process,
is suitable only for specific types of lead-zinc ores.
Almost all zinc ore is converted into slab zinc. The
major zinc smelting countries are the United States
241
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(887,000 short tons of slab zinc production in 1970),
Japan (745,000 short tons), Canada (461,000 short tons),
West Germany (332,000 short tons), Australia (287,000
short tons, and France (247,000 short tons). Total non-
communist production of slab zinc in 197 0 was 4,339,000
short tons.
The major waste problem is the emission of sulfur
dioxide, which occurs in the roasting and sintering
stages of the smelting process for retort methods of
reduction and in the roasting stage for electrolytic
methods. Other dust and gaseous emissions are relatively
easily controlled, except for particulate zinc oxide emis-
sions from horizontal retorts. The sulfur dioxide may
also be captured relatively easily from a technological
point of view by means of an acid plant which produces
sulfuric acid. However, the sulfur concentration of the
off-gases can be quite low, which results in high recovery
costs.
Smelting and refining costs may account for approxi-
mately one-half of total zinc mining and refining costs,
the other half accounted for by the acquisition of zinc
concentrates. As the electrolytic process is more capi-
tal intensive than the retort distillation processes, its
fixed costs are a larger proportion of total costs. This
proportion may be about 30 percent for electrolytic plants
and about 10 percent for distillation plants. For the
long run, smelter costs per unit are probably nearly con-
stant for large scale output.
Mine production of zinc is expected to grow in Canada,
Mexico, Australia and Peru, but appears to be stagnant
within the United States. These major foreign producers
242
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plus Japan and several European countries are expected
to expand their smelter production, which is declining
in the United States.
Consumption of Zinc
Zino is used predominantly as an input in the produc-
tion of other commodities. The major use categories for
sine are galvanizing (protective ooating for other metals),
die casting (machine parts made by forcing molten metal
into molds) and copper base alloys (primarily to produce
k*ass). it is also used in rubber, paints, ceramics, and
• variety of chaaiical products.
Domestic Z1nc Consumption C1tss1f1ed by End Usfe
(Thousands of Short Tons and as a
Percentage of U.S. Total)
End Use
1950
1958
1962
1969
s*lvanlzlng
338. 1
321 .1
307.3
375.9
D,ft Casting
(29.5)
(30.9)
(26.7)
(24.t)
288.6
310.5
418.4
573.1
CoPper Base Alloys
(25.2)
(29.9)
(36.7)
(36.7)
163.9
167.8
1 14.9
213.5
A , .
(14.3)
(16.2)
(10.1)
(13.7)
0+her
346. 1
281 . 1
257.9
399.5

(30.2)
(27.1)
(22.6)
(25.6)
total
1 146.6
1038.1
1140.3
1562.0
SOURCE: I 969 CRA Lead-Zinc Report and ABMS yearbook,
1970. The CRA report, pp. 29-30, describes
the derivation of these figures, which In-
clude both slab ztnc and other forms of
elements! zinc.
248
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Consumption of zinc has grown at about a 1.7 percent
average annual compound rate from 1950 to 1969. The
strongest component has been the zinc die casting market,
whose growth rate averaged 3.6 percent over the same per-
iod. These rates have been pulled down to some extent
by what might be regarded as abnormal circumstances over
the past five years. The future growth rate of zinc con-
sumption is likely to be about 4 percent per annum. If
competitive intrusions on the die casting market from
substitute materials halt that sector's growth completely -
which is an unlikely event — the growth rate of zinc con-
sumption might be reduced to 2 percent per year.
The substitute materials threatening zinc die castings
are injection-molded plastics and aluminum, especially
the former. Automotive parts constitute the main end use
category in die casting, with office machines and home
appliances contributing important shares. In combination
the three account for more than 75 percent of total zinc
die casting. At given prices of zinc, injection-molded
plastics have been able to capture important segments of
the die casting market, both by achieving technological
breakthroughs and by reducing costs. These competitive
intrusions are based on relatively long-term research and
development efforts, so that in the short or intermediate
term there is no significant direct effect of price on
zinc consumption in die casting. Because of this past
experience, the zinc industry is justifiably concerned
that a rise in the price of zinc relative to the price
of plastics might induce further substitution.
The nature of the response of substitute materials
an increase in other end uses is similar to that in die
244
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casting, although such response is evidently weaker in
the other uses.
As in the case of lead, foreign zinc consumption
growth has been more rapid than in the United States, and its
Pattern has been different. European consumption of slab
zinc grew at about a 4.3 percent average annual compound
rate from 1957 to 1969, that of Japan was nearly 14 per-
cent, while for the total noncommunist world, slab zinc
consumption averaged a 6.2 percent growth rate. There
has been relatively greater emphasis on brass in Europe,
and on galvanizing in Japan. Greater detail on end use
Patterns in the United States and the rest of the noncom-
munist world is contained in Chapter 3 of this report.
Prices in the Zinc Industry
The benchmark quote for domestic zinc prices is the
Producers' quoted price for prime western slab zinc, the
9rade used in galvanizing. Zinc is often sold at a dis-
count below the producers' published price, but rarely at
a premium. Adherence to the published price is generally
stronger than in the case of lead, however. Concentrate
Prices tend to be closely associated with prime western
Quotes.
Until 1965 the price basis for foreign sales of zinc
was the LME price, since then zinc sales abroad have been
**ade on the basis of a price set by producers under the
leadership of the Imperial Smelting Corporation of Great
Britain. This price has been changed infrequently and
•ince its inception both the LME and the U.S. producers'
Price have fluctuated less than before. The U.S. price
to be above the LME price by no more thin tariff
*nd transport costs.
245
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The behavior of zinc prices is suggestive of a con-
centrated market, especially so for foreign production.
European price changes have appeared to be initiated by
a well recognized leader, and adherence to the quoted price
appears to be the rule.
The existence of relatively more successful coopera-
tion among foreign producers, together with the greater
share of sine imports in total U.S. supply, has left less
room for price discretion among U.S. producers than in
the case of lead. Nonetheless, the price history of zinc
is consistent with the hypothesis that there is a fairly
stable mark-up between an efficient producer's long-run
average costs and price. This mark-up is in the nature
of an administered price with a strong element of price
leadership, particularly by the lower-cost producers,
which takes into account the behavior of foreign prices.
The stable mark-up between average cost and price
is likely to persist in the future. Long-run average cost
of the efficient producers has remained fairly constant.
Under normal market conditions, the price of zinc over
the next 5 to 10 years will probably be in the range of
$0.16 to $0.17 per pound (in 1970 dollars), or approxi-
mately equal to the average historical (deflated) value
since the Korean War.
Structure of the Zinc Industry
Zinc is marketed both as a concentrate and as smelted
slab or oxide. Because a substantial portion of the world's
concentrate production is carried on by integrated firms
and does not reach the market, our discussion of price
and output focuses on the market for slab zinc.
246
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For some purposes it is important to distinguish be-
tween primary and secondary zinc products. Of the 1970
total supply of zinc metal in the U.S./ primary producers
accounted for about 58 percent and secondary producers con-
tributed about 18 percent, with imports and stocks account-
ln9 for the remainder. Suppliers of secondary products
differ from suppliers of primary products with respect
to Production costs, raw materials sources, entry condi-
tions, scale of operations and concentration. The main
c°st to secondary producers is the price of scrap zinc.
New scrap zinc is generated by consumers of slab zinc
who make galvanized steel, die castings, brass, and
°ther zinc products; old scrap is reclaimed from discarded
sine products. New scrap accounts for about 80 percent
°f total scrap supply, and die castings and brass account
the bulk of new scrap.
Entry into the secondary market is easier than into
primary market, as access to secondary raw materials
(scrap zinc) is much easier than access to primary raw
Materials (mined zinc), and the time horizon for entry
0r capacity adjustment is shorter for the secondary than
the primary sector. The secondary zinc market is much
concentrated than is the primary sector, and the
8°ale of operations of a secondary producer is typically
v®*y small relative to that of a primary producer. Of
domestic distilled and electrolytic zinc, primary
tefineries account for about 93 percent. The share of
8®condary producers in U.S. consumption of zinc has remained
*°*»ghly constant over the past decade. As the supply of
*ft°cndary zinc is closely tied to pa«t consumption, it is
*®nsitive to the price of zinc except perhaps in the
run.
247
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COMPOSITION AND DISPOSITION OF
U.S. SUPPLY OF ZINC, 1970
(Thousands of Short Tons)
Components of U.S.
Supply (and % of Total)
Disposition of
Supply (and % of Total)
U.S. Primary Production
1059,8 (57.956)
U.S. Consumpt i on
1643.9 (89.8*)
Imports of Meta I
270.4 ( 14.8/0
Industry Stocks
187.9 (10.2%)
Secondary Metal
332.4 (18.I*)
Exports
0.29 (neg . )
Industry Stocks
168.2 (9.2*)
After primary and secondary production, imports are
the third largest contributor to domestic supply, account-
ing for 14.8 percent in 1970. The share of imports in
total U.S. consumption has risen from less than 10 percent
to about 23 percent over the 1960-1969 period, and is
likely to increase still further. It appearB that the
decline of U.S. smelting capacity relative to consumption
is contributing most importantly to this import displace-
ment. The major exporters of zinc to the United States
are Canada, Australia, Mexico, Peru and Japan.
Although there seem to be substantial international
competitive pressures, national market structures vary.
In Prance, for example, the industry structure is highly
concentrated. Competitive forces in the United States
appear to be stronger, although the market is becoming in-
creasingly concentrated. The geographic scope for competi-
tion in zinc lies somewhere between the two extremes of a
248
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national market subject to peripheral import competition
and a cohesive world market where economic and political
barriers are negligible.
The U.S. zinc industry contains both integrated and
nonintegrated producers, with the latter including inde-
pendent mining firms and custom smelters and refiners.
The integrated firms own mines and mills as well as smelt-
ing and refining plants. A much larger part of their
zinc output is refined from concentrates produced by
their own mines and mills. Custom smelters purchase con-
centrates from other foreign or domestic companies and
either smelt or refine or both. The distinction between
custom refiners and independent producers is not absolute,
as some custom refiners own mines and integrated firms
do some custom work.
Refining is a more concentrated activity than is
mining, both in the United States and abroad. In 1966,
10 integrated domestic producers accounted for about 98
percent of total U.S. primary and secondary zinc, and for
about 55 percent of total U.S. output of mined zinc. In
the noncommunist world, the primary capacity of 32 inte-
grated primary producers accounted for 90 percent of
world production. In world mining, integrated primary
producers contributed at least 15 percent of mine produc-
tion. Secondary zinc involves a much lower degree of
integration than does the primary sector. The U.S. indus-
try is now even more concentrated, as seven firms, most of
whom do some custom work, account for all domestic primary
zinc.
An indicator of the degree of concentration is world
concentration in primary zinc refinery capacity. In
249
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our 1969 report to GSA, we indicated that the top four
firms' refining capacity accounted for 23 percent of the
total noncommunist world production. The top eight firms
accounted for nearly 40 percent, and the top 20 firms for
nearly 72 percent. Domestically, the top four firms
accounted for 62 percent of the value of shipments of
refined zinc, and the top eight firms accounted for about
96 percent in 1963. It appears that the U.S. industry
is becoming increasingly concentrated, and that foreiqn
producers will increase their share of the domestic mar-
ket at the expense of domestic production. Both of these
trends are attributable to the decline of relatively high-
cost mines and smelters in the United States and the
expansion of mines and smelters abroad.
Government Policies in the Zinc Industry
The most important government policies currently
affecting the zinc market are the import tariff and
surcharge and the stockpile.
The current zinc price is $0.17 per pound. The
pre-August 1971 tariff plus 10 percent of the October
LME price of $0,149 exceeds the 193 0 statutory tariff
rate of $0.0175 per pound, so that the rate now apply-
ing to zinc imports is $0.017 5 per pound. When freight
and delivery charges are added, this makes the delivered
price of imported zinc about $0,179 per pound.
250
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In October 1971, GSA declared that 536,000 tons of
zinc were held in excess of the stockpile target level,
in that same month, letters of agreement were signed by-
all U.S. primary zinc producers and GSA. These agree-
ments provided for annual producer purchases from the
stockpile of up to 50,000 tons of zinc. The purchase per-
iod will stretch over about 10 years, with amounts allo-
cated to individual smelters according to their 1970 pro-
duction. The allocations are subject to review every three
years. The disposal rate may be altered or suspended in
times of market surplus, as measured by the ratio of pri-
mary smelter stocks to the previous year's domestic pri-
mary shipments. The metal will be priced at published
quotations with individually negotiated discounts to cover
reworking, handling, and distribution costs. Both the
GSA and industry officials expect to complete their arrange-
ments in time for Congress to authorize sales in 1972.
The Zinc Industry in the United States
There are three zinc mining areas in the United States,
distinguished by the local ore type, which are classified
on the basis of recoverable metal contained: zinc ores,
lead-zinc ores, lead ores, and all other ores from which
zinc is obtained. In the eastern states, ores are primarily
251
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in the zinc category. Ores in the central states are of
the lead type, and in the western states lead-zinc and
more complex composite ores predominate. The major mining
states are Tennessee, New York, Missouri# and Colorado.
The relative importance of the first three of these is
likely to increase. Ores from domestic mines provided
domestic smelters with about 50 percent of 1970 require-
ments — the remainder being imported.
PRODUCTION OF SOME LARGE U.S. ZINC MINERS
(Short Tons)
Company
1969
American Zinc Company
74,699
ASARCO
2 1 ,240
Bunker Hill
33,921
Eag1e Pi cher
32,068
New Jersey Zinc
154,)34
St. Joe Minerals Corporation
79,059
U.S. Smelting Refining
and Mining
23,333
There are seven primary zinc reduction companies pro-
ducing all of domestic primary smelted and refined zinc.
These companies operate eight smelters. The smelter at
Great Falls, Montana, is scheduled to shut down in mid-1972.
The eight domestic primary smelters, soon to be seven,
can be categorized according to low and high production
costs. The important factors determining a smelter's
placement in the low-cost category are access to low-cost
ores, access to good water transportation, and relatively
252
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modern technology. The two Pennsylvania smelters and the
Texas electrolytic plant share these advantages. The
Idaho plant is probably in a somewhat higher cost position
owing to the nature of its ore sources. The three hori-
zontal retort plants share to sane extent both the high-
cost concentrate and the old technology problems. The
Montana plant is scheduled to close down because of its
inability to compete for concentrates.
The Economic Effects of Pollution Control
on the Zinc Market
The Environmental Protection Agency has proposed
standards governing both the emission into the air of
sulfur dioxide from zinc smelters and the discharge of
wastes into water sources. In addition, the EPA has
estimated the costs of installing control equipment to
meet these standards.
Pollution Control Costs
Table 8-1, from Chapter 8 of this report,1 presents EPA
data provided by the Council on Environmental Quality
showing costs that would have to be incurred by zinc
smelters to attain the standard of 90 percent removal of
feed sulfur. Table 8-2 presents data for water pollution
control costs. Table 8-3 presents the combined annual
costs estimated for 1976. These can be regarded as the
level of costs persisting in the long run after full
installation of the required pollution abatement equip-
ment and all the costs which will affect the producers1
profit rates.
tables 8-1, 8-2, and 8-3 are reproduced here for
convenience.
458-471 O - 72 - 17	253
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Table 8-1
COSTS OF CONTROLLING SULFUR DIOXIDE EMISSIONS
AT PRIMARY ZINC SMELTERS, RELATIVE TO THE STANDARD
OF 90 PERCENT REMOVAL OF FEED SULFUR
(Millions of August 1971 Dollars)
Investment Outlays

