United States
Environmental Protection
Agency
Office Of Air Quality
Planning And Standards
Research Triangle Park, NC 27711
September 2002
FINAL REPORT
Air
Economic Impact Analysis of
Final Coke Ovens NESHAP
Final Report
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EPA 452/R-02-008
September 2002
Economic Impact Analysis of
the Final Coke Ovens NESHAP
By:
Michael P. Gallaher
Brooks M. Depro
Center for Regulatory Economics and Policy Research
RTI
Research Triangle Park, NC 27709
Prepared for:
Tyler J. Fox
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group
(MD-C339-01)
Research Triangle Park, NC 27711
EPA Contract No. 68-D-99-024
RTI Project No. 7647.003.274
Steve Page, Director
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Office of Air and Radiation
Research Triangle Park, NC 27711
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This report has been reviewed by the Emission Standards Division of the Office of Air Quality Planning
and Standards of the United States Environmental Protection Agency and approved for publication.
Mention of trade names or commercial products is not intended to constitute endorsement or
recommendation for use. Copies of this report are available through the Library Services (MD-C267-01),
U.S. Environmental Protection Agency, Research Triangle Park, NC 27711, or from the National Technical
Information Services 5285 Port Royal Road, Springfield, VA 22161.
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CONTENTS
Section Page
1 Introduction 1-1
1.1 Agency Requirements for an EIA 1-1
1.2 Overview of Coke, Iron and Steel, and Foundry Industries 1-2
1.3 Summary of EIA Results 1-4
1.4 Organization of this Report 1-5
2 Industry Profile 2-1
2.1 Production Overview 2-1
2.1.1 By-Product Coke Production Process 2-2
2.1.2 Types of Coke 2-3
2.2 Industry Organization 2-8
2.2.1 Manufacturing Plants 2-8
2.2.2 Companies 2-11
2.2.3 Industry Trends 2-13
2.2.4 Markets 2-15
2.3 Market Data 2-16
3 Engineering Cost Analysis 3-1
3.1 Overview of Emissions from Coke Batteries 3-1
3.2 Approach for Estimating Compliance Costs 3-2
111
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CONTENTS (CONTINUED)
Section Page
3.3 Costs for MACT Performance 3-3
3.3.1 Costs for the Baseline Program 3-4
3.3.2 Major Repairs 3-4
3.3.3 Quenching 3-5
3.3.4 Monitoring Costs 3-5
3.3.5 Capital Recovery Factors 3-6
3.4 Estimates of Nationwide Costs 3-6
4 Economic Impact Analysis 4-1
4.1 EIA Data Inputs 4-1
4.1.1 Producer Characterization 4-1
4.1.2 Market Characterization 4-2
4.1.3 Regulatory Control Costs 4-4
4.2 EIA Methodology Summary 4-6
4.3 Economic Impact Results 4-8
4.3.1 Market-Level Impacts 4-9
4.3.2 Industry-Level Impacts 4-9
4.3.2.1 Changes in Profitability 4-12
4.3.2.2 Facility Closures 4-15
4.3.2.3 Changes in Employment 4-15
4.3.3 Social Cost 4-15
5 Small Business Impacts 5-1
5.1 Identifying Small Businesses 5-1
5.2 Screening-Level Analysis 5-2
5.3 Economic Analysis 5-4
5.4 Assessment 5-4
IV
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CONTENTS (CONTINUED)
Section Page
Appendices
A Economic Impact Analysis Methodology A-l
B Development of Coke Battery Cost Functions B-l
C Economic Estimation of the Demand Elasticity for Steel Mill Products C-l
D Economic Estimation of the Demand Elasticity for Iron Castings D-l
E Joint Economic Impact Analysis of the Integrated Iron and Steel
MACT Standard with the Coke MACT Standard E-l
F Foreign Imports Sensitivity Analysis F-l
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LIST OF FIGURES
Number Page
1-1 Summary of Interactions Between Producers and Commodities in the
Iron and Steel Industry 1-3
2-1 The By-Product Coke Production Process 2-3
2-2 A Schematic of a By-Product Coke Battery 2-4
2-3 Distribution of U.S. Coke Production by Type: 2000 2-5
2-4 Location of Coke Manufacturing Plants by Type of Producer: 1997 2-9
2-5 Distribution of Affected U.S. Companies by Size: 2000 2-13
2-6 Price Trends for Coke: 1992-2001 2-19
4-1 Market Linkages Modeled in the Economic Impact Analysis 4-3
4-2 Market Equilibrium without and with Regulation 4-7
VI
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LIST OF TABLES
Number Page
2-1 Air Emissions from U.S. Coke Manufacturing Plants by Emission Point 2-4
2-2 Summary Data for Coke Manufacturing Plants: 1997 2-6
2-3 Coke Industry Summary Data by Type of Producer: 1997 2-10
2-4 Summary of Companies Owning Potentially Affected Coke
Manufacturing Plants: 2000 2-12
2-5 U.S. Production, Foreign Trade, and Apparent Consumption of Coke:
1980-1997 (103 short tons) 2-17
2-6 Domestic Coke Production by Type: 1998-2000 2-18
2-7 Foreign Trade Concentration for Coke Production 2-18
3-1 Repair Categories and Assignment of Batteries 3-2
3-2 Capital Recovery Factors (at 7 percent interest) 3-6
3-3 Capital Costs for Battery Repairs and Baseline Program ($1,000) 3-7
3-4 Total Annual Costs for Battery Repairs and Baseline Program ($1,000) 3-8
3-5 Estimated Nationwide Compliance Costs for Coke Batteries Associated with the
MACT Floor 3-9
4-1 Baseline Characterization of U.S. Iron and Steel Markets: 2000 4-5
4-2 Market-Level Impacts of the Final Coke MACT: 2000 4-10
4-3 National-Level Industry Impacts of the Final Coke MACT: 2000 4-11
4-4 Distribution Impacts of the Final Coke MACT Across Directly Affected
Producers: 2000 4-14
4-5 Distribution of the Social Costs of the Final Coke MACT: 2000 4-16
5-1 Summary Statistics for SBREFA Screening Analysis: 2000 5-3
5-2 Small Business Impacts of the Final Coke MACT: 2000 5-5
vn
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SECTION 1
INTRODUCTION
The U.S. Environmental Protection Agency (EPA) has developed a maximum
achievable control technology (MACT) standard to reduce hazardous air pollutants (HAPs)
from the coke ovens: pushing, quenching, and battery stacks source category. To support
this rulemaking, EPA's Innovative Strategies and Economics Group (ISEG) has conducted
an economic impact analysis (EIA) to assess the potential costs of the rule. This report
documents the methods and results of this EIA. These final standards will implement
Section 112(d) of the Clean Air Act (CAA) by requiring all major sources to meet HAP
emission standards reflecting the application of the MACT. The HAPs emitted by this
source category include coke oven emissions, polycyclic organic matter, and volatile organic
compounds such as benzene and toluene.
1.1 Agency Requirements for an EIA
Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for
specific regulations and standards proposed under the authority of the Act.1 ISEG's
Economic Analysis Resource Document provides detailed guidelines and expectations for
economic analyses that support MACT rulemaking (EPA, 1999). In the case of the coke
MACT, these requirements are fulfilled by examining the following:
• facility-level impacts (e.g., changes in output rates, profitability, and facility
closures),
!In addition, Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs for
proposed significant regulatory actions. Office of Management and Budget (OMB) guidance under EO
12866 stipulates that a full benefit-cost analysis is required only when the regulatory action has an annual
effect on the economy of $100 million or more. Other statutory and administrative requirements include
examination of the composition and distribution of benefits and costs. For example, the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of 1996
(SBREFA), requires EPA to consider the economic impacts of regulatory actions on small entities.
1-1
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• market-level impacts (e.g., changes in market prices, domestic production, and
imports),
• industry-level impacts (e.g., changes in revenue, costs, and employment), and
• societal-level impacts (e.g., estimates of the consumer burden as a result of higher
prices and reduced consumption levels and changes in domestic and foreign
profitability).
1.2 Overview of Coke, Iron and Steel, and Foundry Industries
In the United States, furnace and foundry coke are produced by two producing
sectors—integrated producers and merchant producers. Integrated producers are part of
integrated iron and steel mills and primarily produce furnace coke for captive use in blast
furnaces. In 2000, integrated producers accounted for approximately three-fourths of U.S.
coke capacity, and merchant producers accounted for the remaining one-fourth. Merchant
producers sell furnace and foundry coke on the open market to integrated steel producers
(i.e., furnace coke) and iron foundries (i.e., foundry coke). Some merchant producers sell
both furnace and foundry coke, while others specialize in only one.
Figure 1-1 summarizes the interactions between source categories and markets within
the broader iron and steel industry. As shown, captive coke plants are colocated at integrated
iron and steel mills providing furnace coke for its blast furnaces, while merchant coke plants
supply the remaining demand for furnace coke at integrated iron and steel mills and supply
the entire demand for foundry coke at iron foundries. These integrated mills compete with
nonintegrated mills (i.e., minimills) and foreign imports in the markets for these steel
products typically consumed by the automotive, construction, and other durable goods
producers. Alternatively, iron foundries use foundry coke, pig iron, and scrap in their
ironmaking furnaces (cupolas) to produce iron castings, and steel foundries use pig iron and
scrap in their steelmaking furnaces (electric arc and electric induction) to produce steel
castings. The markets for iron and steel castings are distinct with different product
characteristics and end users.