1972
1973
1974
1975
1976
Cost to contro1
ex 1stIng facilities
2.04
4,07
14.24
16.28
4.07
Costs to control
new fac i 1i t i es
3. 44
3.44
3.44
3. 44
3.44
TOTAL
5.48
7.5 1
1 7.68
19.72
7.51
Annual Costs





Operation and
Ma i ntenance
. 82
2.45
8. 17
14.70
16.33
1nterest
.29
.87
2. 80
5. 20
5. 79
Dep rec i at i on
.20
.61
2.03
3.64
4.05
TOTAL
1.31
3.93
13.00
23.54
26. 1 7
"Total" Costs





Total Cash Costs1
6.59
10.83
28.65
.39.62
29.63
Total Direct Costs2
6.30
9,96
25.85
34.42
23.84
1 Investment costs plus
annua 1
costs
mlnus depreclatlon
*
2Total cash costs minus Interest.
SOURCE: Council on Environmental Quality
Assumptions:
1)	Because of the weak sulfur dioxide concentrat I on
of the off-gas streams of roasters and sinter
machines, the proposed control method Incorporate*5
the upgrading of flues to reduce gas volumes and
then limestone scrubbing to remove the sulfur
dI ox Ide.
2)	The Interest rate Is 10 percent.
3)	The growth of production Is 2,2 percent per yoar*
4)	The depreciation rate Is 7 percent per year.
5)	No down time for Installation Is envisaged.
(Table 8-1 continued on following puge.J
254
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Table 8-1 (Continued)
COSTS OF CONTROLLING SULFUR DIOXIDE EMISSIONS
Assumptions: (Continued)
6)	A smelter model of zero current control, pro-
ducing 92,000 tons per year, and operating at
full capacity for 330 days a year, was used for
the cost calculation.
7)	The sulfur dioxide concentration of the smel-
ter gas is assumed to be 2 percent.
8)	Six zinc smelters were assumed to require
controI.
255
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Table 8-2
COSTS OF WATER POLLUTION CONTROL FOR THE LEAD AND ZINC
INDUSTRY COMBINED, RELATIVE TO THE STANDARD
OF EQUIVALENT OF SECONDARY TREATMENT
(Millions of August 1971 Dollars)
1972	1973	1974	1975	1976
Investment Outlays
Existing Facilities	1.557	1.629	1.703	1.775	1.848
New Facilities	0.231	0.235	0.240	0.245	0.250
Total	1.788	1.864	1.943	2.020	1.090
Annual Costs
Operation &	.
Maintenance	0.204	0.411	0.617	0.823	1.030
Interest	0.115	0.231	0.347	0.463	O.580
Depreclatton	0.071	0.143	0.217	0.289	0.362
Total	0.340	0.785	I.181	1.575	1.972
"Total" Costs
Total Cash1	2.107	2.506	2.907	3.306	3.703
Total Direct2	1.992	2.275	2.560	2.843	3.123
investment costs plus annual costs minus depreciation.
aTotal cash costs minus Interest.
SOURCE; Council on Environmental Quality
ASSUMPTIONS: (I) Lead and Zinc smelters would apply coagulation
sedimentation, and neutralization to 100 percent
of process wastewater.
(2)	The Interest rate Is 8 percent.
(3)	The growth rate of lead production Is 1.4
percent and that of zinc production Is 2.2 perce"
per year.
(4)	The depreciation rate is 5 percent per year.
<5) Some downtime for Installation Is Included.
256
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U.S. Produc-
tion To Which
CEO Control
Costs Apply
-(Tons) .
Table 8-3
ANNUAL COSTS OF SULFUR DIOXIDE EMISSION
AND WATER POLLUTION1 CONTROL
AT PRIMARY ZINC SMELTERS IN 1976
Total
Annual
Abatement
Cost
($ million)
Middle Es t1-	.
mate of Abate-	Low Cost
nient Cost	Estimate
M per pound)	(ft per pound)
High Cost9
Estimate
($ per pound)
,004,000
502,000
27.156
27.i 56
0.0135
0.0270
0.0123
0.0246
0.0267
0.0534
SOURCES: Tables 8-1 and 8-2
'The annual cos fs of water pollution control
fcr the combined lead and zinc Industries.	h-i? +»,at combined
table are basod on the arbitrary allocation of half that combined
fiqure to lead and half to zinc. The results are not sensitive to
this allocation, as air pollution control costs for the zinc ndus-
ln are ?argerVan combined .ead and zinc Industry water pollution
control costs by a factor of over 13.
2The CEO's estimated growth rate of zinc production — 2.2 per-
center 1 !- Is applied arithmetically to 1970 U.S. zinc output
of 887,200 tons to yield the figure of 1,004,000 for output In 1976
This is the figure applying In the case +ha+ ®®njT®,r^?+?*re
spread evenly over the entire II.S. oujPu +*	. .. f domestic
which the control costs are borne by	®' . +
capacity, the figure of 1,004,000 Is divided by two o t
502,000 tons per year, which results In a doubling of the P®£
pound cost estimates. This Is a roughest!mate	?9r Pound
coit Increases which will be faced by those smelters needing
PolIutlon control.
'The high and low cost estimates allowed the mlnus 10 to pI us
103 percent error for air pollution control costs, and no error
for water pollution control costSe
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Effects of Pollution Controls on the Zinc Industry
In the absence of pollution abatement costs, U.S.
zinc consumption is likely to increase at an average
annual compound rate in the neighborhood of 4.0 percent.
The growth would uccur priinuriJy in Lhu die cttbLiny m.irkcl,
which appears likely to Hold its own against further
competitive intrusions by substitute materials. Neither
the total consumption trend nor that of die casting is
likely to be altered by the imposition of pollution control
costs because the price changes that can be expected to
follow the pollution cost increase are fairly small.
The major trends on the supply side of the zinc mar-
ket are the decline of older, high-cost mines and the
smelters that drew upon them for ores, an increase in mar-
ket concentration, and an increase in the foreign producers'
share of the slab zinc market. The important factors
causing this change are the development of rich ore deposits
and new, low-cost smelters abroad and the playing out of
older mines and smelter technologies within the United
States. These trends form an important part of the basis
for our segmentation of the domestic primary zinc industry
into high- and low-cost producers. The major impact of
abatement costs will be to accelerate these trends.
The price of zinc is likely to remain constant or
increase slightly in real terms in the absence of abate-
ment costs, due to similar trends in production costs.
The effects of abatement costs on price will depend impor-
tantly upon their incidence on high- and low-cost producers.
It appears very likely that the abatement costs will fall
258
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much more heavily upon the high-cost producers, in which
case it is likely that any price increases caused fay pol-
lution controls will be moderate. In the les& likely
event that abatement costs fall equally upon all producers,
some substantial price increase can be expected. However,
the price increases will be significantly less than the
cost increases, because of the pressures of foreign com-
petition and of the fears of long-run substitution of
other materials for zinc in its end uses. Any price
increases will cause an acceleration of the trend towards
a higher share of zinc metal imports in U.S. consumption.
In the absence of abatement costs, there will proba-
bly be a continuation of the trend toward less employment
in mining and smelting. The impetus for this decline
arises both from increased mechanization and automation
through all stages of production and from the fact that
the mining areas in Tennessee, New York, and Missouri
which are likely to be the main ore source in the future
are less labor intensive than the older mining operations.
The effect of abatement costs will be to accelerate the
decline of employment in the high-cost sector. This is
likely to have more severe effects in Oklahoma and perhaps
Idaho, which are more rural and undiversified, than Texas.
As the price change that can be expected to follow
the pollution cost increase is moderate, it is not likely
that there will be greatly increased imports on this
account alone. The most severe impact would occur if
all high-cost firms shut down and were replaced entirely
by imports. It appears likely that the maximum amount
of high-cost producer market loss is between 365,000
259
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and 572,000 tons per year. If low-cost domestic producers
expand their operations by 25 percent, there would be room
for additional imports of 230,000 to 365,000 tons. (That
all high-cost producers close and that the low-cost pro-
ducers expand production by only 25 percent are extreme
assumptions.) At the current price of $340 per ton, this
would mean additional import values of $78,000,000 to
$124,000,000. This increase is likely to be offset to
some extent by reduced imports of concentrates and should
be regarded as an extreme upper limit estimate. The net
effect on the balance of payments, however, depends upon
numerous changes and adjustments that may occur throughout
the economy.
260
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PETROLEUM REFINERIES
Prepared by
Stephen Sobotka & company
261
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INTRODUCTION
Changes in tastes and preferences as well as technolo-
gical change frequently cause economic dislocations. We view
the desire for a better environment as a change in people's
preferences as to how they wish to live. Analytically this is
equivalent to a change in people's preferences for certain goods
or services. The workings of the market usually translate such
preference changes into new and different resource allocations.
In the case of environmental controls the market mecha-
nism is not the instrument through which economic adjustments take
place. Rather, environmental controls are imposed because the
national well-being requires them because there is indication
that people want them. But in this case people do not have a
chance to "vote" in the market place by buying or selling. Con-
sequently those who impose the controls should have knowledge
about their likely economic impact. The purpose of our study is
to provide estimates about the economic impact of such controls
on the petroleum refining industry.
This study is limited to assessing the economic impact
of pollution abatement costs which result from regulation of
petroleum refinery operations. It is aimed at determining the
impact of the costs of controlling refinery airborne and water-
borne emissions.
Some important pollution abatement costs which will
affect the refining industry and its customers are excluded from
the study. One of these is an increasing limitation on the sale
of residual fuel oil containing normally occurring amounts of
sulfur. Impacts of changes in the quality of the industry's
products brought on by environmental considerations and changes
in the supplies of materials to the industry are also excluded
from the study. Some excluded matters are discussed in Section D
of this Summary.
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A.	Principal Conclusions
We have examined the implications for the refining industry
of proposed regulations for controls on refinery operations, in-
cluding the requirement to use low sulfur liquid fuels. On the
basis of the EPA* s cost estimates we conclude:
/
1)	PLefined product prices at the refinery gate \^ill
increase about 6 cents per barrel (1+2 U.S. gallons) or 0.2 cents
per gallon (an increase of 1 2/3 percent).
2)	The earning power of the industry as a whole will
be unimpaired.
3)	There may be a minor acceleration in the rate at
which very small refineries close.
4)	Fewer than 1,000 people out of a total employment
of 150,000 may be displaced.
B.	Structure of the Industry
1. Industry organization
There are about 130 firms in the oil refining industry.
They own some 250 refineries. Refineries are concentrated along
the Mississippi-Louisiana-Texas Gulf Coast, near Los Angeles and
San Francisco, in the Pacific Northwest, near Chicago, near Phila-
delphia, and in New Jersey, in Ohio, and in Oklahoma.
Multiple plant operations are commonplace. The 16 largest
firms, each of which has over 200,000 barrels per day of total
capacity, operate 105 refineries. These 105 plants account for
SO percent of the industry's capacity. Half of all refineries
264
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process less than 25*000 barrels per day. They account for only
g percent of industry capacity. Very few new refineries have
been built in the last five years and few have been abandoned*
Industry growth has primarily taken place via the expansion of
existing facilities.
It is impossible to analyze the financial structure of
ths petroleum refining industry because too few firms, and none
that are typical of the industry, are exclusively or even primarily
in the refining .business. Almost all firms operating refineries
are also either marketers of products or producers of crude'oil
or both. We can assume that refining operations are, on the
margin, neither more nor less profitable than the rest of a typical
oil company's business. Profitability of the oil business as a
whole has been subject to some variability but industry earnings
have been adequate to attract capital to finance growth.
we estimate that roughly $20 billion of capital will be
invested in U.S. refineries in the next ten years. Total refinery
capital requirements are about 1/4 of oil companies* domestic
capital expenditures. Slightly under $1 billion, or about 5 per-
cent, of the $20 billion.will be needed to conform refinery operations
to environmental standards.
The market for wholesale oil products is competitive.
That is, the price elasticity of demand facing individual firms
is high. Despite a strong and continuing industry effort to
establish brand differentiation for retail consumers, the whole-
sale market operates on a commodity basis. Prices on the various
unbrandad markets typically are close to short-run marginal costs
which may be higher or lower than average costs, including capital
charges, depending on refinery utilization rates.
265
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There currently are about 150,000 employees in refining.
Despite recent industry growth employment has been essentially
stable. About 2/3 of these employees work in refineries, the
balance in laboratories or central offices. Of the employees
actually working in refineries about 35,000 are skilled workers
who are specialized to the industry. Hourly earnings in 1971
in petroleum refining are estimated at $4.$2 versus $3-5S for all
manufacturing.
2. Markets and Products
Well over half of total refinery output is sold through
distribution and marketing facilities which refining companies
own or in which they have a financial interest. But considerable
product is sold by refiners directly to customers.
The industry manufactures hundreds of different products
which may be grouped into four broad product classes: gasoline,
intermediates, residual, and other.
Gasoline accounts for about 45 percent of industry output,
about one half of the value of output, and is typically priced at
about 12 cents per gallon in cargo lots on the Gulf Coast. Con-
sumption and production have increased about 4.7$ per year.
Intermediates include jet fuel, kerosene, space heating
oil, and diesel fuel. These products are typically priced at
about 10 cents per gallon and make up about 33 percent of industry
output. Consumption and production have increased about 5.2$ per
year.
Residual is currently priced at from about 6 cents to
about 12 cents per gallon or even more, depending on sulfur conte^^
and location. Residual amounts to about 6 percent of domestic
266
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petroleum production and 17 percent of domestic consumption of
all oil products. The difference is accounted for by imports.
U.S. production has been about stable and consumption has in-
creased about 6.5 percent per year.
Other products include asphalt, lubricants, liquefied
petroleum gas (mostly propane), naphthas and solvents, coke,
petrochemicals and petrochemical feedstocks. These products
account for about 16 percent of the domestic industry*s output.
They are priced-from 4 cents to $1.00 per gallon.
As a result of a quota-based limit on imports foreign
competition is essentially non-existent except in the case of
residual oil sold primarily on the Eastern seaboard. Prices of
this product are determined by supply and demand on the inter-
national market.
The industry's primary products - gasoline, turbine fuel
and the transportation fuel part of the intermediates market -
are not subject to significant inter-industry competition. Natural
gas competes with the heating oil portion of the intermediates
market in many parts of the country. Natural gas and coal compete
for a portion of the residual oil market.
Oil product prices have increased at a slower rate than
either consumer or wholesale price indices, largely because the
industry has been able to utilize improved technology to offset
cost increases.
3. The Refining Process
Notable features of refinery operation include extensive
Use of capital equipment, relatively low manpower requirements.
267
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high water requirements, and high energy consumption (about 12
percent of crude intake or its equivalent).
Crude oil is the primary raw material used in refining.
Crude oils are liquid mixtures of many carbon-containing chemical
compounds. In refining, crude oil is first separated into several
groups of varying molecular size known as cuts. The chemical
composition of some of these cuts is then altered by changing the
average molecular size. Some cuts are further processed to alter
the shape or structure of the molecules. Most of the original
and the altered cuts are "treated" to make innocuous or to remove
impurities, notably sulfur. Treated cuts are then blended to
produce finished products. To these may be added substances known
as additives to improve performance of the blended products.
In refining operations polluting materials are generated
and released into the environment if not controlled. For this
study the EPA defined technological solutions to control some of
the emissions of these pollutants as follows:
1.	Sulfur compounds in refinery fuel gases will be
removed.
2.	Tanks containing gasoline or volatile crude oil will
be equipped with floating roofs.
3.	Larger catalytic cracking units will be equipped
with electrical precipitators and with carbon moncxide boilers.
4.	Refinery waste water will be skimmed, neutralized,
settled and subjected to biological treatment.
But one pollution source omitted in the original study
scope, sulfur oxide emissions from burning sulfur-containing liquid
fuels in refineries, has important cost and price consequences.
268
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After discussions with SPA. it was agreed to include the cost of
substituting low sulfur oil for high sulfur fuel as an operat-
ing cost. (See Section D below.)
C. Impact of Pollution Controls
The Environmental Protection Agency has estimated that
$845 million of capital (range: $634 million to $1,155 million)
will be required to conform refineries to new standards. Of this
amount $732 million are required for modifying existing facilities
and $113 million for refining facilities to be built in the period
1972 through 1976. Operating costs of $2 million in 1972 rising
to $21 million in 1976 will be incurred to operate and maintain
this equipment. Substitution of low sulfur liquid refinery fuels
for currently used liquid fuels will cost about $105 million an-
nually by 1976.
The question we attempt to answer is: Who will pay these
new costs, and how important "will they be to the industry as a
whole, to some parts of it, and to the U.S. economy generally?
1. Effect of control costs on industry costs and on prices.
Due to import controls the products of the petroleum re-
fining industry (except residual oil) are not significantly subject
to foreign competition. Furthermore, of the major products, only
residual and intermediates used for space heating face compe-
tition from products of domestic industry, specifically from coal
and natural gas. And due to the nature of the market for crude
oil it is unlikely that the new control costs in petroleum refining
can be passed back to crude oil producers. Consequently these
456-471 0 - 73-18
269
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cost increases will be passed on to the industry's customers or
absorbed by refiners. For the reasons discussed below it is un-
likely that such an absorption will take place by the industry as
a whole.
The increased costs are of two kinds: capital costs, re-
quired to pay for control equipment, and operating costs. The
capital will be used to conform existing facilities and to conform
facilities built to supply the growing demand for industry products.
The operating expenses also are of two kinds: those associated
with operating and maintaining the new equipment, and the costs
of replacing currently used liquid refinery fuel with low sulfur
liquid fuel.
The combined impact of these new costs will be an S cents
per barrel (0.2 cents/gal) price increase. Vte have arrived at this
estimated prico increase as follows: Industry prices will have
to increase about 1 3/4 cents per barrel (about 1/3# of the re-
finery gate value of products) more than they otherwise would in
order to attract the $113 million capital required to install
control equipment in new facilities. This is the price increase
required for an S percent return' on new capital to prevail. V7e
have used this cost of capital (with one minor exception) through-
out our study.
This price increase of 1 3/4 cents per barrel will also
be adequate for the industry to recover, at 6 percent, about $604
million of the $732 million required to conform existing facilities
to new standards. The balance, $12$ million, is unrecoverable and
the recovery of the $604 million will not begin until substantial
new facilities are built.
270
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In addition to the 1 3/4 cents par barrel price increase
there will be a further rise in price of less than 1/2 cent per
barrel to cover the cost of operating control equipment installed
in refineries. In this case, as in that just discussed, the price
increase will be require,d to justify industry expansion.
The economic impact of the substitution of low sulfur
liquid refinery fuels for the currently used liquid fuels will
cause a 5 3/4 cent per barrel price increase and also an increase
in industry cash income. The economic rationale for this is some-
what complicated. Liquid refinery fuels are the highest cost
refinery fuels used. They determine the industry*s marginal costs
and hence refinery gate product prices. V/hen low sulfur fuel
usa^e becomes mandatory refinery marginal costs and hence prices
will rise by about i> 3/4 cents per barrel (assuming the EPA estimate
of a 90 cents per barrel cost differential between high and low
sulfur liquid fuel). But average refining costs will rise by
considerably less because most other refinery fuel costs will be
unaffected. As a result there will be an after tax increase in
cash income of about $36 million per year. Even if only a small
Part of this $36 million per year is actually realized it will be
more than adequate to compensate for the unrecoverable $123 million
in capital mentioned above.
The above are impacts on industry costs and on prices. The
impact of costs on individual refineries may differ considerably
and is discussed next.
2. Control Cost Differences among Refineries
a) Large refineries
The economies of scale in the installation of control
271
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equipment considerably favor large refineries. Hence no large
refinery operations are likely to be discontinued as a result
of the costs of meeting environmental standards.
b) Small refineries
The median size refinery has a crude oil processing
capacity of about 25,000 barrels per day. All refineries of
median siae or smaller account for only 8 percent of the industry's
capacity. Because of the large difference in per-barrel control
costs occasioned by size and also because per-barrel control costs
vary considerably with process equipment installed, and consequently
products mader we attempted to investigate the differing impacts
upon several classes of small refineries. [This is not possible
to do quantitatively because no published data on product volumes,
profitability, cash flows or net worth of such plants exist.]
On the basis of our analysis we judge that there may
be an acceleration in the closing of small plants from a recent
rate of about three per year to a rate of about five per year.
Very few new small plants have been built recently. Our estimate
of the number that may close is subject to a great deal of un-
certainty. The actual number, if any, will be considerably
influenced by small refineries' ability to avoid some of the costs
included in the EPA's estimates. If they can share the cost of
operating water treatment facilities, for example, with their
municipality, or if they can secure some relief in the proposed
sulfur removal equipment requirement, then their ability to bear
the additional costs will be much increased. Otherwise they will
face costs per barrel two to throe times greater than those of
large refineries. If the EPA's high range cost estimate applies,
rather than the mean estimate we used, the cost disadvantage of
small plants would be increased.
272
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Our view is that if control costs lie near the mean SPA
estimate perhaps a dozen small refineries may close during the
period 1972-1976 in addition to the 15 or so that historically
would be expected to close for unrelated reasons. Twelve small
refineries probably employ less than 1000 people and have a total
capacity of less than 100,000 barrels per day. Both of these values
are about 0.7 percent of industry total. The closings might double
if the high range of control cost estimates applies. But the
closing rate is less sensitive to lower costs.
Plant closings are most likely to occur in areas where
no refinery construction or expansion is now taking place. Con-
sequently re-employment is likely to depend on employment opportuni-
ties in other industries in the areas of the closed plants or on
relocation. The refineries most likely to close are for the most
part located outside major metropolitan areas.
D. Related Issues
1. Sulfur emission limitations
In this report we deal with the economic effects of
sulfur emission controls only to a limited extent because we have
been concerned only with control of emissions from refinery opera-
tions. Our consideration was further restricted by the assumption
that desulfurizing of refinery liquid fuels will cost only 90 cents
Per'barrel during the period 1972-1976. This assumption may not
be useful.^
The following comments are directed to the general issue
limiting sulfur oxide emissions from all U.S. users who burn
Residual fuel oil.
I)	(High sulfur $2.00 Der barrel
current Gulf Coast cargo prices	(Ma*imum 0>6 percent sulfur $3.70-
(Piatt*s Oilgram Price Service,	$3.80 per barrel
October 28, 1971)
273
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No commercial facilities now exist in the U.S. to reduce
the sulfur content of residual oil. Residual oil currently con-
sumed in the U.S. varies in sulfur content from about 0.3 percent
to as high as 4 percent. As increasingly stringent sulfur emission
limitations have been imposed in various localities the price
differential between high and low sulfur oil has widened reflecting
the scarcity of low sulfur material. Currently the price differ-
ential is double or triple the 90 cents per barrel estimated by
EPA to be the long term expected differential.
Sulfur oxide emissions from burning residual fuel oil
can be controlled either at the time of combustion or by desulfuri-
zing the fuel. Both control methods will eventually be used and
in time the price differential between high and low sulfur residual
will sink to the level which properly reflects the long run costs
of desulfurizing. But the short run price differential will
probably be higher than the long run cost difference contrary to
what has been assumed in this (and related) studies. This effect
will be amplified if stringent sulfur emission limitations are
imposed more quickly than desulfurizing facilities are built. Con-
sequently, the cost to residual-burning industries to conform to
environmental standards in the next few years may be considerably
greater than these studies suggest.
A price which reflects short term scarcity rather than
long term economic costs will impose costs on fuel users which do
not bring any apparent offsetting benefits. This would happen iff
as we believe, the supply of low sulfur residual is price inelastic
in the short run.
Also a scarcity-determined price would tend to benefit,
beyond the long term value of their facilities or oil, producers
274
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of low sulfur crude oil abroad (or their host countries)^ as
well as those foreign refineries which now have desulfurizing
facilities. At the same time the short term competitive position
°f producers of high sulfur residual oil would be impaired even
though their oil eventually could be sold to users who will install
stack gas scrubbing equipment.
Currently about 600 million barrels of residual fuel oil
imported annually at a cost of over $2 billion. Roughly 300
Million barrels per year are manufactured in the U.S. Under current
import regulations, which restrict importation of crude but not of
Residual, no incentives exist to construct desulfurizing facilities
the U.S. In fact more stringent sulfur emission regulations
ftight result in a reduction of domestic manufacture of residual oil
(the cost of manufacturing low sulfur residual, which must compete
With foreign product, is close to the cost of manufacturing gasoline,
which is protected from foreign competition).
An optimal implementation of sulfur emission limitations,
Whether by regulation or by emissions tax, is'one which leads to
the fastest economic construction of desulfurizing facilities and
a price of low sulfur oil sufficient to insure maximum practicable
distribution of this product in the U.S., but not so high as to
^•mpose undue burdens on its purchasers. We note again that current
lrftport regulations appear to encourage construction of desulfurizing
facilities outside of the U.S. This fact may raise policy questions
^hich are unrelated to environmental considerations.
^ Although much of the crude oil discovered during the past decade
has a rather low sulfur content the residual fuel manufactured
from it typically contains more sulfur than will be permitted
to be burned without further desulfurizing. Moreover, marginal
crude oil supplies are high sulfur. Consequently the price of
low sulfur crude oil includes a "premium1' which reflects the
market value of its low sulfur content.
275
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2. Natural gas use
Pipeline quality natural gas is the least environmentally
damaging fuel available in large quantities. It is also the cheap-
est fuel available in many areas. The supply of gas is not growing
nearly as fast as the demand for it and there should be an optimal
way of allocating the available gas to maximize environmental and
economic considerations.
Many industrial plants, such as utilities, refineries and
manufacturing companies, now burn natural gas. If they have to
switch to another fuel, because of inadequate supply of gas, they
will incur substantial cost increases. A change to low sulfur
liquid fuel would impose still higher costs. Thus, they would incur
substantially higher costs and, at the same time, present a greater
pollution problem to the extent that they must give up gas.
Changing existing space heating from low sulfur home
heating oil to natural gas, on the other hand, brings no important
environmental benefits. Therefore it does not seem desirable to
limit gas consumption by high volume users in order to increase
supplies available for space heating.
In studying this matter the alternative ways of meeting
environmental goals should be explicitly considered together with
the costs of natural gas production and marketing.
276
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PULP AND PAPER MILLS
Prepared by
Arthur D. Little, Inc.
277
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I. INTRODUCTION
This analysis provides our assessment of the economic impact on the paper
and related industries that will result from the air and water pollution control
requirements anticipated through 1976. Developed within a period of nine weeks
under contract with the Council on Environmental Quality, the analysis is meant
to provide information that can be used in formulating federal policy for pollu-
tion abatement programs in the paper industry over the next five years.*
The information contained in this analysis is based upon our knowledge of
and experience with the paper industry plus data derived from a number of
sources during the analysis. Of substantial assistance were the supply/demand data
and analyses of industry financial performance compiled by the American Paper
Institute (API). Our analyses of economically marginal mills were based on our
familiarity with many mills and on the mill data file that we have derived from
the two industry directories: Lockwood's and Post's. We cross checked our
identification of marginal mills with the API Divisions for tissue paper, printing
and writing papers, and paperboard, and with key officers of firms judged to be
marginal within these sectors and within the special industrial paper, insulating
board, construction paper, and semi-chemical corrugating-medium product sec-
tors.
Each of the above sectors was found to contain a relatively large number of
marginal mills and to have experienced severe financial difficulties in 1970 and,
except for construction paper, in 1971. Through our company contacts we
obtained data from a number of mills that would serv^ to characterize the
financial performance of typical marginal mills in each sector. We are indebted to
the companies that provided us with the information; to safeguard their interests
we have pledged to maintain the strictest confidence on individual company data.
The basic approach used in our analysis was to subdivide the industry into its
major product sectors. We then assessed which mills in each sector are marginally
profitable in today's market. Our assessment was based primarily on paper
machine and mill size criteria, but also took into account the relative severity of
pollution control problems in each sector, current overcapacity and price weak-
ness, the degree of vertical integration of the facility and current industry
profitability levels. Then we evaluated future supply/demand trends in each sector
to determine the likelihood that future price increases can be obtained to restore
profits to an adequate level and to absorb additional pollution abatement costs.
(This analysis is described in Part II.)
*The term "paper industry" as used throughout this report includes all of its components:
pulp, paper, paperboard, and building paper and board. In most cases we exclude converting
operations unless they are an integral part of the paper mill.
279
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We then evaluated (see Part III) the estimated pollution abatement costs
against current prices of pulp and paper products and expected profitability of
marginal firms to assess the impact of these costs on price increases and mill
shutdowns. The mill dislocations were compared with our estimates of mill
closures that would occur without any pollution abatement expenditures above
current levels. The estimates of productive capacity removed were then utilized to
reflect the number of jobs that would be lost in each major region of the country
because of the impact of pollution control requirements. Finally, we called upon
our specialists in supplier industries to determine the impact upon them.
The underlying economic assumptions used in this analysis were:
(1)	real growth in gross national product will average 4%/year between
1971 and 1976 with somewhat higher growth (5%/year) in 1972
and 1973; and
(2)	paper prices will be determined solely by market conditions rather
than by regulated price controls.
The assumptions regarding degree of pollution abatement required by 1976
were:
(1)	Water: entire paper industry will be required to remove 95% of
the suspended solids in its waste water through primary treatment
systems, and reduce biological oxygen demand (BOD) by 90%
through secondary systems.
(2)	Air: entire industry will meet the air pollution abatement regula-
tions, tentatively adopted by Oregon; namely, that maximum
discharge of particulate matter will be less than four pounds per
air dried, unbleached ton of kraft pulp (or 90% particulate re-
moval in other processes) and that the maximum discharge of
reduced sulfur gases will be less than 10 parts per million (dry
basis) in the tail gas.
Note that both the capital and operating costs and their impacts will rise
extremely rapidly as the degree of pollution abatement approaches zero pollution.
280
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II. FINDINGS AND CONCLUSIONS
A.	INDUSTRY STRUCTURE
About 45% of all U.S. mills - accounting for some 15% of total U.S. paper
capacity, are economically marginal by current standards of efficiency.* In
general, this means that they fall below the current minimum economic size for
mills in their product sector. These mills will have the greatest difficulty in
meeting the anticipated pollution abatement requirements. Table 1 shows the
distribution of these mills by product sector.
B.	PROFITABILITY TREND
The paper industry's profitability is at its lowest point since World War II,
with after-tax returns on total assets averaging about 4% in 1970. Profitability has
declined further to about 3% of total assets in 1971, judging from the financial
performance reported by 39 publicly held companies for the first nine months of
1971.
Table 2 provides various measures of the total industry's financial perfor-
mance in 1970, and a comparison of the profitability of typical marginal mills in
key impact product sectors. It indicates that profitability for the industry as a
whole is clearly below that necessary to attract capital over the long term. The
situation for economically marginal mills is considerably worse. Thus, this in-
dustry's ability to finance the capital costs and absorb the additional operating
costs necessary for pollution abatement will depend upon its ability to improve
profits through price and productivity improvements.
Table 3 summarizes our projections of U.S. paper industry operating rate
trends between 1970 and 1973.** Our analysis points to improved operating rates
in most sectors of the industry by 1973, assuming real GNP growth of 5% in 1972
and 1973. Significant overcapacity is expected to continue through 1973 in three
product sectors: insulation board, semi-chemical corrugating medium, and special
industrial paper. Mills in these sectors will have great difficulty in coping with
additional pollution abatement costs because of weak prices and low profits. For
the rest of the industry the market environment will generally provide increased
mill utilization and be conducive to price increases in the absence of rigid price
* In this report, except as noted, the term "mill" refers to a single facility that includes both
pulp and papermaking facilities; that is, an integrated facility is considered a single mill.
** 1973 was chosen as the terminal year since this is as far ahead as one can accurately predict
capacity expansion.
281
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TABLE 1
SUMMARY OF ECONOMICALLY MARGINAL PULP AND PAPER CAPACITY, 1971
to
00
to
Production Sector
Sulfite Pulp
Semi-Chemical Pulp
Tissue
Printing, Writing and
Related
Special Industrial Paper
Combination Paperboard
Other Packaging Paper
and Board
Newsprint and Groundwood
Construction Paper
Insulation Board
Hardboard
Total
Total No.
of Mills
37*
41*
102
138
38
170
97
32
47
23
29
752
Economically Marginal Mills
Size Criteria
(under tons/day)
150**
200**
50
200
25
100
200-400
350
100
100
100
No. of Mills
12
9
49
97
9
78
17
11
31
6
10
329
Percent of
Total Mills
33*
22*
48
70
25
49
18
29
60
26
35
44
Percent of
Total Capacity
14
6
18
48
17
27
5
19
36
9
19
15
'Nearly all of these pulp mills are integrated to mills making paper and paperboard.
"Includes some larger mills without chemical recovery systems.
Source: Arthur D. Little, Inc., estimates
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Percent of Sales
Profit before Tax
Profit after Tax
Depreciation and Depletion
Cash Flow
Percent of Total Assets
Profit before Tax
Profit after Tax
Depreciation
Cash Flow
Depreciated Asset Value
TABLE 2
Total
Industry
PAPER INDUSTRY FINANCIAL SUMMARY, 1970
	Typically Economically Marginal Mills
Tissue
Printing and Related
Special Industrial
Combination Board
6.6
4.1
4.8
8.9
(7.7)
(2.3)
4.6
2.3
1.5
0.9
4.4
5.3
4.8
2.4
2.0
4.4
3.0
1.5
3.3
4.8
6.4
4.0
4.7
8.7
55
(13)
(4)
8
4
75
1.8
1.1
5.0
6.1
55
8.0
4.0
3.3
7.3
53
2.0
1.0
2.2
3.2
27
*ln these large composites we used gross fixed assets as an approximation of total assets, since the mills were parts of larger companies.
Sources: American Paper Institute composites (Total Industry and Non-Integrated Printing and Related). Arthur D. Little, Inc., composites
(Economically Marginal Tissue, Special Industrial and Combination Board).
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TABLE 3
SUMMARY OF U.S. PAPER INDUSTRY OPERATING RATE TRENDS
1970-1973
Operating Rate, Percent of Year-End
Capacity
Product Sectors	1970	1973
(Estimated)
Pulp
Dissolving	97	99
Bleached Kraft (integrated and market)	93	97
Packaging
Unbleached Kraft Board	92	96
Semi-chemical Board	89	87
Combination Board	86	94
Bleached Paperboard	100	100
Unbleached Kraft Paper	91	97
Bleached Paper	94	gg
Communication Paper
News and Uncoated Groundwood	96	98
Coated Paper	91	97
Uncoated Book, Writing, and Related	87	95
Bleached Bristols	91	98
Building Paper and Board
Construction Paper	73	89
Hardboard	95	97
Insulation Board	70	77
Others
Tissue and Other Creped	86	93
Special Industrial Paper	74	81
Wet Machine Board	95	92
Sources Arthur D. Little, Inc., estimates of 1973 demand. American Paper Institute survey
of capacity expansion plans.
284
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controls. Between 1974 and 1976 we expect operating rates to decline again
judging from previous cycles in this industry. Industry profitability will follow the
same cyclical trend.
C.	PRICE IMPACT
To determine the price increases necessary to absorb the increased pollution
abatement costs anticipated by 1976, we compared the abatement costs for
efficient mills with the approximate median price of each product group (Ta-
ble 4). The major price increases relative to current prices will be in hardboard,
newsprint and uncoated groundwood, bleached kraft pulp and unbleached kraft
linerboard. Here, the price increases range from 6.5 to 10% of product value,
depending upon the grade. Product sectors that will experience moderate price
increases (3.5 to 6% of current product value) are: bleached paperboard, semi-
chemical corrugating medium, bag and wrapping paper, combination paperboard,
insulation board, printing papers, and dissolving pulp. The other product sector
will require only modest price increases.
We anticipate that all of the above price increases will be obtained (in the
absence of price controls) because of the tightening supply/demand balances
projected for most sectors in 1972 and 1973. In many sectors increases signifi-
cantly higher than those reflected in Table 4 are anticipated by 1974. Beyond
1974 prices might well decline again should the industry enter another cycle of
overcapacity.
In most cases abatement cost levels for marginal mills will be appreciably
higher than those for larger more efficient mills since the latter benefit from
economies of scale. This factor adds to the economic difficulties of the marginal
mills.
D.	MILL SHUTDOWN PROBABILITIES
Table 5 summarizes mill shutdown probabilities between 1972 and 1976
with and without pollution abatement expenditures above current levels. It
indicates that the key impact areas are: sulfite and semi-chemical pulp, tissue
paper, printing and writing paper, special industrial paper, and combination
paperboard. In addition to these we expect less extensive dislocations to occur in
other product groups - mainly newsprint, uncoated groundwood paper, and
packaging paper and board.
Some mills in all of the above sectors will close by 1976 strictly because of
economic considerations, but the closure rate will be increased significantly by
the requirement to expend capital to correct a pollution problem. In most cases
marginal single-mill companies in these sectors will be unable to obtain capital for