The EIA models the specific links between these models. The analysis to support the
coke EIA focuses on four specific markets:
• furnace coke,
• foundry coke,
1-2
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Figure 1-1. Summary of Interactions Between Producers and Commodities in the
Iron and Steel Industry
1-3
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• steel mill products, and
• iron castings.
Changes in price and quantity in these markets are used to estimate the facility, market,
industry, and social impacts of the coke regulation.
1.3 Summary of EIA Results
The rule requires coke manufacturers to implement good management practices and
ongoing maintenance that will increase the costs of producing furnace and foundry coke at
affected facilities. The increased production costs will lead to economic impacts in the form
of increases in market prices and decreases in domestic furnace coke production. The
impacts of these price increases will be borne by integrated producers of steel mill products
as well as consumers of steel mill products. Nonintegrated steel mills and foreign producers
of furnace coke will earn higher profits. Key results of the EIA for the coke MACT are as
follows:
• Engineering Costs: The engineering analysis estimates annual costs for existing
sources of $20.2 million.2
• Sales Test: A simple "sales test," in which the annualized compliance costs are
computed as a share of sales for affected companies that own coke batteries,
shows that thirteen of the fourteen companies are affected by less than 3 percent
of sales. The cost-to-sales ratio (CSR) for the median company is 0.13 percent.
• Price and Quantity Impacts: The EIA model predicts the following:
— The market price for furnace coke is projected to increase by 2.7 percent
($3.00/short ton), and domestic furnace coke production is projected to
decrease by 3.9 percent (348,000 tons/year).
— The market price and domestic foundry coke production for foundry coke are
projected to remain unchanged.
— The market price for steel mill products is projected to increase by 0.03
percent ($0.14/short ton), and domestic production of steel mill products is
projected to decrease by 0.18 percent (192,000 tons/year).
— The market price and production for iron castings are projected to remain
unchanged.
2A11 costs were adjusted to $2000 dollars (base year of the economic analysis).
1-4
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• Plant Closures: Two furnace coke batteries are projected to close.
• Small Businesses: The Agency identified three small companies that own and
operate coke batteries, or 21 percent of the total. The average CSR for these
firms is 2.0 percent. One small business is projected to have a CSR between 1
and 3 percent. One small business is projected to have a CSR greater than
3 percent. No facilities or batteries owned by a small business are projected to
close as a result of the regulation.
• Social Costs: The annual social costs are projected to be $18.6 million.
— The consumer burden as a result of higher prices and reduced consumption
levels is $20.9 million annually.
— The aggregate producer profit gain is expected to increase by $2.3 million.
/ The profit losses are $10.3 million annually for domestic producers.
«/" Foreign producer profits increase by $12.6 million due to higher prices
and level of impacts.
1.4 Organization of this Report
The remainder of this report supports and details the methodology and the results of
the EIA of the coke MACT.
• Section 2 presents a profile of the coke industry.
• Section 3 describes the regulatory controls and presents engineering cost
estimates for the regulation.
• Section 4 reports market-, industry-, and societal-level impacts.
• Section 5 contains the small business screening analysis.
• Appendix A describes the EIA methodology.
• Appendix B describes the development of the coke battery cost functions.
• Appendixes C and D include the econometric estimation of the demand elasticity
for steel mill products and iron castings.
• Appendix E reports the results of the joint economic impacts of the Iron and Steel
and Coke MACTs.
• Appendix F reports the results of foreign coke import elasticity sensitivity
analysis.
1-5
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SECTION 2
INDUSTRY PROFILE
Coke is metallurgical coal that has been baked into a charcoal-like substance that
burns more evenly and has more structural strength than coal. Coke manufacture is included
under Standard Industrial Classification (SIC) code 3312—Blast Furnaces and Steel Mills;
however, coke production is a small fraction of this industry. In 2000, the U.S. produced
20.8 million short tons of coke. Coke is primarily used as an input for producing steel in
blast furnaces at integrated iron and steel mills (i.e., furnace coke) and as an input for gray,
ductile, and malleable iron castings in cupolas at iron foundries (i.e., foundry coke).
Therefore, the demand for coke is a derived demand that is largely dependent on production
of steel from blast furnaces and iron castings.
In the remainder of this section, we provide a summary profile of the coke industry in
the United States, including the technical and economic aspects of the industry that must be
addressed in the economic impact analysis. Section 2.1 provides an overview of the
production processes and the resulting types of coke. Section 2.2 summarizes the
organization of the U.S. coke industry, including a description of U.S. manufacturing plants
and batteries, the companies that own these plants, and the markets for coke products.
Finally, Section 2.3 presents historical data on the coke industry, including U.S. production
and consumption and foreign trade.
2.1 Production Overview
This section provides an overview of the by-product coke manufacturing process and
types of coke produced in the United States. Although not discussed in this section, several
substitute technologies for by-product cokemaking have been developed in the United States
and abroad, including nonrecovery cokemaking, formcoke, and jumbo coking ovens. Of
these alternatives to by-product coke batteries, the nonrecovery method is the only substitute
in terms of current market share in the United States.
2-1
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2.1.1 By-Product Coke Production Process
Cokemaking involves heating coal in the absence of air resulting in the separation of
the non-carbon elements of the coal from the product (i.e., coke). The process essentially
bakes the coal into a charcoal-like substance for use as fuel in blast furnaces at integrated
iron and steel mills and cupolas at iron foundries. Figure 2-1 summarizes the multi-step
production process for by-product cokemaking, which includes the following steps:
• coal preparation and charging,
• coking and pushing,
• quenching, and
• by-product recovery.
In by-product cokemaking, coal is converted to coke in long, narrow by-product coke ovens
that are constructed in groups with common side walls, called batteries (typically consisting
of 10 to 100 coke ovens).
Figure 2-2 provides a schematic of a by-product coke battery. Metallurgical coal is
pulverized and fed into the oven (or charged) through ports at the top of the oven, which are
then covered with lids. The coal undergoes destructive distillation in the oven at 1,650°F to
2,000°F for 15 to 30 hours. A slight positive back-pressure maintained on the oven prevents
air from entering the oven during the coking process. After coking, the incandescent or
"hot" coke is then pushed from the coke oven into a special railroad car and transported to a
quench tower at the end of the battery where it is cooled with water and screened to a
uniform size. During this process, raw coke oven gas is removed through an offtake system,
by-products such as benzene, toluene, and xylene are recovered, and the cleaned gas is used
to underfire the coke ovens and for fuel elsewhere in the plant.
As shown in Table 2-1, pollutants may be emitted into the atmosphere from several
sources during by-product cokemaking. For the final MACT standards, the sources of
environmental concern to EPA are the pushing of coke from the ovens, the quenching of
incandescent coke, and battery stacks. Coke pushing results in fugitive particulate emissions,
which may include volatile organic compounds (VOCs), while coke quenching results in
particulate emissions with traces of organic compounds. EPA will focus on these three areas
of emissions as HAP-emitting source categories to be regulated.
2-2
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Metallurgical Coal
Coal Preparation
and Charging
All Other Inputs
Recycled
Coke
Oven Gas
Coking and Pushing
All Other Inputs
By-Product
Recovery
By-Products
Hot" Coke
Quenching
Other
By-Products
Coke
To Blast Furnace or
Foundry Cupola
Figure 2-1. The By-Product Coke Production Process
2.7.2 Types of Coke
The particular mix of high- and low-volatile coals used and the length of time the
coal is heated (i.e., coking time) determine the type of coke produced: (1) furnace coke,
which is used in blast furnaces as part of the traditional steelmaking process, or (2) foundry
coke, which is used in the cupolas of foundries in making gray, ductile, or malleable iron
castings. Furnace coke is produced by baking a coal mix of 10 to 30 percent low-volatile
coal for 16 to 18 hours at oven temperatures of 2,200°F. Most blast furnace operators prefer
coke sized between 0.75 inches and 3 inches. Alternatively, foundry coke is produced by
baking a mix of 50 percent or more low-volatile coal for 27 to 30 hours at oven temperatures
of 1,800°F. Coke size requirements in foundry cupolas are a function of the cupola diameter
(usually based on a 10:1 ratio of cupola diameter to coke size) with foundry coke ranging in
2-3
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Standpipe Caps
Coal Ports
Quench
Tower
Waste Gas
Stack
Coke Side / Coke Guide
Coal
Conveyor
Figure 2-2. A Schematic of a By-Product Coke Battery
Source: U.S. International Trade Commission. 1994. Metallurgical Coke: Baseline Analysis of the U.S.
Industry and Imports. Publication No. 2745. Washington, DC: U.S. International Trade Commission.