285
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TABLE 4
ANTICIPATED POLLUTION ABATEMENT COST IMPACT ON PRICES
1972-1976
%
Approximate	Estimated	Increase Over
Current Abatement Cost for	Current
Key Grades Average Price	Efficient Mills	Price
($/ton)	($/ton)
Unbleached Kraft Liner 120	8.50	7
Bleached Paperboard 210	12.00	6
Semi-chemical Medium 104	5.50	5.5
Combination Paperboard 110	5.50	5
Unbleached Bag and Wrapping 160	8.50	5.5
Bleached Packaging Paper 200	11.00	5.5
Newsprint 160	12.50	8.5
Uncoated Ground wood 180	12.50	7
Coated Publication 220	8.50	4
Uncoated Book 220	8.50	4
Tissue Paper (Converted) 400	8.50	2
Special Industrial Paper 600	9.50	1.5
Construction Paper (shingles) 65	1.00	1.5
Insulation Board 135	6.00	4.5
Hardboard 80	7.50	10
Bleached Kraft Pulp
Hardwood 120	10.00	8.5
Softwood 140	10.00	7
Dissolving Pulp 220	7.05	3.5
Source: Arthur D. Little, Inc., estimates
286
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TABLE 5
SUMMARY OF MILL SHUTDOWN PROBABILITIES, 1972-1976


Probability of
Closure
Capacity Removal
Product Sector
Marginal
Capacity
(000 tons/yr)
Status
Quo*
1%)
Additional
Abatement
{%>
Status
Quo*
(000 tons)
Additional
Abatement
(000 tons)
Sulfite and Semi-
Chemical Pulp
750
5-10
65
50
485
Tissue
650
15
50
105
345
Printing, Writing and
Related
4,730
10
20
490
890
Special Industrial Paper
60
30
85
20
50
Combination Paperboard
2,030
10
25
200
540
Other Products
Total
3,315
11,535
5
25
205
1,070
775
3,085
'Assumes no additional pollution control expenditures above current levels.
Source: Arthur D. Little, Inc., estimates
pollution control equipment because their return on investment is destined to
remain very low. Most such mills are not integrated to woodpulp and will face a
cost/price squeeze since prices for the market pulp or waste paper upon which
they are dependent are expected to increase at a more rapid rate than the price of
the end products which they produce. The life of many of these mills will be
prolonged if they are able to minimize their capital costs by joining in a municipal
water treatment system. For other mills, particularly tissue paper and special
industrial paper companies, it is still questionable whether they can absorb the
increased operating costs for pollution abatement since these costs are signifi-
cantly higher for them than for large-scale producers.
Many marginal mills are parts of larger companies which will have difficulty
justifying the expenditure of the necessary capital in an obsolete facility. A
number of tissue, printing and writing, and combination paperboard mills fit this
category. In many cases the parent companies will elect to centralize their
production in a larger mill rather than revamp a marginal mill. Again the life of
these mills will be extended if they are able to share a municipal treatment system
and thus minimize the required capital investment.
287
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We expect all six of the marginal mills in the insulation board sector to be
closed by 1976 strictly because of the economic pressures resulting from stagnant
demand and continuing overcapacity. Pollution control requirements will advance
their shutdown by about three years.
Product sectors where we expect no shutdowns as a result of the increased
pollution abatement costs through 1976 are: unbleached kraft linerboard,
bleached paperboard, construction paper, hardboard and bleached kraft pulp. In
each of these sectors we anticipate significantly improved operating rates through
1973 which will restore profitability to an acceptable level and create an environ-
ment for price increases to fully absorb the increased operating costs for pollution
abatement anticipated through 1976. By 1974 firms in these sectors should have
made commitments for the capital expenditures necessary to meet the 1976
abatement requirements.
E. EMPLOYMENT IMPACT
Table 6 translates our tonnage removals due to pollution abatement in each
product sector into a regional employment impact. We expect about 16,000 jobs
in the paper industry to be lost by 1976 because of mill shutdowns caused by the
anticipated pollution abatement requirements. In addition to the direct employ-
ment losses there will be indirect losses of jobs in the local service and supplier
industries. These generally will amount to about 200% of the direct labor impact
and will raise the unemployment totals accordingly. The greatest impact will be
felt in the New England, Middle Atlantic, and North Central regions which
together will incur about 85% of the paper industry unemployment. The remain-
ing 15% of the jobs will be split between the West and the South.
Within some of these regions the unemployment impact will be localized and
severe. Principal examples are small communities in Massachusetts, Connecticut
and the northern portions of New York and Wisconsin. Most of these communi-
ties are highly dependent on the local paper industry and are in areas already
considered "depressed" by the Economic Development Administration. Thus
there are relatively few nearby employment alternitives for the affected workers.
Production capacity lost through marginal mill closures will be made up by
mill construction or expansions principally in the South and West and to a lesser
extent in Maine and Minnesota. Such expansion should more than compensate for
pollution related jobs lost in the South and the West; however, they will do little
to relieve the unemployment in other regions. These expansions not only will
involve long distance moves by the unemployed mill workers in the other regions,
but also, because of economies of scale, will offer fewer jobs than those elimin-
ated by the closures.
288
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TABLE 6
SUMMARY OF EMPLOYMENT IMPACT BY REGION
Net Capacity Removed	Jobi Lost	Jobs Lost
Due to Additional	in Paper	in Service and
Region Abatement	Industry	Support Industries
(000 tons)
New England
Mid-Atlantic
North Central
South Atlantic
South Central
West
Total
645
350
560
45
110
305
2,015
Source: Arthur D. Little, Inc., estimates
6,000
4,400
3,150
750
300
1,550
16,150
12,000
8,000
6,300
1,500
600
3,100
32,300
F. INDIRECT IMPACTS
1. Supplier Industries
In the logging industry we expect pollution-related job reductions of about
200 workers in New England, 700 in the North Central region, 400 in the West,
and 70 in the South Central region. We believe that indirect, unemployment in
these relatively remote logging areas will be about 50% of these figures.
In New England and in the North Central region the reduction in pulp wood
demand will have a more significant impact than the above numbers indicate.
Much of this timber is supplied by small woodlot owners who harvest their wood
on a part-time basis to obtain supplementary income. Thus, many part-time jobs
are at stake.
In the West the decline in jobs will probably be offset by increased activity
in the export of wood chips. Woods labor in this region is involved primarily in
sawiog production since the pulp mills use mostly saw mill residue rather than
roundwood. In the South the job loss is small and will be offset by growing
demand for pulp wood and sawiog production.
We anticipate significantly reduced saltcake consumption in the U.S. kraft
pulping industry as a result of greater recovery of sulfur values to minimize the air
pollution caused by the process. We estimate that this factor, coupled with
substitution of other chemicals to provide sodium values, will lead to a consump-
tion loss of 750,000 tons, mostly from imported and natural saltcake. We
estimate a loss of employment of about 500 jobs, primarily from domestic natural
saltcake production in the West.
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We also estimate a displacement of chlorine consumption by the paper
industry as chlorine bleaching processes are increasingly replaced by oxygen
bleaching to avoid water pollution. Oxygen bleaching should reduce chlorine
consumption about 140,000 tons by 1976. This reduction will result in the loss of
roughly 70 jobs in the chlor-alkali industry, mainly in the Southeast and North-
west.
The implementation of increased water and air pollution abatement by the
paper industry in itself will create new increments of market demand for capital
goods industries associated with the abatement processes. The effects will be
substantial in the initial years as existing manufacturing plants expend capital to
meet evolving pollution abatement requirements. We expect the paper industry's
capital expenditures (in 1971 dollars) to amount to $2.5 billion for water
pollution between 1972 and 1976, and $800 million for air pollution, for a total
of $3.3 billion if the assumptions about abatement levels and timetables are
correct.
2. Customers
Our analysis shows increased pollution expenditures to have no measurable
impact upon market demand trends since demand for paper products is generally
price inelastic. Accordingly, we do not foresee significant changes in growth rates
associated with the use of the various paper and board products comprising this
industry. In every case where we anticipate capacity removals as a result of
additional pollution abatement costs, the larger and more efficient producers
should be able to make up for the tonnage lost. Therefore, customers generally
should have no difficulty in obtaining pulp and paper products as a result of this
capacity removal.
As noted earlier, price increases ranging from 2 to 10% of product value can
be expected as a result of the additional pollution abatement costs anticipated
through 1976. However, the paper industry's profitability is extremely low and
price increases are already needed if profits are to be restored to a level that will
attract sufficient capital to expand capacity and assure a continued supply of
these products beyond 1973 when supply and demand are expected to be closely
balanced. Thus, if the market behaves freely, customers of the pulp and paper
industry can expect more significant price increases from market and general
economic factors than from pollution abatement costs. If a stringent price control
is levied on the industry there is likely to be a shortage of paper products after
1973.
290
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3. Balance of Payments
The pollution abatement costs anticipated through 1976 will not signifi-
cantly affect^the international competitiveness of U.S. paper producers. The
pollution abatement objectives are similar in all of the pulp and paper producing
regions of the world. Also, differences in implementation schedules are expected
to be small (probably less than three years), and not sufficient to cause a
substantial shift in world trade patterns and capital flow for pulp and paper
production. Consequently, pollution abatement in the paper industry should not
exert a measurable impact upon the United States balance of payments with
respect to Canada, Scandanavia, Western Europe, or other competing regions of
the world.
III. SUMMARY OF POLLUTION ABATEMENT COST ESTIMATES
We called upon our own specialists in water and air pollution control to
analyze the capital and operating costs associated with the pollution abatement
requirements anticipated over the next five years. They drew upon a variety of
sources of current cost data including both published and unpublished Environ-
mental Protection Agency (EPA) data; the Department of Commerce report,
"Control of Atmospheric Emissions in the Wood Pulping Industry" by E.R.
Hendrickson, et al.; information and reports provided by the National Council of
the Paper Industry for Air and Stream Improvement; and our own data on costs
incurred by specific mills. These data were then applied to the air and water
emissions associated with each major type of pulp and paper making process to
calculate the anticipated capital and operating costs for each.
We found that our cost estimates for water pollution abatement generally
fell close to the median of those provided by EPA for this study; we felt,
however, that the EPA data were not specific enough for our detailed product
sector analysis and that a narrower range of uncertainty (typically ± 20%) could
be placed around our estimates. Our air pollution costs are higher than those
provided by the EPA since the latter did not take into account removal of
reduced sulfur gases except in defining the upper range of uncertainty in the EPA
data. However, our costs for sulfur compound removal should be considered
tentative since the technology is not yet fully defined. Table 7 shows the basic
cost estimates we employed. (The bases for these estimates are discussed in
Part III.)
291
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TABLE 7
SUMMARY OF ANTICIPATED POLLUTION ABATEMENT COSTS1

Operating Costs ($/Ton)
Capital Costs ($000/Daily Capacity Ton)
Product Sector
Water2
Air
Total
Water2
AirAir
Total
News and Uncoated Groundwood
13.20
1.00
14.20
23
3
26
Printing and Writing3
10.50
1.00
11.50
16
1
17
Tissue3
12.20
1.00
13.20
18
1
19
Unbleached Industrial and Converting
8.30
2.50
10.80
20
1
21
Unblesched Kraft Board
6.50
2.50
9.00
13
3
16
Semi-Chemical Medium






With Cross Recovery
3.80
2.00
5.80
13
2
15
Without Recovery
11.50
2.00
13.50
20
2
22
Bleached Packaging and Board
9.70
2.50
12.20
22
3
25
Combination Board3
6.20
1.00
7.20
10
1
11
Construction Paper3
5.90
1.00
6.90
9
1
10
Insulation Board3
7.10
1.00
8.10
9
1
10
Hardboard3
8.70
1.00
9.70
8
1
9
Bleached Kraft Pulp
7.70
2.50
10.20
16
2
18
Bleached Sulfite Pulp
8-17
2.00
10-19
8-43
2
10-45
Groundwood Putp
2.90
1.00
3.90
4
-
4
Oeinked Waste Paper
13.80
1.00
14.80
20
-
20
1.	Based on minimum economic size mills in 1971 dollars. Costs for economically marginal mills are higher. Example: operating costs/ton — Tissue $19; Printing and Writ-
ing $19; Special Industrial $26; Combination Board $9. Capital costs/daily ton ($000): Tissue $46; Printing and Writing $43; Special Industrial $52; Combination Board
$17.
2.	Based on extended aeration.
3.	Not integrated to pulping.
Sourca: Arthur. D. Little, Inc., estimates
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STEEL MAKING
Prepared by
Booz-Allen Public Administration Services, Inc.
203
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EXECUTIVE SUMMARY
1. INTRODUCTION
If a number of conditions are met, principally reflecting
resumed economic growth with inflation under control, it is
reasonably likely the steel industry should, on the whole, be able
to support the expenditures needed to meet Federal air and water
pollution abatement requirements over the next five years. These
conditions include:
That demand for steel and steel products will
recover as general economic growth resumes
That import penetration, especially of specialty
steels (stainless steel and alloys) will be
controlled
That average price increases of 3.4% to 3. 7%
per year can be realized to cover cost increases,
including pollution abatement costs. (Phase II
guidelines specify average annual price increases
of 2.5%)
That labor rate increases, after 1972, will
average approximately 5.5% per year, in line
with Phase II guidelines
That labor productivity from 1972 to 1976 will
improve by 3.5% per year reflecting increases
in capacity utilization and the realization of the
full benefits of recent modernization
That average materials and services costs will
increase at approximately 2.5% annually, in line
with Phase II guidelines
205
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That present industry production capacity (raw
steel production and finishing capacity) is
generally sufficient to meet steel demand over
the next five years, with relatively minor ex-
pansion required
Parts II and III of our detailed report assume that these
conditions will exist.
These conditions reflect a period of economic activity
significantly more vigorous than has occurred over the past five
years and are based on projections of annual increases in real
GNP averaging at least five percent over the next five years. If
economic growth in 1972-76 proceeds at a significantly slower pace,
the steel industry will be hard pressed to finance pollution abate-
ment requirements.
Furthermore, producers with greater-than-average overall
plant modernization requirements may, even in the favorable
climate anticipated)above, have difficulty in funding the level of
capital expenditureb required to modernize and meet pollution
abatement requirements. In such cases, it is possible that some
form of assistance from Federal or other outside sources may be
required.
Additionally, the potential financial impact on the steel
industry of factors other than pollution abatement requirements have
not been considered. Such factors, that can have a major influence
on the industry's ability to finance pollution abatement, include:
Requirements imposed by the Occupational
Health and Safety Act
Significant increases in Federal, state, or local
taxes
Significant increases in required Social Security,
medical care, or private pension benefits
296
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2. STEEL INDUSTRY CHARACTERISTICS AND PERFORMANCE
Since the end of World War II, the steel industry has grown
at a rate of less than 3% per year. In the early 1960's, growth
above 7% annually occurred but since 1966, industry output has
leveled off, reflecting the lack of vigor in the overall economy.
Steel industry output has historically been, and remains,
highly concentrated, with more than 50% of production accounted
for by 4 companies and 75% of output by the 8 largest companies.
Geographic concentration of production is also significant.
Major steel markets include the automobile, construction,
and capital goods industries. The sensitivity of these industries
to changes in the level of economic activity is reflected in the
sharp responsiveness of steel demand and output to cyclical
trends in the general economy. Despite the cyclical nature of
demand, steel prices have historically tended to remain rigid in
an upward direction. Recently, however, evidence of a partial
breakdown in price leadership and increasing price shading has
appeared as the industry faced lagging demand and import
competition.
Faced with stagnating demand, industry profits fell from a
1966 peak of $1.1 billion to $563 million in. 1970. Prospects for
1971 are even bleaker. In spite of falling profits, industry
dividend payouts were not reduced and capital expenditures re-
mained high. Thus increased reliance was placed on long-term
debt for financing. In 1971, dividend cuts by most producers
became necessary.
Until 1959, the U.S. was a significant exporter of steel.
Subsequently, imports, spurred by increasing worldwide steel
capacity and low-cost production, exceeded exports and rose
rapidly to a level of 18 million tons in 1968, equal to 16,7% of
the apparent domestic market. During 1969 and 1970, voluntary
restraint arrangements (VRA) negotiated with Japan and the
European Economic Community countries limited overall import
tonnages although a switch in import product mix to higher value
items has seriously hurt the domestic specialty steel industry.
During 1971, imports again rose to about 18 million tons,
apparently reflecting noncompliance with VRA quotas, especially
by the European Community.
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3. STEEL DEMAND AND IMPORT PENETRATION 1972-1976
Since 1965, steel demand has shown no net growth. In 1970,
mainly because of the recession, net steel shipments were only
91 million tons compared to 93 million tons in 1965. For 1971,
shipments may be as low as 86 million tons. Prospects for a
recovery of steel demand in 1972 appear good, however, with
industry forecasts as high as 96 million tons. Assuming that
expectations of a vigorous economic upturn are realized, and that
import penetration is restrained, shipments by domestic mills
could reach 115 million tons by 1976. A slightly smaller rate of
increase might occur if the economy grows at a slower than
expected pace (say 4% in real GNP per annum). If the sluggishness
of 1966 to 1971 persists, little growth in demand can be anticipated.
Prospects for limiting future import penetration appear
reasonably good as a result of the recent dollar devaluation,
particularly with respect to the Japanese yen and the deutsche-
mark, and indications exist that the VRA may be renegotiated and
extended on terms more favorable to domestic producers. Signifi-
cant terms of a renegotiated VRA, subject to the final outcome of
current talks, may be as follows:
A roll back of steel imports to 14. 5 - 14. 8
million net tons
An increase factor for imports of 2. 5% per year
from a base of 14. 5 - 14.8 million tons
Limitations on product mix to relieve specialty
steel producers who have been hard hit by
switches in import tonnages toward high value
specialty steel
4. STEEL PRODUCTION CAPACITY 1972-1976
We have based our analysis on the assumption that present
steelmaking and finishing capacity, with limited increases
associated with continuing modernization is sufficient to support
shipments of 115 million tons by 1976. Statistics as to industry
capacity are not available; however, some industry sources, basing
298
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their estimates on past peak production periods, regard shipments
of roughly 105 million net tons as the practical 1976 limit. In
either event, in the face of a vigorous economic upturn, capacity
utilization should be high by 1975-76, thus permitting efficient
operation.
If it turns out that demand does exceed practical domestic
capacity by a wide margin, the gap might be filled by relaxing
import restraints.
5. STEEL INDUSTRY PROFITABILITY 1972-1976 (Baseline
Projections - Excludes Consideration of Pollution
Abatement Costs)
At present, the steel industry is plagued by lagging profits
and a heavy burden of long-term debt. If economic growth resumes
in 1972-76, steel industry profitability should also increase as
volume of production and capacity utilization grow. If further
borrowing is limited, debt-equity ratios should return to levels
satisfactory for financing.
By 1976, projected profits could reach 4,1% of sales, in
line with historical industry performance, and long-term debt
could decrease from 40% of equity to 30% of equity or less, a level
regarded as "comfortable" by industry analysts contacted. Return
on equity, over the same period, could approach or exceed the
average rate of 7.3% achieved by the industry from 1961 through
1965. It should be noted that the forecasted profitable operations
are closely related to projected productivity increases which in
turn are due partially to a high level of capacity utilization.
It should also be noted that assumed steel price increases
for purposes of our baseline projections were set at 2, 5% annually
for the period 1972 through 1976, in line with Phase II guidelines.
Assuming greater price increases, especially in the early years,
industry profitability and financial condition should improve more
rapidly than we have projected. This, of course, assumes that
other factors such as labor rates and material prices increase in
line with Phase II guidelines.
299
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6.
POLLUTION ABATEMENT COSTS
Estimates supplied to us by the Council indicate that signifi-
cant air pollution abatement economies of scale can be achieved
in most steelmaking processes. For example, on a per ton of
output basis, estimates prepared for the National Air Pollution
Control Administration (NAPCA) indicate that air pollution abate-
ment capital and operating costs for a 300-ton electric furnace
are less than half of such costs associated with a 25-ton electric
furnace. Air pollution abatement economies should also be
present as follows:
Sintering, Open Hearth, and BOF steelmaking
exhibit economies associated with large size.
Multiple furnace installations can generate cost
economies per unit of output.
Modern processes such as BOF steelmaking are
less costly per unit of output to clean up than
older processes such as Open Hearth furnaces.
With respect to water pollution abatement, costs per gallon
of water treated decrease as water flow increases according to
estimates prepared by the Council. Water flow per ton of steel
processed does not vary greatly, except in large, new hot-rolling
mills where gallons per ton may be double that used in older
facilities. In general, however, such facilities are likely to have
significant water pollution abatement equipment in place which
would tend to minimize incremental costs of water pollution
abatement.
Cost estimates prepared by the Council indicate that com-
bined air and water pollution abatement capital expenditure needed
to meet industrywide Federal standards by 1976 could be as high
as $3.5 billion. In current dollars (inflated at 2.5% per year),
estimated total pollution abatement capital expenditures would
range from $2. 6 billion to $3. 8 billion. Estimated capital expendi-
tures required for air pollution abatement are approximately 2.3
times those required for water pollution abatement. (See the
exhibits following this page.)
300
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EXHIBIT
ESTIMATED AIR POLLUTION
ABATEMENT COSTS
1972-1976 ^
(in millions)
Year