Table 2-1. Air Emissions from U.S. Coke Manufacturing Plants by Emission Point
Emission Point
Example Pollutants
Oven charging and leaks from doors, lids, and
offtakes3
Coke pushing, coke quenching, and battery stacks
(oven underfiring)b
By-product recovery plant0
Polycyclic organic matter (e.g., benzo(a)pyrene and
many others), volatile organic compounds (e.g.,
benzene, toluene), and particulate matter
Benzene, toluene, zylene, napthalene, and other
volatile organic compounds
a A NESHAP was promulgated for these emission points in 1993—see 40 CFR Part 63, Subpart L.
b The final MACT standard evaluated in this economic analysis will address hazardous pollutants from these
emission points and is scheduled for promulgation in 2001 in 40 CFR Part 63, Subpart CCCCC.
c A NESHAP for the by-product recovery plant was promulgated in 1989 in 40 CFR Part 61, Subpart L.
2-4
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size from 4 inches to 9 inches (Lankford et al., 1985). Because the longer coking times and
lower temperatures required for foundry coke are more favorable for long-term production,
foundry coke batteries typically remain in acceptable working condition longer than furnace
coke batteries (Hogan and Koelble, 1996).
As shown in Figure 2-3, furnace coke accounts for the vast majority of coke produced
in the United States. In 2000, furnace coke production was roughly 17.7 million short tons,
or 85 percent of total U.S. coke production, while foundry coke production was only
1.3 million short tons. Integrated iron and steel producers that use furnace coke in their blast
furnaces may either produce this coke on-site (i.e., captive coke producers) or purchase it on
the market from merchant coke producers. As shown in Table 2-2, almost 76 percent of U.S.
furnace coke capacity in 1997 was from captive operations at integrated steel producers.
Alternatively, there are no captive coke operations at U.S. iron foundries so these producers
purchase all foundry coke on the market from merchant coke producers. In summary,
captive coke production occurs at large integrated iron and steel mills and accounts for the
vast majority of domestic furnace coke production, while merchant coke production occurs at
smaller merchant plants and accounts for a small share of furnace coke production and all of
the foundry coke produced in the United States.
U.S. Coke Production
20.8 million short tons
Foundry Coke
6%
/ s\
Furnace Coke
85%
I
Industrial Coke and
Coke Breeze
9%
Figure 2-3. Distribution of U.S. Coke Production by Type: 2000
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Table 2-2. Summary Data for Coke Manufacturing Plants: 1997
ON
Plant Name
Number
of
Location Batteries
Number
of Coke
Ovens
Total Coke
Capacity
(short
tons/yr)
Coke Production by Type (short tons/yr)
Furnace Foundry
Other
Total
Integrated Producers
Acme SteeF
AK Steel
AK Steel
Bethlehem Steel
Bethlehem Steer
Geneva SteeF
Gulf States Steel
LTV Steer
LTV Steel
National Steel
National Steel
U.S. Steel
U.S. Steel
Wheeling-
Pittsburgh
Total, Integrated
Chicago, IL
Ashland, KY
Middletown, OH
Burns Harbor, IN
1 Lackawanna, NY
Provo, UT
Gadsden, AL
Chicago, IL
Warren, OH
Ecorse, MI
Granite City, IL
Clairton, PA
Gary, IN
Follansbee, WV
Producers
2
2
1
2
2
4
2
1
1
1
2
12
4
4
40
100
146
76
164
152
252
130
60
85
85
90
816
268
224
2,648
500,000
1,000,000
429,901
1,877,000
750,000
800,000
500,000
615,000
549,000
924,839
601,862
5,573,185
2,249,860
1,247,000
17,617,647
493,552
942,986
410,000
1,672,701
747,686
700,002
521,000
590,250
543,156
908,733
570,654
4,854,111
1,813,483
1,249,501
16,017,815
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
19,988
0
0
82,848
0
16,320
0
0
0
0
0
0
0
36,247
155,403
513,538
942,986
410,000
1,755,549
747,686
716,322
521,000
590,250
543,156
908,733
570,654
4,854,111
1,813,483
1,285,748
16,173,216
(continued)
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Table 2-2. Summary Data for Coke Manufacturing Plants: 1997 (Continued)
Plant Name
Merchant Producers
ABC Coke
Citizens Gas
Empire Coke
Erie Coke
Indiana Harbor Cokeb'c
Jewell Coke and Coalb
Koppers
New Boston Coke"
Shenango, Inc.
Sloss Industries
Tonawanda
Number
of
Location Batteries
Tarrant, AL
Indianapolis, IN
Holt, AL
Erie, PA
East Chicago, IN
Vansant, VA
Monessen, PA
Portsmouth, OH
Pittsburgh, PA
Birmingham, AL
Buffalo, NY
Total, Merchant Producers
Total, All Producers
3
3
2
2
4
4
2
1
1
3
1
26
66
Number
of Coke
Ovens
132
160
60
58
268
142
56
70
56
120
60
1,182
3,830
Total Coke
Capacity
(short
tons/yr)
699,967
634,931
162,039
214,951
1,300,000
649,000
372,581
346,126
514,779
451,948
268,964
5,615,286
23,232,933
Coke Production by Type (short tons/yr)
Furnace
25,806
173,470
0
0
0
649,000
358,105
317,777
354,137
268,304
0
2,146,599
18,164,414
Foundry
727,720
367,798
142,872
122,139
0
0
0
0
0
131,270
136,225
1,628,024
1,628,024
Other
0
93,936
0
19,013
0
0
0
4,692
0
33,500
63,822
214,963
370,366
Total
753,526
635,204
142,872
141,152
0
649,000
358,105
322,469
354,137
433,074
200,047
3,989,586
20,162,802
a Closed since 1997.
b Operates nonrecovery coke batteries not subject to the regulations.
c Newly built coke operations coming on-line during 1998.
Sources: U.S. Environmental Protection Agency. 1998. Coke Industry Responses to Information Collection Request (ICR) Survey. Database
prepared for EPA's Office of Air Quality Planning and Standards. Research Triangle Park, NC.
Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel Plants: Volume 1 Plants and Facilities."
Pittsburgh, PA: AISE.
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Co-products of the by-product coke production process are (1) coke breeze, the fine
screenings that result from the crushing of coke; and (2) "other coke," the coke that does not
meet size requirements of steel producers that is sold as a fuel source to non-steel producers.
In addition, the by-product cokemaking process results in the recovery of some salable crude
materials such as coke oven gas, ammonia liquor, tar, and light oil. The cleaned coke oven
gas is used to underfire the coke ovens with excess gas used as fuel in other parts of the plant
or sold. The remaining crude by-products may be further processed and separated into
secondary products such as anhydrous ammonia, phenol, ortho cresol, and toluene. In the
past, coke plants were a major source of these products (sometimes referred to as coal
chemicals); however, today their output is overshadowed by chemicals produced from
petroleum manufacturing (DOE, 1996).
2.2 Industry Organization
In order to inform the economic impact analysis, we provide an overview of the U.S.
coke industry based on survey data collected by the Agency for 1997. Note, however, six
coke plants have closed since the survey was completed (see Table 2-2). We also have
provided selected updated information that reflects current trends in the industry (i.e.,
company and market data).
2.2.1 Manufacturing Plants
Figure 2-4 identifies the location of U.S. coke manufacturing plants by type of
producer (i.e., integrated and merchant). As of 1997 (see Table 2-2), there were
14 integrated plants operating 40 coke batteries with 2,648 coke ovens. Total coke capacity
at these plants was 17.6 million short tons with production devoted entirely to furnace coke.
Large integrated steel companies owned and operated these plants and accounted for
80 percent of total U.S. coke production in 1997 (all furnace coke). U.S. Steel was the
largest integrated producer, operating two coke manufacturing plants in Clairton,
Pennsylvania and Gary, Indiana. The Clairton facility was the largest single coke plant in the
United States, accounting for roughly 24 percent of U.S. cokemaking capacity. Together, the
two U.S. Steel plants accounted for roughly 40 percent of all coke batteries and ovens at
integrated plants. As shown in Table 2-3, integrated coke plants had an average of 2.9 coke
batteries, 189 coke ovens, and coke capacity of 1.26 million short tons per plant. These
plants produced an average of 1.14 million short tons of furnace coke and accounted for 88
percent of the 18.2 million short tons of furnace coke produced in 1997.
2-8
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• Integrated Producers
x Merchant Producers
Figure 2-4. Location of Coke Manufacturing Plants by Type of Producer: 1997
Source: U.S. Environmental Protection Agency. 1998. Coke Industry Responses to Information Collection
Request (ICR) Survey. Database prepared for EPA's Office of Air Quality Planning and Standards.
Research Triangle Park, NC.