1972
1973
1974
1975
1976
Best Estimate





Capital Investment
$132
$217
$643
$728
$217
Annual Costs





Operation and Maintenance
$ 16
$ 48
$160
$288
$320
Interest
10
29
97
175
194
Depreciation
10
29
97
175
194
Subtotal
36
106
354
638
708
Investment Credit*
(9)
(15)
(45)
(51)
(15)
Total Annual Cost
$ 27
$ 91
$309
$587
$693
High Estimate (+25%)





Capital Investment
$165
$271
$804
$910
$271
Annual Costs
$ 34
$114
$386
$734
$866
Low Estimate (-10%)





Capital Investment
$119
$195
$579
$655
$195
Annual Costs
$ 24
$ 82
$278
$528
$624
^Computed by Booz, Allen Public Administration Services, Inc.
Source: Council on Environmental Quality
301
45«.m O- 71 - 20
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EXHIBIT
ESTIMATED WATER POLLUTION
ABATEMENT COSTS
1972-1976
(in millions)
Year

1972
1973
1974
1975
1976
Best Estimate





Capital Investment
$154
$161
$169
$176
$183
Annual Costs





Operation and Maintenance
$ 17
$ 33
$ 50
$ 67
$ 84
Interest
15
30
45
59
75
Depreciation
7
15
22
30
37
Subtotal
$ 39
$ 78
$117
$156
$196
Investment Credit*
(11)
(11)
(12)
(12)
(14)
Total Annual Cost
$ 28
$ 67
$105
$144
$182
High Estimate (+30%)





Capital Investment
$200
$209
$220
$229
$238
Annual Costs
$ 36
$ 87
$137
$187
$237
Low Estimate (-25%)





Capital Investment
$116
$121
$127
$132
$137
Annual Costs
$ 21
$ 50
$ 79
$108
$137
^Computed by Booz, Allen Public Administration Services, Inc,
Source: Council on Environmental Quality
302
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Assuming steel shipments of 115 million tons by 1976, esti-
mated annual pollution abatement costs should increase from less
than $1 per ton in 1972 to a peak of from $6. 60 to $9. 60 per ton in
1976. In current (inflated) dollars, the 1976 annual cost range
would be from $7.50 to $10.90 per ton. At a less optimistic 1976
shipment level of 105 million tons, costs per ton in that year would
be on the order of $9.30 to $12.00 per ton 
-------
The ability of a given producer to meet pollution abatement
capital requirements, given a favorable industrywide climate,
depends on two variables:
The present state of plant and equipment which
determines potential cost
The financial condition of the individual producer
which determines his capacity to bear required
costs
Given that the financial condition of most producers is not
exceptionally healthy at present, companies which will have diffi-
culty raising needed capital (not covering annual costs) for
pollution abatement are those which must raise large sums for
general modernization as well as pollution abatement.
Assuming that pollution abatement requirements and general
modernization needs for individual companies exceed industry
averages by as little as 20%, the capacity of such companies to
raise needed capital becomes sensitive to the pollution abatement
cost estimates used. If low pollution abatement cost estimates,
as shown on the preceding exhibits, are accepted, the availability
of sufficient capital would be marginal. If high estimates are
accepted, capital needed to meet all requirements would not be
available without substantial assistance, principally because of
the large expenditures required for general modernization. Thus,
some plant curtailment would be required unless greater-than-
postulated price increases were possible to make high cost pro-
ducers sufficiently strong to provide for the ability to:
Raise funds internally
Attract equity capital
Raise debt on a broader equity base
In our analysis, we have postulated minimum price increases
which would allow producers to cover costs and return to profitability
by 1976. To keep higher cost producers in operation, however, will
likely require greater-than-minimum price increases both to cover
costs and justify the retention of capital in marginal enterprises.
304
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Given the relatively inelastic demand for steel, and the
possibility of significant pollution related price increases for
competing materials, the situation which may occur is a series
of price increases sufficiently large to allow higher cost producers
to modernize, with more competitive producers enjoying greater
profitability. The extent of price increases needed by higher cost
producers is not determinable from the data at hand. However, price
increases significantly in excess of 3. 7% per year will likely be made
impractical by competitive conditions; consequently, higher cost
producers might need substantial Federal or other outside assistance
in raising required capital.
As we point out in Part II of this report, steel stock values
are related to anticipated dividend yields. Because of the poor
showing of the steel industry recently, stock prices are depressed,
especially in view of the dividend cuts announced this year. While
our projections indicate that, with an expanding economy, the steel
industry should recover and resume growth in profitability, the
need to meet pollution abatement requirements may result in lower
than otherwise anticipated dividend yields. In view of this, it is
highly probable that the market value of steel stocks will reflect
the influence of pollution abatement related capital requirements.
However, increasing industry profitability and increasing dividends,
though not at the rate possible without pollution abatement capital
requirements, could lead to some recovery of steel stocks from
their present depressed market values.
8- THE IMPACT OF STEEL INDUSTRY POLLUTION
ABATEMENT COSTS ON THE GENERAL ECONOMY
Assuming that economic conditions over the next five years
will be as projected, the impact of pollution abatement on major
steel-using industries should be small, and on the general price
level negligible. (This refers, of course, to steel alone; the
combined effect of abatement programs and resultant costs on a
broad range of industries will raise the general price level some-
what, but assessment of this combined impact is beyond the scope
of the present study.) Steel mill products represents 4.7% of the
weight of the industrial component of the Wholesale Index; hence,
a 3, 7% average price increase for steel would directly affect the
index for all industrials by only 0.2%.
305
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Possible price increases in steel-using industries, reflecting
the higher costs of steel, would also affect the overall index some-
what; but probably by less than the 0.2% ratio. For example, look-
ing at individual steel-using industries, the average annual total
increase in the cost of steel in a typical automobile (assuming that
the cost of steel amounts to approximately 10% of total production
costs) should approximate 0.4% of total production costs, with the
cost of pollution abatement, on the average, accounting for less
than half of the increment.
Similarly, the pollution cost impact on a typical heavy con-
struction project may be estimated at less than 1%. It does not
follow that automobile prices or construction bids would be affected
by a like amount as these industries are much more responsive to
market conditions than to such minor cost changes. For most
other steel-consuming industries, any impact should similarly be
small.
Assuming that steel industry output growth will continue at
the projected rate and that pollution abatement costs can be passed
on to customers, there should be no significant cost impact on
suppliers. This does not, of course, consider any direct impact
of pollution abatement costs on the suppliers themselves.
9- THE IMPACT OF POLLUTION ABATEMENT COSTS ON
STEEL INDUSTRY EMPLOYMENT
Employment impacts associated with pollution abatement
costs should be most significant in those production facilities
where overall costs of modernization and pollution abatement are
highest. In addition, it can be expected that employment impacts
in partially modernized facilities will be greater with respect to
facilities owned by companies with a relatively large percentage
of older plants.
Following the above logic, we have reviewed facilities de-
scriptions published by the American Iron and Steel Institute cover-
ing more than 90 plants owned by 31 companies. Our identification
of the universe of facilities potentially subject to pollution abatement
related employment impacts is based on a review of the apparent
adoption of modern steelmaking technology between 1964 and 1970
(Basic Oxygen Process & Electric Furnaces) and the construction,
where identifiable, of new finishksg. capacity.
306
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Because our review was based on published data (1D70) alone,
the following limitations should be kept in mind:
Improvements to facilities after 1970 have not
been considered.
Improvements to facilities which do not reflect
the adoption of new steelmaking processes or
the erection of new finishing capacity have not
been considered.
The installment of pollution abatement equipment
per se has not been considered.
The above limitations notwithstanding, we feel that our re-
view of published data provides a reasonable approximation of
those geographic areas where pollution abatement related employ-
ment impacts, if such impacts occur, would likely be felt.
Specifics of our analysis are included as an Annex to Part III
of our report. In general, our facilities review indicates the
following:
Approximately 85,000 workers or 16% of steel
industry employment (as reported in 1970) were
working in facilities where little or no apparent
modernization has been reported from 1964 to
1970.
An additional 67,000 workers (as reported in
1970) were employed in partially modernized
facilities owned by companies with potentially
significant overall modernization cost
requirements.
It should be clearly understood that our review does not
indicate that all of these workers are vulnerable to loss of employ-
ment due to pollution abatement costs. Rather, these workers
represent the apparent universe, from which those workers
vulnerable to loss of employment because of pollution abatement
are most likely to be drawn. 'Whether those vulnerable to loss of
employment number 1,000 or 10,000 cannot be determined from
the data at hand.
307
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Plant owners, especially those with plants showing little
modernization since 1964, will have to decide whether capital
expenditures for modernization with the added burden of pollution
abatement can provide an adequate rate of return on investment.
It is unlikely in the extreme, however, that anything
approaching the number of workers indicated above will be affected
by whatever shutdown decisions may be reached. Current esti-
mates are that domestic steel shipments in 1972 will equal or
exceed previous high levels, thus permitting profitable operations
even for less efficient plants, especially since fixed costs related
to the initial investment will have been largely written off. Man-
agement decisions are likely to assume at least some further
increases in demand as the general economy recovers. More-
over, a number of the older plants in need of modernization are
located in areas which yield a geographic price advantage, while
several others are essential links in the overall operations of
integrated companies.
It must be assumed, nevertheless, that for some already
marginal plants, the cost of meeting pollution abatement standards
on top of that needed for modernization might well tilt the balance
in favor of shutdown. Given rising demand, however, it may be
expected that some of these decisions will take the form of erecting
new modern facilities to replace the capacity of those being
abandoned. Taking all these considerations into account, the net
impact of pollution abatement regulations on employment prospects
is likely to be relatively small, though it may involve some dis-
placement of employment from older to newer producing areas.
10. REQUIREMENTS FOR FURTHER STUDY
Although it may be possible for the steel industry to finance
the bulk of capital expenditures required to meet Federal air and
water pollution abatement requirements if specified conditions are
met, sufficient uncertainty about these conditions exists to require
additional analysis. In order to clearly identify and evaluate these
uncertainties, we feel that the following additional elements of
study must be undertaken.
Steel demand projections, assuming less favorable
conditions for economic growth and/or greater
than expected import penetration should be
308
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prepared to evaluate their impact on. potential
steel industry profitability and capability to
absorb pollution abatement costs.
Steel capacity estimates should be refined, as a
basis for estimating as accurately as possible:
Capital expenditures required to modernize
and replace existing capacity
Capital expenditures required to expand
capacity to meet alternative levels of
demand
Pollution abatement cost estimates supplied by
the Council should be evaluated for sensitivity to
alternative levels of capacity and production.
Financial projections should be prepared for
alternative levels of expected demand to identify
the sensitivity of industry cash flow and
profitability to a range of expected volume.
Potential constraints to movements in steel prices
should be assessed in conjunction with the financial
projections discussed above to determine the
potential sensitivity of the market to required
price increases higher than we have projected.
The influence of varying production levels on
productivity should be assessed to evaluate
potential impacts on profitability.
As a function of the analytical steps outlined above,
the following assessments should be made:
The impact of pollution abatement capital
and operating costs on steel industry profits
and financial resources at varying levels of
demand
The potential return on investment from
capital expenditures for expansion and
modernization with pollution abatement
capital and operating cost added at varying
levels of expected demand
309
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Given the above analysis, alternative means of
financing pollution abatement requirements should
be evaluated including such alternatives as
industrial revenue bonds.
Estimates of employment impact should be
reevaluated against the alternatives outlined above.
To assess possible industry response to alternative situations,
we will conduct appropriate discussions with steel industry
executives.
The supplementary study described should provide a thorough
evaluation of the potential capacity of the steel industry to bear the
burden of pollution abatement costs under various assumptions as
well as the degree of risk involved in taking up such a burden.
310
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THE GENERAL ECONOMY
Prepared by
Chase Econometric Associates, Inc.
311
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Introduction
This report serves as a general summary and background frame of
reference for the detailed industry reports prepared for the Council on
Environmental Quality. It estimates the macroeconomic effect of the sum
of the requirements for pollution control standards for all of the industries
examined in those reports. We have taken the costs of pollution control,
as estimated by CEQ and EPA, which have been incorporated in those reports,
and have applied price mark-up factors to determine the amount of price
increase at the industry and macroeconomic levels. We have also analyzed
the effects of increased investment which will be required by existing
pollution control legislation. The Chase Econometrics macroeconomic model
is then used to determine what effect these changes in costs, prices, and
investment will have on the overall economy. Key variables which we examine
Include the aggregate price indexes, the unemployment rate, output, and the
net foreign balance. We have calculated the effects both under the assumption
that the government takes no action to offset the rising unemployment and
lower real output and under the assumption that the government uses monetary
and fiscal policy to return the economy to the same level of output and
®°Ployment, but at the cost of higher prices. Simulations of this nature
have been prepared for both "full employment" and "recession" scenarios;
however we discuss only the full employment runs in this summary. While we
have used the CEQ and EPA figures on pollution control costs as our best
Estimates, we have also taken 75%* 125%, and 150% of the estimated values
*» Plausible alternatives and have prepared simulations for these cases as
V*U. We do not discuss these calculations in the summary except for a
h*ief mention of the 150% case, since In our opinion this serves as a real-
i8t*c upper limit for the expected cost Increases.
313
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In the remaining sections of this summary, we discuss the method-
ology used in moving from industry costs to macroeconomic prices and quan-
tities, the types of simulations which have been calculated, and the major
findings and implications of these simulations. In the conclusion we
comment briefly on the major policy variables affected by the implementation
of existing pollution control legislation and outline various policies which
could be used to mitigate unfavorable movements in these variables.
Methodology
In this study we have combined the Chase Econometrics Macroeconomic
Model and Inter-Industry Forecasting System to estimate the effects which cost
increases in certain specified industries will have on the overall economy.
Of primary interest are the effects on prices, output, employment, and foreign
trade. In this section we outline the major steps which are taken in this
procedure.
1.	We calculate the percentage cost increase faced by each major polluting
industry. In doing this, we use the numbers supplied by CEQ and EPA on the
actual cost increases for the industries with largest pollution control
costs. These figures, available annually, include both capital costs (on an
annualized basis) and operating expenses. They are available for the fifteen
industries in which pollution control expenditures are expected to be the
most significant. The actual and percentage cost increases are given in
Table 1.
2.	We translate the percentage cost increases into percentage price increases'
The "mark-up" factors, which represent the proportion of additional costs
passed along as higher prices, have already been calculated on an industry-by-
industry basis in the Chase Econometrics Industry models. These mark-ups, as
314
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Food and Kindred Products Textile Mill Products
(I/O 14)	(i/o 16)
Change in
annualized
costs*
(millions
of 1971 $)
As a
fraction
of value
added
Change in
annualized
costs*
(millions
of 1971 $)
As a
fraction
of value
added
09
i—•
a*
1972
29.1
.08
7.2
.13
1973
30.5
.08
7.8
.13
1974
32.5
.08
8.4
.14
1975
34.2
.08
8.5
.14
1976
36.3
.09
9.3
.15
1977
14.2
.03
4.1
.06
1978
14.3
.03
4.0
.06
1979
14.6
.03
4.2
.06
1980
14.6
.03
4.4
.06

Plastics
Petroleum
fipf-lni ng

(I/O 28)

(I/O
31)
1972
2.78
.05
12.9
M9
1973
2.98
.04
19.0
.27
1974
3.06
.04
50.3
.67
1975
3.21
.04
55.5
.71
1976
3.30
.04
29.9
.36
1977
1.70
.02
10.3
.12
1978
1.60
.01
10.1
.11
1979
1.50
.01
10.2
.11
1980
1.60
.01
10.3
.10
Primary Nonferrous Metals Motor Vehicles & Equip.
(I/O 38)	(I/O 59)
1972
30.8
.39
1.78
.0^
1973
49.7
.61
1.81
1.44
1974
142.9
1.69
1.92
1.39
1975
161.4
1.84
2.04
4.36
1976
60.2
.66
2.07
2.63
1977
18.4
.19
.87
.00
1978
18.5
.19
.88
.00
1979
18.7
.18
.88
.00
1980
18.7
.18
.88
.00
~Incremental cost over previous year
•Excluding mobile source emission control standards
Tabie I
Lumber and Wood Products Paper and Products
(I/O 20)	(i/o 24)
Change in As a	Change in As a
annualized fraction annualized fraction
costs* of value costs* of value
(millions added	(millions added
of 1971 $)	of 1971 $)
Chemicals & Products
(I/O 27)
Change in As a
annualized fraction
costs* of value
(millions added
of 1971 $)
2.7
.04
32.4
.35
35.8
.27
2.7
.04
35.8
.37
41.9
.30
2.8
.04
4o.5
.48
61.4
.42
2.9
.04
51.8
.50
78.9
.52
3.0
.04
39.2
.36
54.7
.34
0.8
.01
15.9
.14
30.0
.18
0.9
.01
16.1
.14
29.4
.17
0.8
.01
16.0
.13
29.9
.16
0.8
.01
16.3
.13
30.5
.16
Leather	Stone & Clay Prod. Primary Iron & Steel

(1/0 33)

(I/O 36)

(1/0 37)
2.11
.59
8.05
.10
44.8
.26
2.14
.58
10.42
.13
121.6
.70
2.17
.57
20.97
.25
330.9
1.85
2.17
.55
23.87
.27
373.3
2.03
2.17
.54
11.24
.13
122.3
.65
.37
.09
2.89
.03
24.2
.13
.38
.09
2.99
.03
27.6
.14
.38
.09
2.99
.03
27.7
.14
.38
.08
2.99
.03
27.8
.13
Aircraft and Parts
Elec.,Gas, Water & Sanitary
Wholesale & Retail

(1/0 60)
Services
(1/0 68)
Trade (I/O 69)
.76
.01
123.0
.50
6.6
.00
.77
.01
274.7
1.03
6.6
.00
•83
.01
430.7
1.53
25.3
.02
.88
.01
483.2
1.65
28.7
.02
.88
.01
176.9
.57
12.3
.01
.37
.00
65.8
.20
1.5
.00
.37
.00
73.1
.20
1.5
.00
.38
.00
73.3
.19
1.5
.00
.38
.00
73.6
.18
1.5
.00
''Including mobile source emission control standards
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might be expected, all range from 0.8 to 1.0 In the manufacturing sector.
3.	We then calculate how these price Increases will affect all other
industries. In the previous step we calculated only the direct effect of
pollution controls on prices; that is, the amount that the price of steel
(e.g.) rises because pollution control equipment is now used by the steel
industry. However, we must also consider the effect which an increase in
steel will have on machinery, autos, and other steel-using industries. In
other words, we must measure the indirect as well as the direct effect of
the price increases in each industry.
The input/output table is particularly well suited for this, since
itspecifically measures both direct and indirect effects and combines them
in a single table; that is, we use the coefficients from the I/O table
entitled "Total Requirements Per Dollar of Delivery to Final Demand". These
coefficients are input weights, and are thus the correct ones to use in
determining the total increase in product prices caused by increases in input
prices.
4.	We convert the price increases of final demand categories to those for
aggragate demand categories. We must use a reverse bridge matrix to go from
the 80 categories of final demand to the approximately 40 categories of
aggragate demand contained in the Chase Econometrics macromodel. For example,
we must convert the price increase in the food industry to an increase in the
consumer price index for food.
5.	Next we translate the ex ante price increases at the aggregate demand
level which we have just calculated into actual ex post price changes. Until
this has been accomplished we do not yet know what changes in final product
316
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prices will be, since the cost Increases may not be fully passed along. We
use the mark-up factors at the final demand level (consumption, Investment,
and exports) to determine how much prices will initially rise.
6.	Finally we calculate the equilibrium changes in prices and other variables
by solving the complete macroeconomic model. The final price rises, after
the dynamics of the system have come into play, are likely to be substantially
different from the impact increases. First, higher prices will in general
lead to lower output, which results in lower capacity utilization and hence
a slightly smaller mark-up factor. In addition, lower output leads to higher
unemployment, somewhat smaller wage demands, and thus lower unit labor costs
and prices. On the other hand, higher prices usually lead to greater wage
demands, which in turn raise unit labor costs and prices. These two effects
are, of course, offsetting, and there is no a priori way to determine which
one will predominate in any given situation.
7.	In addition we must adjust for changes in fixed business investment. We
have so far discussed changes in the price terms only, yet the cost and price
increases occur because of the increased investment required by the pollution
control standards. We should adjust investment as well. Since more invest-
ment will be needed, the constant term in the investment function Is raised
by the incremental expenditure. However, more Investment for a given set of
monetary conditions will result in somewhat higher interest rates and great-
er credit rationing, and hence a decline in other investment, although the
reduction will be felt more strongly in housing than in producers durable
equipment.
In addition, the user cost of capital will rise somewhat, since it
will now take more investment to produce a given amount of output. Hence the
required rate of return on productive Investment will have to increase to offset
ui'ffi o - n - at	317
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the zero return on non-productive investment. Some investment projects
which otherwise could have been undertaken will be cancelled because of
the increased expense, which will cause a decline in productive invest-
ment in constant dollars.
It should be pointed out that an increase in investment would
ordinarily lead to an increase in labor productivity and hence a decline
in the labor/output ratio. However, since investment for pollution con-
trol purposes Is not considered to be productive investment, there will
be no such substitution effect between labor and capital. Thus we have
in addition adjusted the model to reflect the fact that there is no net in-
crease in the productive capital stock.
Background for Simulations
As mentioned above, we have prepared simulations for both the
"full employment" and "recession" cases, partly because of the possibility
that the economy will not return to full employment in the near future, and
partly to measure the differential effects of a given cost Increase at 4*5%
and 6% unemployment. However, since the industry reports have all been
prepared using the assumptions of a full employment economy and a constant
rate of growth, we restrict our remarks in this summary to an examination of
the effects on the economy at full employment.
In projecting the economy to 1980 using a full employment scenario,
we have adjusted fiscal and monetary policy to achieve the following results:
1.	The unemployment rate remains at approximately 4.5% during the latter
half of the 1970's.
2.	The rate of inflation, as measured by the implicit GNP deflator, fluctuates
between 3 and 4% during the decade but declines to 3% by 1980.
318
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3.	The economy grows at an average rate of 4 1/3% in constant prices
during the 1976-1980 period.
4.	The Federal government budget registers a slight surplus during this
same period.
Using these standards to formulate a "baseline" simulation, we have then
calculated the effects of additional costs caused by the implementation of
existing pollution control standards. The cost estimates supplied by CEQ
and EPA can be denoted as the "median change" case. We then calculate the
effect of increases in costs which are 75%, 125%, and 150% of the median
change.
In addition to determining how the economy would be affected by
different levels of pollution control costs, we have also prepared additional
simulations where we use monetary and fiscal policy to return the economy to
the level of output and unemployment which would have existed without any
pollution control costs - i.e., the baseline estimates. These simulations,
known as the "offset" runs, are also calculated for the various cost levels
listed above.
In the median change run without offsets, unemployment rises by
approximately 0.2% by 1976. Because unemployment is higher, wage rates rise
at a slightly slower rate and hence unit labor costs are slightly lower.
This in turn causes prices to rise at a slightly lower rate during the 1976-
1980 period. The net result is that by 1980 the consumer price index returns
to its baseline level, although the implicit GNP deflator and the wholesale
price index are still somewhat higher. Furthermore the relative decline
in prices from 1976 to 1980 causes slightly larger increases in real output,
hence narrowing the unemployment differential between the baseline solution
and the median change run to 0.15% in 1980.
319
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It is, however, quite likely that the government would use fiscal
and monetary policy to keep real GNP and the unemployment rate at the level
which would have occurred in the absence of the additional pollution control
costs. In that case the price level would continue to rise above the base-
line solution throughout the simulation period. Since much of the fiscal
and monetary expansion would end up as price increases rather than volume
increases, the stimulus would have to be substantial. A more detailed dis-
cussion of these results is given next.
320
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Principal Results
The effects on pollution control costs on the key economic policy
variables are given in Table II. They can be summarized briefly as follows:
A.	Without Government Offset
1.	By 1976, the wholesale price index will be 2.9% higher, the implicit GNP
deflator will be 1.7%, and the consumer price index will be 1.2%
higher. After that, lower levels of capacity utilization and higher levels of
unemployment lead to a slower rate of price increase, so that by 1980 the
differentials are 2.8%, 0.9%, and 0.0% respectively.
2.	Constant-dollar GNP is $ 13 billion lower in 1976 but rises to only $ 8
billion less in 1980. The unemployment rate reaches a maximum differential
of 0.18%, which narrows to 0.15% in 1980.
3.	The net foreign balance declines an additional $ 1.9 billion in 1975
(when the maximum disturbance occurs), but the differential narrows to
$ 0.2 billion by 1980.
4.	In spite of the additional expenditures for pollution control invest-
ment, fixed business investment in constant dollars is $ 0.1 billion lower
in 1976 and $ 1.2 billion lower in 1980. Higher capital goods prices, a
lower rate of return, and the decline in output all contribute to this decline.
5.	Housing starts, which usually are hit hardest by the increase In demand
for funds elsewhere In the economy, decline by 0.09 million units in 1976 but
are 0.03 million units higher in 1980.
The results, however, are much different If the government maintains the
baseline level of output and employment, as is shown next.
B.	With Government Offset
1. By 1976, the wholesale price index will be 2.9% higher, the implicit
321
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GNP deflator will be 1.8% higher, and the consumer price index will be 1.5%
higher. These increases will continue, as higher levels of prices coupled
with the same level of unemployment lead to larger wages, so that by 1980
the differentials are 3.7%. 2.6%,and 2.4% respectively.
2.	Constant-dollar GNP and the rate of unemployment are assumed to stay
at the baseline levels.
3.	The net foreign balance is $ 2.2 billion lower in 1976 and $ 2.8 billion
lower by 1980.
4.	Fixed business investment in constant dollars is higher by $ 1.5 billion
in 1976, as the added stimuli of increased pollution control expenditures
and easier money more than balance the higher prices and lower rate of return.
However, in the latter half of the decade the continued rise in prices, plus
the lack of any substantial incremental Investment for pollution control,
finally leads to a lower level of - $ 0.2 billion.
5.	Housing starts are 0.14 million lower in both 1976 and 1980.
The increases in Federal purchases of goods and services, state
and local government purchases, transfer payments, and unborrowed reserves
(the chief monetary policy variable in the model) are given in Table III.
Since we are specifically pointing an expansionary policy, it is assumed
that both Federal and state and local government spending are financed
through increased deficits with no additional taxes and no tightening in
monetary policy.
322
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Table II
Effects on Selected Hacroeconomic Variables for Median Change in Pollution Control Costs
With and Without Government Offset
Cross Rational Product, current dollars
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference (froa baseline)
Groea Rational Product, constant dollars
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference {from baseline)
Illicit OP Deflator. 1958-100.0
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference (froa baseline)
Price Index. 1967-100.0
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference (froa baseline)
Wholesale Price Index. 1967-100.0
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference (froa baseline)
Htt Foreign Balance
Baseline projection
With pollution control costs
Difference
With offsetting government policy
Difference (froa baseline)
1972
1973
1974
1975
1976
1977
1978
1979
1980
1147.7
1267.4
1374.9
1480.3
1611.9
1747.3
1886.0
2033.0
2187.2
1151.8
1271.5
1381.6
1487.4
1616.0
1751.1
1891.6
2038.2
2190.4
4.1
4.1
6.7
7.1
4.1
3.8
5.6
5.2
3.2
1151.8
1271.5
1385.7
1502.8
1641.5
1782.7
1926.2
2080.0
2245.4
4.1
4.1
10.8
22.5
29.6
35.4
40.2
47.0
58.2
786.4
836.6
875.7
907.8
954.3
997.3
1038.8
1083.6
1131.5
788.4
835.7
872.4
899.4
941.2
984.8
1029.0
1075.0
1123.2
2.0
-0.9
-3.3
-8.4
-13.1
-12.5
-9.8
-8.6
-8.3
788.4
835.7
874.6
907.8
954.1
997.6
1038.6
1083.2
1131.7
( not calculated
)