As of 1997, there were 11 merchant plants operating 26 coke batteries with
1,182 coke ovens. Total coke capacity at these plants was 5.6 million short tons with
production split between furnace and foundry coke. Merchant coke plants are typically
owned by smaller, independent companies that rely solely on the sale of coke and coke by-
products to generate revenue. These plants accounted for 20 percent of total U.S. coke
production in 1997. Sun Coal and Coke is the largest merchant furnace producer, operating
Jewell Coke and Coal in Vansant, Virginia and newly constructed operations at Indiana
Harbor Coke in East Chicago, Illinois (both plants employ the nonrecovery cokemaking
processes). Although listed as a merchant producer, the Indiana Harbor Coke plant is co-
located with Inland Steel's integrated plant in East Chicago, Illinois and has an agreement to
2-9
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Table 2-3. Coke Industry Summary Data by Type of Producer: 1997
Item
Coke Plants (#)
Coke Batteries (#)
Total number
Average per plant
Coke Ovens (#)
Total number
Average per plant
Coke Capacity (short tons/yr)
Total capacity
Average per plant
Integrated Producers
Total Share
14 56.0%
40 60.6%
2.86
2,648 69.1%
189.1
17,617,647 75.8%
1,258,403
Merchant Producers
Total Share
1 1 44.0%
26 39.4%
2.36
1,182 30.9%
107.5
5,615,286 24.2%
510,481
Total
25
66
2.64
3,830
153.2
23,232,933
929,317
Coke Production (short
tons/yr)
Total production
Furnace
Foundry
Other
Total
Average per Plant
Furnace
Foundry
Other
Total
16,017,815
0
155,403
16,173,218
1,144,130
0
11,100
1,155,230
88.2%
0.0%
42.0%
80.2%
2,146,599
1,628,024
214,963
3,989,586
195,145
148,002
19,542
362,690
11.8%
100.0%
58.0%
19.8%
18,164,414
1,628,024
370,366
20,162,804
726,577
65,121
14,815
806,512
Sources: U.S. Environmental Protection Agency. 1998. Coke Industry Responses to Information Collection
Request (ICR) Survey. Database prepared for EPA's Office of Air Quality Planning and Standards.
Research Triangle Park, NC.
Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel Plants:
Volume 1 Plants and Facilities." Pittsburgh, PA: AISE.
2-10
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supply 1.2 million short tons of coke to Inland and sell the residual furnace coke production
(Ninneman, 1997). As shown in Table 2-3, merchant coke plants are smaller than integrated
plants with an average of 2.4 coke batteries, 108 coke ovens, and coke capacity of only
0.5 million short tons per plant. In 1997, these plants produced an average of 195,000 short
tons of furnace coke and 148,000 short tons of foundry coke per plant, accounting for
12 percent of U.S. furnace coke and 100 percent of foundry coke produced.
2.2.2 Companies
The final MACT will potentially affect business entities that own coke manufacturing
facilities. Facilities comprise a land site with plant and equipment that combine inputs (raw
materials, energy, labor) to produce outputs (coke). Companies that own these facilities are
legal business entities that have capacity to conduct business transactions and make business
decisions that affect the facility. The terms facility, establishment, plant, and mill are
synonymous in this analysis and refer to the physical location where products are
manufactured. Likewise, the terms company and firm are synonymous and refer to the legal
business entity that owns one or more facilities.
As shown in Table 2-4, 14 companies currently operate U.S. coke manufacturing
coke batteries. These companies ranged from small, single-facility merchant coke producers
to large integrated steel producers. As shown, integrated producers are large, publicly owned
integrated steel companies such as USX Corporation and Bethlehem Steel Corporation.
Alternatively, merchant producers are smaller, typically privately owned and operated
companies including Koppers Industries, Drummond Company (which owns ABC Coke),
McWane Incorporated (which owns Empire Coke), and Citizens Gas and Coke. These
potentially affected parent companies range in size from 200 to over 50,000 employees.
Companies are grouped into small and large categories using Small Business
Administration (SBA) general size standard definitions for North American Industry
Classification System (NAICS) codes. Under these guidelines, SB A establishes 1,000 or
fewer employees as the small business threshold for Iron and Steel Mills (i.e., NAICS
331111), while coke ovens not integrated with steel mills are classified under All Other
Petroleum and Coal Products Manufacturing (i.e., NAICS 324199) with a threshold of 500.
Figure 2-5 illustrates the distribution of affected U.S. companies by size based on reported
employment data. As shown, three companies (all merchant producers), or 21 percent, are
categorized as small, and 11 companies, or 79 percent, are categorized as large. As expected,
the companies owning integrated coke plants are generally larger than the companies owning
2-11
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Table 2-4. Summary of Companies Owning Potentially Affected Coke
Manufacturing Plants: 2000
Company Name
Bethlehem Steel Corporation
Citizens Gas and Coke
Drummond Company Inc.a
International Steel Groupb
Koppers Industries Inc.
McWane Inc.c
NKK Corporation
Shenango Groupd
Sunacoe
Tonawanda Coke
Corporation'
USX Corporation
Walter Industries Inc.g
WHX Corporation11
Legal Form of
Organization
Public
Private
Private
NA
Private
Private
NA Foreign
Holding company
Public
NA
Public
Public
Public
Producer
Type
Integrated
Merchant
Merchant
Integrated
Merchant
Merchant
Integrated
Merchant
Merchant
Merchant
Integrated
Merchant
Integrated
Total Sales
($106)
4,197
339
615
4,934
724
755
14,148
49
12,426
47
39,914
1,185
1,745
Total
Employment
14,700
1,000
2,800
16,500
2,085
5,170
39,875
200
14,200
260
49,679
6,535
6,991
Small
Business
No
Yes
No
No
No
No
No
Yes
No
Yes
No
No
No
a Owns ABC Coke.
b Owns LTV Corporation. Data presented is for LTV Corporation.
c Owns Empire Coke.
d Owns Shenango Inc.
e Owns Indiana Harbor Coke Company and Jewell Coke and Coal Company, which are not subject to final
regulations.
f Owns Erie Coke Corporation.
8 Owns Sloss Industries Corporation.
h Owns Wheeling-Pittsburgh Corporation.
Source: Hoover's Online and selected 10-K and Annual Reports.
merchant coke plants. None of the nine companies owning integrated operations have fewer
than 1,000 employees or are classified as small businesses. Alternatively, three of the
companies owning merchant operations have fewer than 1,000 employees and are classified
as small businesses. However, not all companies owning merchant coke plants are small; for
example, the Sun Company is one of the largest companies with over 10,000 employees.
2-12
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Small
/ ^^^^^^^&
Large
79%
Figure 2-5. Distribution of Affected U.S. Companies by Size: 2000
2.2.3 Industry Trends
During the 1970s and 1980s, integrated steelmakers shut down blast furnaces in
response to reduced demand for steel, thereby reducing the demand for furnace coke. During
the same period, many coke batteries were also shut down, thereby reducing the supply of
coke. During the 1990s, the improved U.S. economy has produced strong demand for steel,
and domestic coke consumption currently exceeds production. This deficit may increase
because many domestic furnace coke batteries are approaching their life expectancies and
may be shut down rather than rebuilt. However, no new coke batteries have been built and
only two coke oven batteries have been rebuilt since 1990—National Steel in Ecorse,
Michigan and Bethlehem Steel in Burns Harbor, Indiana (Agarwal et al., 1996). Most recent
investments in new cokemaking have been made in non-recovery, rather than by-product
recovery, coke batteries. In fact, LTV Steel Corporation and the U.S. Steelworkers Union
are reportedly exploring the possibility of locating a non-recovery coke facility on the site of
LTV's current coke plant in Pittsburgh (American Metal Market, 1998). LTV closed this
coke plant at the end of 1997 because its operating and environmental performance
deteriorated to the point that it was unable to meet CAA requirements without prohibitive
investments of between $400 and $500 million (New Steel, 1997a).
2-13
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Faced with the prospect of spending hundreds of millions of dollars to rebuild aging
coke batteries, many integrated steelmakers have totally abandoned their captive cokemaking
operations and now rely on outside suppliers. As of 1997, five integrated steel companies
did not produce their own coke and had to purchase this input from merchant plants, foreign
sources, or other integrated producers with coke surpluses. These integrated steel
companies—Inland Steel, Rouge Steel, USS/Kobe Steel, WCI Steel, and Weirton Steel—had
an estimated aggregate coke demand of 5.8 million short tons (Hogan and Koelble, 1996). In
addition, four other integrated producers currently have coke deficits. However, there are
few integrated producers with coke surpluses to take up the slack. Hogan and Koelble
(1996) reported that only four integrated steelmakers had coke surpluses as of 1995. This
number is now down to three with the March 1998 closing of Bethlehem Steel's coke
operations in Bethlehem, Pennsylvania (New Steel, 1998b). These recent closures by LTV
and Bethlehem removed 2.4 million short tons, or 10.5 percent, of U.S. coke capacity (New
Steel, 1998b).
Furthermore, several integrated firms have sold some or all of their coke batteries to
merchant companies, which then sell the majority of the coke they produce to the steel
company at which the battery is located. Some of these are existing coke batteries, and
others are newly rebuilt batteries, including some that use the non-recovery cokemaking
process. An example is the Indiana Harbor Coke Company's coke batteries located at Inland
Steel's Indiana Harbor Works in East Chicago, Indiana. Both National Steel and Bethlehem
Steel have recently sold coke batteries to DTE Energy Company (New Steel, 1998a; New
Steel, 1997b). Both steel companies will continue to operate the batteries and will buy the
majority of the coke produced by the batteries from DTE at market value (National Steel,
1998).
These recent trends should have the following future impacts on the U.S. coke
industry:
• Reduce the share of furnace coke produced by integrated producers, thereby
increasing reliance on merchant producers and foreign sources.
• Increase the furnace coke share of merchant production as these producers
respond to expected increases in market prices for furnace coke, which also has
lower production cost than foundry coke.
• Increase the volume of foreign imports of furnace and foundry coke as domestic
demand continues to exceed domestic supply.
2-14
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In 2000 and 2001, representatives from the coke industry (furnace and foundry) filed
separate petitions alleging that the industry was materially injured or threatened with
material injury from imports being sold at less than fair value (LTFV). After Commission
investigations, the U.S. International Trade Commission found "no reasonable" indication
the blast furnace coke industry was materially injured from these imports. In contrast, the
Commission did find that foundry coke was sold in the United States at LTFV. As a result,
the Secretary of Commerce issued an antidumping duty order on September 17, 2001 which
assessed antidumping duties on foundry coke from China.
2.2.4 Markets
The U.S. coke industry has two primary product markets (i.e., furnace and foundry
coke) that are supplied by two producing sectors—integrated producers and merchant
producers. Integrated producers are part of integrated iron and steel mills and only produce
furnace coke for captive use in blast furnaces. Therefore, much of the furnace coke is
produced and consumed by the same integrated producer and never passes through a market.
However, some integrated steel producers have closed their coke batteries over the past
decade and must purchase their coke supply from merchant producers or foreign sources. In
addition, a small number of integrated steelmakers produce more furnace coke than they
need and sell their surplus to other integrated steelmakers. As of 1997, integrated producers
accounted for roughly 76 percent of U.S. coke capacity with merchant producers accounting
for the remaining 23 percent. These merchant producers sell furnace and foundry coke on
the open market to integrated steel producers (i.e., furnace coke) and iron foundries (i.e.,
foundry coke). Some merchant producers sell both furnace and foundry coke, while others
specialize in only one.
Although captive consumption currently dominates the U.S. furnace coke market,
open market sales of furnace coke are increasing (USITC, 1994). Because of higher
production costs, U.S. integrated steel producers have been increasing their consumption of
furnace coke from merchant coke producers, foreign imports, and other integrated steel
producers with coke surpluses. Although concentration ratios indicate that the U.S. furnace
market is slightly concentrated, it is expected to be competitive at the national level after
factoring in competition from foreign imports and integrated producers with coke surpluses.
Merchant coke producers account for a small share of U.S. furnace coke production
(about 12 percent in 1997); however, they account for 100 percent of U.S. foundry coke
production. The U.S. foundry market appears to be fairly concentrated with two companies
currently accounting for almost 68 percent of U.S. production—Drummond Company
2-15
-------
Incorporated with 45 percent and Citizens Gas and Coke with 22.6 percent. The remaining
four merchant producers each account for between 7.5 and 8.8 percent of the market.
However, these producers do not produce a differentiated product and are limited to selling
only to iron foundries, and these factors limit their ability to influence prices. In addition, the
strategic location of these manufacturers would appear to promote competition within the
southeastern and north-central United States and, perhaps, across regions given access to
water transportation. Thus, the U.S. market for foundry coke is also expected to be
competitive at the national level.
2.3 Market Data
The average annual production growth rate for furnace and foundry coke declined
approximately 2.6 percent for the period 1990 and 2001 (see Table 2-5). Production fell
significantly between 2000 and 2001 (9.0 percent) as a result of declining economic
conditions in the United States and high volumes of Chinese imports. In 2000, 17.7 million
short tons of furnace coke and 1.3 million short tons of foundry coke were produced
domestically (see Table 2-6).
Apparent consumption of coke declined by almost 2 percent between 1990 and 2001,
while levels have fluctuated in recent years. In 2001, coke consumption fell to its lowest
level in over 2 decades. This follows trends in the integrated iron and steel sector, the
primary consumer of domestic coke. The steel industry has faced strong import competition
and declining national economic conditions during this period.
Export ratios indicate that 5.5 percent of domestic production was sold overseas in
2000 (see Table 2-7). This ratio has more than doubled over the past 10 years, from an
initial level of 2.1 percent in 1990. The imports have also grown throughout the decade, and
comprised over 16 percent of U.S. consumption in 2000. China and Japan are particularly
strong suppliers to U.S. markets.
The average price per ton for coke has fluctuated moderately during the past decade.
Price volatility was greatest during the latter part of the 1990s, with 1999-2000 exhibiting
the largest variation in prices, a drop of nearly 8 percent (see Figure 2-6). From the fourth
quarter of 1999 to the second quarter of 2001, the price of furnace coke fluctuated modestly
between $109 and $112 per short ton (USITC, 2001c). Between the third quarter of 1998
and the first quarter of 2000, foundry coke prices declined steadily, falling from $165 to
$161 per short ton (USITC, 2001b). Substantially lower import prices on coke put
downward pressure on domestic prices throughout this period, according to the ITC.
2-16
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Table 2-5. U.S. Production, Foreign Trade, and Apparent Consumption of Coke:
1980-1997 (103 short tons)
U.S.
Year Production
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
1980-2001
1980-1989
1990-2001
46,132
42,786
28,115
25,808
30,561
28,651
25,540
26,304
28,945
28,045
27,617
24,046
23,410
23,182
22,686
23,749
23,075
22,115
20,041
20,016
20,808
18,949
-2.9%
-4.6%
-2.6%
Exports
2,071
1,170
993
665
1,045
1,122
1,004
574
1,093
1,085
572
740
642
835
660
750
1,121
832
1129
898
1146
1069
Average Annual
-0.9%
-4.1%
5.5%
Changes in Apparent
Imports Inventories Consumption3
659
527
120
35
582
578
329
922
2,688
2,311
1,078
1,185
2,098
2,155
3,338
3,820
2,543
3,185
3,834
3,224
3,781
2,340
Growth Rates
14.6%
24.0%
8.5%
3,442
-1,903
1,466
^,672
198
-1,163
^87
-1,012
529
336
-1
189
-224
^22
-525
366
21
3
-361
-81
202
-73
41,278
44,046
25,776
29,850
29,900
29,270
25,352
27,664
30,011
28,935
28,124
24,302
25,090
24,924
25,889
26,453
24,476
24,465
23,107
22,423
23,241
20,293
-2.2%
-3.7%
-1.9%
a Apparent consumption is equal to U.S. production minus exports plus imports minus changes in
inventories.
Sources: U.S. Department of Energy. "AER Database: Coke Overview, 1949-1997."
. Washington, DC: Energy Information
Administration. As obtained on September 14, 1998a.
Hogan, William T., and Frank T. Koelble. 1996. "Steel's Coke Deficit: 5.6 Million Tons and
Growing." New Steel 12(12):50-59.
U.S. International Trade Commission. Trade Database: Version 1.7.1.
As obtained in September 1998.
U.S. Department of Energy, Energy Information Administration. 2002. Quarterly Coal Report:
January-March 2002. Washington, DC: U.S. Department of Energy.
.
2-17
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Table 2-6. Domestic Coke Production by Type: 1998-2000
Year
1998
1999
2000
Furnace
17,637
16,976
17,747
Share
88.0%
84.8%
85.3%
Foundry
1,364
1,376
1,257
Share
6.8%
6.9%
6.0%
Other
1,040
1,665
1,804
Share
5.2%
8.3%
8.7%
Total
20,041
20,016
20,808
Sources: U.S. International Trade Commission. July 2000. "Foundry Coke: A Review of the Industries in
the United States and China." .
U.S. Department of Energy, Energy Information Administration. 2002. Quarterly Coal Report:
January-March 2002. Washington, DC: U.S. Department of Energy.
.
U.S. International Trade Commission (USITC). 2001c. "Blast Furnace Coke from China and
Japan." Investigations Nos. 73l-TA-951-952 (Preliminary) Publication 3444; August 2001.
.
Table 2-7. Foreign Trade Concentration for Coke Production
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Export Ratio
2.1%
3.1%
2.7%
3.6%
2.9%
3.2%
4.9%
3.8%
5.6%
4.5%
5.5%
Import Ratio
3.8%
4.9%
8.4%
8.6%
12.9%
14.4%
10.4%
13.0%
16.6%
14.4%
16.3%
Sources: U.S. Department of Energy, Energy Information Administration. 2002. Quarterly Coal Report:
January-March 2002. Washington, DC: U.S. Department of Energy.
.
2-18
-------
160
g 140
ii
CM A on
o> I^U
O)
X
0)
•
0)
u
100
-± 80
60
40
1992 1993 1994 1995
1996 1997
Year
1998 1999 2000 2001
Figure 2-6. Price Trends for Coke: 1992-2001
2-19
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SECTION 3
ENGINEERING COST ANALYSIS
Control measures implemented to comply with the MACT standard will impose
regulatory costs on coke batteries. This section presents compliance costs for representative
"model" batteries and the estimate of national compliance costs associated with the rule.
These engineering costs are defined as the initial capital and annual operating costs assuming
no behavioral market adjustment by producers or consumers. For input to the EIA,
engineering costs are expressed per unit of coke production and used to shift the coke supply
functions in the market model.