145.9
151.5
157.0
163.0
168.9
175.2
181.5
187.6
193.3
146.1
152.1
158.4
165.4
171.7
177.8
183.8
189.6
195.0
0.2
0.6
1.4
2.4
2.8
2.6
2.3
2.0
1.7
146.1
152.1
158.4
165.5
172.0
178.7
185.4
192.0
198.4
0.2
0.6
1.4
2.5
3.1
' 3.5
3.9
4.4
5.1
124.8
129.9
135.6
141.7
147.4
153.5
159.6
165.3
170.6
125.0
130.6
137.0
143.6
149.2
154.8
160.4
165.7
170.6
0.2
0.7
1.4
1.9
1.8
1.3
0.8
0.4
0.0
125.0
130.6
137.0
143.7
149.6
155.9
162.4
168.6
174.7
0.2
0.7
1.4
2.0
2.2
2.4
2.8
3.3
4.1
116.1
117.9
119.8
122.3
124.5
126.5
128.3
129.5
130.4
116.3
118.7
121.5
125.3
128.1
130.1
131.8
133.1
134.0
0.2
0.8
1.7
3.0
3.6
3.6
3.5
3.6
3.6
116.3
118.7
121.5
125.3
128.2
130.4
132.4
134.0
135.3
0.2
0.8
1.7
3.0
3.7
3.9
4.1
4.5
4.9
3.5
3.5
1.6
1.0
0.2
-1.1
-1.1
0.7
3.3
2.9
2.7
0.1
-.9
-.8
-1.3
-1.2
.6
3.1
-.6
-.8
-1.5
-1.9
-1.0
-0.2
-0.1
-0.1
-0.2
2.9
2.7
0.1
-1.3
-2.0
-3.4
-3.4
-1.8
0.5
-.6
-.8
-1.5
-2.3
-2.2
-2.3
-2.3
-2.5
-2.8
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Table Ix (Cont'd)
CO
K
Ql
oe
i
*2

1972
1973
1974
1975
1976
1977
1978
1979
1980
Unemployment Sate, percent







4.44
4.47
Baseline projection
5.41
4.93
4.70
4.73
4.38
4.37
4.44
With pollution control costs
5.39
4.99
4.81
4.90
4.52
4.55
4.61
4.59
4.62
Difference
.02
.06
.11
.17
.14
• 18
.17
.15
.15
With offsetting government policy
5.39
4.99
4.79
4.81
4.38
4.40
4.48
4.43
4.45
Difference (from baseline)
( not
calculated
)






Fixed Business Investment, constant dollars









Baseline projection
83.6
93.0
101.4
105.7
112.4
118.3
123.3
129.2
135.1
With pollution control costs
85.4
95.0
104.5
108.5
112.3
116.5
121.5
127.7
133.9
Difference
1.8
2.0
3.1
2.8
-0.1
-1.8
-1.8
-1.5
-1.2
With offsetting government policy
85.4
95.0
104.6
109.6
113.9
118.2
122.6
128.8
134.9
Difference (from baseline)
1.8
2.0
3.2
3.9
1.5
-0.1
-0.7
-0.4
-0.2
Housing Starts, millions









Baseline projection
2.09
1.95
1.71
1.76
1.87
1.99
2.12
2.21
2.35
With pollution control costs
2.07
1.88
1.59
1.63
1.78
1.99
2.18
2.28
2.38
Difference
-.02
-.07
-.12
-.13
-.09
.00
.06
.07
.03
With offsetting government policy
2.07
1.88
1.59
1.61
1.72
1.91
2.06
2.12
2.21
Difference (from baseline)
-.02
-.07
-.12
-.15
-.15
-.08
-.06
-.09
-.14
Percentage Growth Bate of GUP. constant dollars








Baseline projection
5.98
6.38
4.68
3.67
5.12
4.51
4.16
4.31
4.42
With pollution control costs
6.25
6.00
4.38
3.10
4.64
4.63
4.49
4.46
4.48
Difference
.27
-.38
-.30
-.57
-.48
.12
.33
.15
.06
With offsetting government policy
6.25
6.00
4.64
3.80
5.10
4.56
4.11
4.29
4.48
Difference (from baseline)
( not
calculated
)






Percentage Growth Bate of Consumer Price Index









Baseline projection
2.97
4.13
4.39
4.48
3.98
4.17
3.96
3.56
3.21
With pollution control costs
3.17
4.47
4.88
4.83
3.87
3.80
3.61
3.29
2.99
Difference
.20
.34
.49
.35
-.11
-.37
-.35
-.27
-.22
With offsetting government policy
3.17
4.47
4.87
4.88
4.10
4.27
4.16
3.83
3.57
Difference (from baseline)
.20
.34
.48
.40
.12
.10
.20
.27
.36
N.B. The "difference" for constant-dollar GMP and the unemployment rate has not been calculated for the simulation with
offsetting government policy, since that run vas designed to duplicate the baseline projection for those two variables.
-------
table III
CO
£
1972	1973 1974 1975 1976 1977 1978 1979 1980
Unborrowed Reserves
Baseline	33.3 35.7 39.2 43.3 47.3 51.6 56.0 60.5 64.8
Offset	33.3 35.7 39.2 43.2 47.4 51.9 56.7 61.5 66.3
CweiiiMat hplorwat
baseline	13.18 13.55 14.02 14.62 15.22 16.00 16.68 17.40 18,20
Offset	18.18 13.55 14.05 14.71 15.32 16.10 16.78 17.50 18,30
federal Goverwwrit Sop-Defense
Purchases of Gooda and Services
Baseline	26.1 29.9 33.1 35.9 38.7 41.5 45.1 49.9 55.0
Offset	26.1 29.9 33.1 35.9 38.7 42.2 46.9 52.2 57.8
State and Local Govercaent Purchases
Baseline	150.2 166.2 183.1 202.6 223.7 246.9 272.1 301.0 332.2
Offset	150.2 166.2 186.4 210.1 231.7 254.9 279.9 309.0 342.2
Other Federal Transfer Pawents
Baseline	21.5 28.8 33.0 35.5 39.5 43.5 47.5 54.0 62.0
Offset	21.5 28.8 34.5 41.8 52.0 54.8 58.5 65.0 73.0
All figures are in billion of current dollars except government employment, in millions.
-------
As can be seen, the monetary and fiscal stinulus needed to return
the economy to the baseline solution is substantial. We have raised Federal
government purchases of goods and services by $ 3 billion, Federal transfer
payments by $ 11 billion, and state and local government purchases by $ 10
billion. We have also raised civilian government employment by 100,000. In
the area of monetary policy we have raised unborrowed reserves by $ 1.5
billion, which is sufficient to keep free reserves, interest rates, and
credit rationing at approximately their baseline levels. While there are
other fiscal policy mixes which could have been chosen, this particular set
of changes seemed to contain realistic magnitudes and also minimized the
distortion in the components of GNP relative to the baseline calculations.
One of the most interesting, although potentially confusing,
aspects of these simulations is the way in which a rise in unemployment leads
to lower prices and hence to a partial resurgence of output and employ-
ment. In order to comprehend this, it is necessary to understand the
mechanisms by which a rise in prices decreases real output (and vice versa).
This occurs through several distinct channels:
a.	A higher rate of inflation, cet. par, raises the personal savings rate.
b.	Higher rates of inflation lead to higher interest rates and tighter
credit rationing, thus reducing investment.
c.	Higher prices lead to less investment because of the increased cost,
particularly in housing.
d.	Higher prices lead to a worsening of the net export position.
e.	Higher prices lead to a lower constant dollar government spending for
the same current dollar figure. If the current dollar figure is raised,
there are still some offsetting effects through an increase in taxation or
326
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higher interest rates due to a larger budget deposit unless, of course,
the Federal Reserve System expands the money supply at the same time.
In addition, as previously discussed, the user cost of capital has been raised
by the percentage increase in the supply price of capital goods.
These negative effects are partially offset by the increase in
investment due to the pollution control standards. However, it is clear
from the accompanying tables that this effect is far smaller than the
price effects if in fact the economy is at full employment.
In addition there are several important secondary effects.
A decline in real GNP increases unemployment, which in turn lowers
wage increases and unit labor costs. In addition, the lower level of
capacity utilization leads to lower mark-up factors. When these
events begin to increase in importance, the previous price increases
diminish and then the decline in real GNP due to these price increases
also slackens. Thus prices and real GNP tend to return toward the
level which would have occured if the pollution control costs had not been
added. Since we are assuming that the economy is near full employment, it
should not be surprising to see prices return to their former level. However,
we would not expect a full recovery in output or employment, since by intro-
ducing non-productive Investment we have retarded the rate of productivity
growth - at least as traditionally measured - and hence have reduced the
increase In real wages.
Because of this, it is Important to consider the offset simulations,
where we introduce fiscal and monetary policies which keep real GNP and
employment at the same level which we have in the baseline solution. In
order to do this, of course, prices rise substantially more and investment
In constant dollars declines. This exercise points out one of the moat
327
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important findings of the report, namely that the additional burdens of
pollution control standards while maintaining the economy at full em-
ployment will cause significant additional inflation over the decade.
It is also interesting to note that the major differences in
the price patterns between the median change and the offset runs during
the 1976-1980 period occur for service prices rather than goods prices.
The change in the wholesale price index, which is determined in large part
by raw material input prices and capacity utilization, differs very little
between these two simulations. On the other hand, service prices, which de-
pend almost entirely on labor costs, decline substantially as higher unemploy-
ment leads to smaller increases in wage rates. Thus the consumer price index
is much more affected by changes in the unemployment rate, and hence unit
labor costs, than is the wholesale price index or the implicit GNP deflator.
It should be stressed in any case that the baseline case was con-
structed specifically to keep the economy near full employment. The Phillips
curve,or tradeoff between inflation and unemployment, is highly nonlinear in
this region, and substantial changes in price - either up or down - are
required to produce relatively small changes in output and employment. The
exact political tradeoff between inflation and unemployment may be determined
differently by different individuals or administrations, but in any case the
functional form of this tradeoff in the region of 4%% unemployment should
be made explicit.
One of the most striking results of these simulations is the amount
which the net foreign balance deteriorates in the government offset simulations.
Yet this should not really be much of a surprise. An increase in domestic
prices for the same level of real output is bound to increase imports and decrea®*
328
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exports in constant dollars if not in current dollars as well. We have
estimated the price elasticities for imports of finished goods to be
approximately -1.5 and for other imports to be -0.9. Thus an increase of
approximately 2*g% in the overall price index should raise imports of
goods approximately 3% by 1980.
There are, of course, several counter measures which could be taken
to reduce this trade deficit, some of which are discussed in the conclusion.
For example, a 3% rise in foreign prices relative to domestic prices would
eliminate any deterioration in the net foreign balance due to pollution
control standards, and there are several different ways to accomplish this.
In any case we do point out that a decline of $ 2 to $ 3 billion in the
net foreign balance clearly is consistent with a price level which is 3%
higher by the end of the decade.
We might briefly mention the effects of two other variables of
interest and importance: the Federal government budget and the corporate bond
rate. We have not included these variables In Table II because they are
almost totally dependent on the choice of exogenous policy instruments which
are used in the government offset calculations. We have»for example,
chosen a monetary policy which basically keeps Interest rates at the base-
line levels. With respect to the government budget, it might be noted that
although we have Increased Federal government spending by $ 14 billion, the
surplus declines only $ 5% billion. The difference is made up by Increased
taxes resulting from the higher nominal value of personal and corporate Incomes.
Although we do not discuss the other runs in this summary, it nay be
of interest to examine briefly the results which would occur for the 150% of
median change run. Under this maximum reasonable assumption, we would find
329
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the following (the numbers in parantheses refer to the analogous results
for the 100% run).
1.	By 1976, the wholesale price index will be 4.5% (2.9%) higher, the
implicit GNP deflator will be 2.8% (1.8%) higher, and the consumer price
index will be 2.4% (1.5%) higher. By 1980 the differentials become 5.6%
(3.7%), 4.0% (2.6%), and 3.8% (2.4%) respectively.
2.	The net foreign balance is $ 3.4 ($2.2) billion lower in 1976 and
$ 4.5 ($2.8) billion lower by 1980.
3.	Fixed business investment in constant dollars is $2.6 ($1.5) billion
higher in 1976, but $0.1 ($0.2) billion lower in 1980.
4.	Housing starts are 0.27 (0.14) million lower in 1976 and 0.26 (0.14)
million lower in 1980.
In addition, the Federal government surplus, which had only declined from
$7.7 billion to $ 2.2 billion in the 100% offset run, now registers - $ 3.7
billion.
It can be seen that there are important nonlinearities in the
model as the amount of fiscal stimulus increases. Prices rise more than
1.5 times the median change simulation, and the net foreign balance declines
more than 1.5 times as much. Fixed business investment rises proportionately
less and housing starts are relatively much harder hit. Thus if pollution
control costs are 150% of the median estimates used in this study
and steps are taken to offset the rise in enemployment but not
in prices, prices could be as much as 4% higher above the baseline solution
and the net foreign balance could be as much as $ 4.5 billion lower by 1980.
330
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Conclusion
In this report we have shown that the additional costs
incurred by implementing existing laws for pollution control
standards will indeed have a significant effect on the U.S.
economy. in particular, it is very difficult to escape the
conclusion that either prices must rise by an additional 1/4%
per year throughout the decade - with peak incremental differ-
ences of 1/2% in 1974 and 1975 - or the rate of unemployment
must be as much as 1/4% higher during the decade. The U.S.
has thus far in the postwar period been unable to resolve the
problem of price stability at full employment, and there is no
reason to expect that this problem will respond more favorably
to the added costs of pollution controls than it has to the
added costs of higher factor prices. In fact, insofar as
investment to meet pollution control standards may be non-
productive in the sense that it does not increase output, price
increases might be more pronounced than in other cases.
On the other variable of major importance, namely the
sharp decline in the net foreign balance, a variety of measures
(tax or devaluation) could be adopted to reduce the decline in
net exports.
There are, of course, a number of caveats which must be
attached to these results. By the very nature of the macroeco-
331
-------
nomic approach which we have used, this report does not consider
the differential effects on specific regions or firms. Since
we have used cost data for only 15 major industries, the cost
estimates are understated by some unknown proportion. Further-
more, the cost data themselves are probably subject to serious
reservations, a point which is technically beyond the scope of
this report but should be considered as a distinct possibility.
No assumption has been made about the productivity on pollution
control investment except that it does not add or detract from
output. This can be challenged for a number of industries. We
have also had to make a number of critical assumptions about
percentage pass-alongs at various stages of the analysis.
However, in view of our much more detailed analysis on cost-
price mark-ups for pollution control equipment in the auto
industry, we believe that these mark-up estimates are fairly
close.
332
U. 8. GOVERNMENT PRWTTNO OrriCBi l»T» O -
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