The final MACT will cover the "Coke Ovens: Pushing, Quenching, and Battery
Stacks" source category. It will affect all 46 by-product coke oven batteries at 17 coke
plants. The processes covered by the regulation include pushing the coke from the coke
oven, quenching the incandescent coke with water in a quench tower, and the battery stack
which is the discharge point for the underfiring system. Capital, operating, and monitoring
costs were estimated for representative model batteries. Model battery costs were linked to
the existing population of coke batteries to estimate the national costs of the regulation.
3.1 Overview of Emissions from Coke Batteries
The listed HAP of concern is "coke oven emissions," which includes hundreds of
organic compounds formed when volatiles are thermally distilled from the coal during the
coking process. Traditionally, benzene-soluble organics and methylene chloride-soluble
organics have been used as surrogate measures of coke oven emissions. The primary
constituents of concern are polynuclear aromatic hydrocarbons. Other constituents include
benzene, toluene, and xylene.
Coke oven emissions occur from pushing and quenching when the coal has not been
fully coked, which is called a "green" push. A green push produces a dense cloud of coke
oven emissions that is not captured and controlled by the emission control systems used for
particulate matter. Coke oven emissions occur from battery stacks when raw coke oven gas
leaks through the oven walls, enters the flues of the underfiring system, and is discharged
through the stack. Coke oven emissions from these sources are controlled by pollution
3-1
-------
prevention activities, diagnostic procedures, and corrective actions. One component of the
control technology is good systematic operation and maintenance of the battery to prevent
green pushes and stack emissions.
Based on limited test data and best engineering judgment, the final standards are
expected to reduce coke oven emissions from pushing, quenching, and battery stacks by
about 50 percent. There is uncertainty in estimates of emissions and emission reductions
because the emissions are fugitive in nature. For example, the emissions from green coke
during pushing and quenching are not enclosed or captured in a conveyance, which makes
accurate measurement of concentrations and flow rates very difficult (or impossible).
3.2 Approach for Estimating Compliance Costs
The costs for individual batteries to achieve the MACT level of control will vary
depending on the battery condition and control equipment in place. There is uncertainty in
determining exactly what costs will be incurred by each battery. Consequently, several
model batteries were developed to represent the range of battery types and conditions to
place bounds on the probable costs. Several repair categories were developed, and after
review by the Coke Oven Environmental Task Force (COETF) of the American Coke and
Coal Chemicals Institute (ACCCI), the number of categories was expanded. The repair
categories recommended by COETF are given in Table 3-1. Costs estimates for each type of
repair and any lost production associated with them were also provided by COETF based on
the experience of coke plant operators. These cost estimates were then applied to each repair
category to estimate the costs for model batteries.
Actual batteries were assigned to model batteries based on opacity data, discussions
with plant operators, information from site visits, conversations with inspectors from state
agencies, and best judgment based on battery age and repair history. The battery
assignments to specific repair categories are given in Table 3-1. The most uncertainty in the
assignment to model batteries is for those batteries for which the least information is
available. These batteries were assigned to the more extensive repair groups. Consequently,
the costs to be incurred by these batteries may be overstated because they may not require
the extensive repairs that were assumed. In addition, some of these batteries may have
required repairs to continue operating even without the MACT standard.
3-2
-------
Table 3-1. Repair Categories and Assignment of Batteries
Repair Category
Batteries Assigned
A—Battery in good condition and can already
meet the emission limits
B—Needs a baseline program (includes special
program for tall batteries; coal quality
assurance/quality control, inspection
procedures, extensive oven patching and
welding for all batteries)
C—Needs baseline program plus end flue
repair for 25 percent of the ovens
D—Needs baseline program, 1 through wall, 5
end flue repairs
E—Tall battery that needs baseline program
F—Tall battery that needs baseline program
plus end flue repair for 25 percent of the ovens
USS Clairton Works (12 batteries)
USS Gary Works (4 batteries)
Bethlehem Steel—Burns Harbor (2 batteries)
Citizen's Gas Battery 1
ABC Coke 1,5, and 6 plus all batteries listed
below in other categories
AK Steel (KY) 3 and 4
AK Steel (OH) 3
ISG - Warren 4
Shenango 1
Sloss 5
Tonawanda 2
Koppers 1 and 2
Citizens Gas E and H
Empire 1 and 2
Wheeling-Pittsburgh 1, 2, and 3
National Granite City A and B
Erie Coke A and B
Sloss 3 and 4
National Steel, Ecorse 5
Wheeling-Pittsburgh 8
3.3 Costs for MACT Performance
The MACT standard involves a routine program of good systematic operation and
maintenance and oven repairs to control emissions from battery stacks and pushing. In
addition, batteries in poor condition may have to rebuild oven walls and end flues. An
important element of this routine program for battery stacks is the use of continuous opacity
monitors (COM). In addition, control of quenching emissions will require the installation of
baffles in three quench towers that do not have them.
3-3
-------
3.3.1 Costs for the Baseline Program
The baseline program includes routine oven patching, coal quality control, and other
measures that are used by the best controlled batteries. The cost elements for the baseline
program were provided by COETF and are discussed below.
a. Oven patching: Add one patcher, include extensive ceramic welding repairs to two
ovens per year, and account for lost production while welding and patching. The
estimated costs in $/yr per oven are $2,917 for a short foundry coke battery, $2,933
for a short furnace coke battery, and $3,083 for a tall furnace coke battery.
b. Coal testing program: Implement a quality assurance/quality control program for
coal, including bulk density, size, blend composition, and moisture. Estimate a
capital cost of $10,000 ($167/oven) to develop a statistical sampling program and an
operating cost of $72,000/yr ($l,200/yr per oven) for one lab technician.
c. Inspections: Capital cost of $6,000 ($100/oven) to develop procedures for hard
pushes. Estimate the operating cost for periodic refractory inspection, documentation
and specifications for pressure and contraction as $4,000/yr or $67/yr per oven.
d. Special testing and procedures for tall batteries: Capital costs include an initial
structural evaluation to determine acceptable wall pressure ($40,000 or $667/oven),
testing equipment for coal ($263,000 for testing equipment or $4,383/oven), and
equipment for field tests of coking pressures ($10,000 for testing equipment or
$167/oven). Operating costs include testing moisture and bulk density of the coal
($20,000/yr or $333/yr per oven), test all coal for "Go/No Go" status ($168,000/yr for
2.4 lab technicians, $10,000/yr for maintenance, or $2,970/yr per oven), one "No Go"
per year with 6 hours lost production ($31,000/yr or $517/yr per oven), and periodic
field tests of coking pressures ($12,000/yr for labor or $200/yr per oven). This
results in a total operating cost for a tall 60-oven battery of $241,000/yr or $4,017/yr
per oven.
3.3.2 Major Repairs
Some batteries may incur a one-time capital expense to rebuild oven walls and end
flues to achieve the level of control associated with the best performing batteries. Cost
estimates for these major repairs were provided by COETF based on the experience of coke
plant operators.
a. End flue repairs: For Category C and F batteries, assume 25 percent of the ovens
need end flue repairs. For the small Category D foundry batteries (less than 50
ovens), assume 5 ovens need end flue repairs. Estimate the cost as $175,000 per oven
for short batteries and $245,000 per oven for tall batteries. For lost coke production
during the repair, add $78,000 per oven for short foundry batteries, $130,000 for
3-4
-------
short furnace batteries, and $220,000 for tall batteries. (The cost of lost production is
based on $62/ton for furnace coke and $73/ton for foundry coke.)
b. Through wall repairs: For Category D batteries, COETF recommended using one
through wall repair for small batteries (less than 50 ovens). Estimate the cost as
$800,000 per through wall. For lost coke production during the repair, add $113,000
per through wall for short foundry batteries.
c. Oven patching: Include a capital cost for one-time patching for all ovens for
batteries in Categories C, D, and F at $525/oven.
3.3.3 Quenching
Three quench towers at two coke plants will require the installation of baffles: one
quench tower at Erie Coke and two quench towers at Tonawanda Coke. The capital cost for
installing baffles with a water spray cleaning system in quench towers is $140,000 (based on
responses to EPA's cost survey).
3.3.4 Monitoring Costs
The following monitoring costs are included.
a. The capital cost for installing a continuous opacity monitor (COM) is $37,000 and
the operating cost is $8,000/yr (based on responses to EPA's cost survey). A total of
18 stacks will require new COM.
b. The capital cost for installing a bag leak detection system is $9,000 and the operating
cost is $500/yr. There are 18 baghouses applied to pushing emissions.
c. Method 9 observations of 4 pushes per battery per day have an annual cost of $11,000
times the number of batteries (approximately one hour per day per battery for
observations) plus $22,000 per coke plant (2 hours per day for travel time and data
entry). These costs will be incurred by batteries that are not currently making
Method 9 observations (38 batteries at 17 plants, adjusting for cases in which two
small batteries are operated as a single battery).
d. Other costs include the startup, shutdown, and malfunction plan (assume 40 hrs every
5 years or 8 hrs/yr), operation and maintenance plan (assume 40 hrs every 5 years or
8 hrs/yr), Method 5 testing (80 hrs every 2.5 years or 32 hrs/yr), monthly inspections
of control equipment (2 hrs/month or 24 hrs/yr), and notifications and records (40
hrs/yr) for a total of 112 hrs/yr. Using a typical labor rate of $50/hr, these costs total
$5,600/yr.
3-5
-------
3.3.5 Capital Recovery Factors
Capital recovery factors are used to annualize the cost of capital to estimate total
annual cost. The equipment lifetimes and capital recovery factors (based on 7 percent
interest) are given in Table 3-2.
Table 3-2. Capital Recovery Factors (at 7 percent interest)
Life Capital Recovery
(years) Factor Capital Items
5 0.244 • Initial structural evaluation to determine acceptable wall
pressure
• Develop a coal QA/QC program
• Develop procedures for tracking and addressing sticker
pushes
• Equipment for field tests of coking pressure
10 0.142 • End flue repairs
• Continuous opacity monitor
• Bag leak detector
15 0.110 • Testing equipment for coal
20 0.094 • Through wall repairs
* Baffles for quench towers
3.4 Estimates of Nationwide Costs
Tables 3-3 and 3-4 illustrate the development of nationwide costs for the baseline
program and for major repairs. The cost functions discussed earlier in $/oven were applied
to the appropriate categories of model batteries, and the cost elements were summed to get a
total cost for each model battery. Nationwide costs were estimated by multiplying the model
battery cost by the number of actual batteries associated with each model battery. The tables
show a total capital cost of $88 million and a total annual cost of $19 million/yr for the
baseline program and major repairs.
Other costs associated with MACT include installing baffles in quench towers,
monitoring, reporting, and recordkeeping. Table 3-5 presents the nationwide costs for these
additional items as well battery repair costs. The total nationwide capital cost is estimated as
$89.5 million with a total annualized cost of $20.2 million/yr.
3-6
-------
Table 3-3. Capital Costs for Battery Repairs and Baseline Program ($l,000)a
Category
Short/Tall
Coke type
No. of ovens
Actual batteries
represented
Baseline Program Only
B
Short
Foundry
76
1
Cost for baseline program:
Structural evaluation
Coal testing
Pressure testing
Develop procedures for
sticker pushes
Coal QA/QC
Total for baseline
Endflue repairs
Lost production
Through wall repairs
Lost production
Patch all ovens
Cost per model battery
Nationwide costb
8
13
20
20
20
B
Short
Foundry
37
2
4
6
10
10
20
E
Tall
Furnace
76
1
51
333
13
8
13
417
417
417
Baseline plus Repair 25 Percent of End Flues
C
Short
Foundry
64
5
6
11
17
2,800
1,248
34
4,099
20,493
C
Short
Foundry
37
4
4
6
10
1,619
722
19
2,370
9,478
C
Short
Furnace
37
4
4
6
10
1,619
1,203
19
2,851
11,402
C
Short
Furnace
64
1
6
11
17
2,800
2,080
34
4,931
4,931
C
Short
Furnace
76
4
8
13
20
3,325
2,470
40
5,855
23,421
F
Tall
Furnace
76
1
51
333
13
8
13
417
4,655
4,180
40
9,292
9,292
Baseline, End Flues,
through Walls
D
Short
Foundry
37
4
4
6
10
875
390
800
113
19
2,207
8,829
Total nationwide capital cost = $88.3 million
a All costs are in 2001 dollars.
b Cost per model battery times the number of actual batteries represented.
-------
Table 3-4. Total Annual Costs for Battery Repairs and Baseline Program ($l,000)a
Group
Short/Tall
Coke type
No. of ovens
Actual batteries
represented
Capital recovery,
baseline program
Tall battery coke/coal
testing
Baseline patch/weld
Coal QA/QC
Inspect/procedures
Total baseline/battery
Capital recovery, end
flues
Capital recovery,
through walls
Capital recovery, lost
production for repairs
Capital recovery,
patching all ovens
Cost per model battery
Nationwide costb
Baseline Program Only
B
Short
Foundry
76
1
2.9
221.7
91.2
5.1
320.8
—
—
—
—
321
321
B
Short
Furnace
37
2
1.4
108.5
44.4
2.5
156.8
—
—
—
—
157
314
E
Tall
Furnace
76
1
48.5
305.3
234.3
91.2
5.1
684.3
—
—
—
—
684
684
Baseline Program plus Repair 25 Percent of End Flues
C
Short
Foundry
64
5
2.4
186.7
76.8
4.3
270.2
399
—
178
4.8
851
4,257
C
Short
Foundry
37
4
1.4
107.9
44.4
2.5
156.2
231
—
103
2.8
492
1,969
C
Short
Furnace
37
4
1.4
108.5
44.4
2.5
156.8
231
—
171
2.8
561
2,245
C
Short
Furnace
64
1
2.4
187.7
76.8
4.3
271.2
399
—
296
4.8
971
971
C
Short
Furnace
76
4
2.9
222.9
91.2
5.1
322.1
473
—
352
5.7
1,153
4,612
F
Tall
Furnace
76
1
48.5
305.3
234.3
91.2
5.1
684.3
663
—
595
5.7
1,948
1,948
Baseline, End
Flues, through
Walls
D
Short
Foundry
37
4
1.4
107.9
44.4
2.5
156.2
125
76
66
2.8
425
1,701
oo
Total nationwide annual cost = $19 million/vr
a All costs are in 2001 dollars.
b Cost per model battery times the number of actual batteries represented.
-------
Table 3-5. Estimated Nationwide Compliance Costs for Coke Batteries Associated with
the MACT Floor3
Cost Element
Baseline repair program
Major repairs (end flues, through walls,
Capital Cost
($106)
1.2
87.1
Total Annualized Cost
($106/yr)
6.8
12.0
oven patching)
Baffles, continuous opacity monitors, bag 1.2 1.4
leak detectors, daily Method 9 observations,
and reporting, recordkeeping.
Total 89.5 20.2
All costs are in 2001 dollars.
These costs estimates are expected to be upper bound costs for several reasons. If
some batteries are in a serious state of disrepair as indicated by the model battery categories,
they could incur these expenses in the future simply to keep operating even in the absence of
the MACT standard. In addition, the repairs will help to maintain production and extend
battery life; consequently, the true cost of lost coke production while the repairs are being
made are overstated. Although we know which batteries can achieve MACT without any
significant repairs, we have much less information on those that may not achieve it and what
repairs would be required. Some of these batteries may implement more cost effective
approaches than the extensive repairs assumed in this cost analysis.
3-9
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SECTION 4
ECONOMIC IMPACT ANALYSIS
The final rule to control the release of HAPs from coke pushing and quenching
operations will directly (through imposition of compliance costs) or indirectly (through
changes in market prices) affect the entire U.S. iron and steel industry. Implementation of
the final rule will increase the costs of producing furnace and foundry coke at affected
facilities. As described in Section 3, these costs will vary across facilities and their coke
batteries depending upon their physical characteristics and baseline controls. The response
by these producers to these additional costs will determine the economic impacts of the
regulation. Specifically, the impacts will be distributed across producers and consumers of
coke, steel mill products, and iron castings through changes in prices and quantities in the
affected markets. This section presents estimates of the economic impacts of the coke
MACT using an economic model that captures the linkages between the furnace coke and
steel mill products, and foundry coke and iron castings markets.
This section describes the data and approach used to estimate the economic impacts
of this final rule for the baseline year of 2000. Section 4.1 presents the inputs for the
economic analysis, including characterization of producers, markets, and the costs of
compliance. Section 4.2 summarizes the conceptual approach to estimating the economic
impacts on the affected industries. A fully detailed description of the economic impact
methodology is provided in Appendix A. Lastly, Section 4.3 provides the results of the
economic impact analysis.
4.1 EIA Data Inputs
Inputs to the economic analysis are a baseline characterization of directly and
indirectly affected producers, their markets, and the estimated costs of complying with the
final rule.
4.1.1 Producer Characterization
As detailed in Section 2, the baseline characterization of integrated and merchant
manufacturing plants is based on the facility responses to EPA's industry survey and industry
data sources for 1997. In order to develop a baseline data set for coke batteries consistent
4-1
-------
with the year 2000, EPA collected aggregate production and shipment data for furnace and
foundry coke reported in recent USITC publications (USITC, 2001a,b,c). These reports
distinguished the data by type of coke (furnace, foundry) and use (captive and merchant).
Using this data, EPA applied factors to individual coke battery production data collected
from the 1997 survey (see Table 2-2) that result in a data set that is consistent with aggregate
baseline production values reported by USITC. Coke-specific cost equations were developed
using the 1993 Coke Ovens MACT methodology (as described fully in Appendix B).
Plant-specific data on existing integrated steel producers were supplemented with
secondary information from company 10K, 10K-405, and annual reports; the 1998 Directory
of Iron and Steel Plants published by the Association of Iron and Steel Engineers; World
Cokemaking Capacity published by the International Iron and Steel Institute.
4.1.2 Market Characterization
Figure 4-1 summarizes the market interactions included in the Agency's EIA
modeling approach. Changes in the equilibrium price and quantity due to control costs on
coke batteries were estimated simultaneously in four linked markets:
• market for furnace coke,
• market for foundry coke,
• market for steel mill products, and
• market for iron castings.
As described in Section 2, many captive coke plants supply their excess coke to the
furnace coke market. Merchant coke plants and foreign imports account for the remaining
supply to the furnace coke market. Furnace coke produced at captive coke plants and
shipped directly to integrated iron and steel mills owned by their parent companies does not
directly enter the market for furnace coke. However, compliance costs incurred by captive,
or "in-house", furnace coke batteries indirectly affect the furnace coke market through price
and output changes in the steel mill products market.
The market demand for furnace coke is derived from integrated mills producing steel
mill products. Integrated iron and steel mills that need more coke than their captive batteries
can produce purchase furnace coke from the market. Integrated mills' market (and captive)
demand for furnace coke depends on their production levels as influenced by the market for
steel mill products. Steel mill products are supplied by three general groups: integrated iron
4-2
-------
Consumers of Steel
Mill Products
Consumers of
I ran Castings
Imports
Exports <
Market for
Steel
Mill Products
Figure 4-1. Market Linkages Modeled in the Economic Impact Analysis
4-3
-------
and steel mills, nonintegrated steel mills (primarily minimills), and imports. Domestic
consumers of steel mill products and exports account for the market demand.
As described in Section 2, domestic and foreign merchant plants are the suppliers of
foundry coke to the market. Consumers of foundry coke include foundries with cupolas that
produce iron castings, and they are modeled using aggregate market demand curves.1
Table 4-1 provides the 2000 data on the U.S. furnace and foundry coke, steel mill
products, and iron castings markets for use in this analysis. Coke prices were obtained from
USITC reports (USITC, 2000b, 2000c). The market price for steel mill products was
obtained from Current Industrial Reports (CIR) and reflects the production-weighted average
across all product types. The market price for iron castings was also obtained from CIR and
reflects the production-weighted average across iron castings (ductile, gray, and malleable).
Domestic production from affected facilities reflects the aggregate of the plant-specific data
developed from survey and secondary data sources, while unaffected domestic production is
derived either directly from secondary sources or as the difference between observed total
U.S. production and the aggregate production from affected facilities. Foreign trade data
were obtained from industry and government statistical publications supplemented by survey
data. Market volumes for each product are then computed as the sum of U.S. production and
foreign imports.
4.1.3 Regulatory Control Costs
As shown in Section 3, the Agency developed compliance cost estimates for model
plants that may be mapped to each of the coke manufacturing facilities affected by the final
rule. These estimates reflect the "most-reasonable" scenario for this industry. To be
consistent with the 2000 baseline industry characterization of the economic model, the
Agency adjusted the nationwide compliance cost estimate of $20.2 expressed in 2001 dollars
(Table 3-5) to be $20.1 million as expressed in 2000 dollars using an engineering cost index.2
These cost estimates serve as inputs to the economic analysis and affect the operating
decisions for each affected facility and thereby the markets that are served by these facilities.
'Other coke, frequently grouped with foundry coke, is purchased as a fuel input by cement plants, chemical
plants, and nonferrous smelters. For simplicity, supply and demand for other coke are assumed to be
unaffected by the final coke regulation and are not included in the market model.
! EPA used the chemical engineering plant cost index with the following values:
4-4
394.1
395.1
-------
Table 4-1. Baseline Characterization of U.S. Iron and Steel Markets: 2000
Baseline
Furnace Coke
Market price ($/short ton) $112.00
Market output (103 tpy) 12,004
Domestic production" 8,904
Imports 3,100
Foundry Coke
Market price ($/short ton) $ 161.00
Market output (103 tpy) 1,3 85
Domestic production 1,23 8
Imports 147
Steel Mill Products
Market price ($/short ton) $489.45
Market output (103 tpy) 147,007
Domestic production 109,050
Integrated producers 57,153
Nonintegrated steel millsb 51,897
Imports 37,957
Iron Castings
Market price ($/short ton) $1,028.50
Market output (103 tpy) 8,793
Domestic production3 8,692
Cupola furnaces 5,210
Electric furnaces0 3,482
Imports 101
a Includes minimills.
b Excludes captive production.
c Includes electric arc or electric induction furnaces.
4-5
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4.2 EIA Methodology Summary
In general, the EIA methodology needs to allow EPA to consider the effect of the
different regulatory alternatives. Several types of economic impact modeling approaches
have been developed to support regulatory development. These approaches can be viewed as
varying along two modeling dimensions:
• the scope of economic decision making accounted for in the model, and
• the scope of interaction between different segments of the economy.
Each of these dimensions was considered in selecting the approach used to model the
economic impact of the final coke regulation.
To conduct the analysis for the final coke regulation, the Agency used a market
modeling approach that incorporates behavioral responses in a multiple-market partial
equilibrium model. Multiple-market partial equilibrium analysis provides a manageable
approach to incorporate interactions between coke, steel mill product, and iron castings
markets into the EIA to better estimate the final regulation's impact. The multiple-market
partial equilibrium approach represents an intermediate step between a simple, single-market
partial equilibrium approach and a full general equilibrium approach. The modeling
technique is to link a series of standard partial equilibrium models by specifying the
interactions between the supply and demand for products and then solving for changes in
prices and quantities across all markets simultaneously. The EIA methodology is fully
detailed in Appendix A.
The Agency's methodology is soundly based on standard microeconomic theory
relying heavily on previous economic analyses, employs a comparative static approach, and
assumes certainty in relevant markets. For this analysis, prices and quantities are determined
in perfectly competitive markets for furnace coke, foundry coke, finished steel mill products,
and iron castings. The competitive model of price formation, as shown in Figure 4-2 (a),
posits that market prices and quantities are determined by the intersection of market supply
and demand curves. Under the baseline scenario, a market price and quantity (P, Q) are
determined by the downward-sloping market demand curve (DM) and the up ward-sloping
market supply curve (SM) that reflects the horizontal summation of the individual supply
curves of directly affected and indirectly affected facilities that produce a given product.
4-6
-------
Affected Facilities
P'
P
S'
Affected Facilities
+ p
= p
DM
Q
Unaffected Facilities
a) Baseline Equilibrium
Market
P'
P
J I
Unaffected Facilities
Q' Q
Market
b) With-Regulation Equilibrium
Figure 4-2. Market Equilibrium without and with Regulation
4-7
-------
With the regulation, the cost of production increases for directly affected producers.
The imposition of the compliance costs is represented as an upward shift in the supply curve
for each affected facility from Sa to Sa'. As a result, the market supply curve to shift upward
to SM/ as shown in Figure 4-2(b) reflecting the increased costs of production at these
facilities. In the baseline scenario without the final standards, the industry would produce
total output, Q, at the price, P, with affected facilities producing the amount qa and
unaffected facilities accounting for Q minus qa, or qu. At the new equilibrium with the
regulation, the market price increases from P to P' and market output (as determined from
the market demand curve, DM) declines from Q to Q'. This reduction in market output is the
net result from reductions at affected facilities and increases at unaffected facilities.
4.3 Economic Impact Results
Based on the simple analytics presented above, when faced with higher costs of coke
production, producers will attempt to mitigate the impacts by making adjustments to shift as
much of the burden on other economic agents as market conditions allow. The adjustments
available to facility operators include changing production processes, changing inputs,
changing output rates, or even closing the facility. This analysis focuses on the last two
options because they appear to be the most viable for coke manufacturing facilities, at least
in the near-term. A large segment of the furnace and foundry coke market is affected by the
regulation so we would expect upward pressure on prices as producers reduce output rates in
response to higher costs. Higher prices reduce quantity demanded and output for each
market product, leading to changes in profitability of batteries, facilities, and firms. These
market and industry adjustments will also determine the social costs of the regulation and its
distribution across stakeholders (producers and consumers).
To estimate these impacts, the economic modeling approach described in Appendix A
was operationalized in a multiple spreadsheet model. This model characterizes those
producers and consumers identified in Figure 4-1 and their behavioral responses to the
imposition of the regulatory compliance costs. These costs are expressed per ton of furnace
or foundry coke and serve as the input to the economic model, or "cost-shifters" of the
baseline supply curves at affected facilities. Given these costs, the model determines a new
equilibrium solution in a comparative static approach. The following sections provide the
Agency's estimates of the resulting economic impacts for the final rule.
4-8
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4.3.1 Market-Level Impacts
The increased cost of coke production due to the regulation is expected to increase
the price of furnace coke and steel mill products and reduce their production and
consumption from 2000 baseline levels. As shown in Table 4-2, the regulation is projected
to increase the price of furnace coke by 2.6 percent, or $3.00 per short ton. The increased
captive production costs and higher market price associated with furnace coke are projected
to increase steel mill product prices by less than 0.1 percent, or $0.14 per ton. As expected,
directly affected output declines across all producers, while supply from domestic and
foreign producers not subject to the regulation increases. Although the resulting net declines
are slight across all products (i.e., less than 1 percent decline in market output) the change in
domestic production is typically higher than 0.1 percent. This is especially true for furnace
coke where domestic production declines by 3.9 percent.
In contrast, the regulation showed no impact on price or quantity in the foundry coke
market. This is due to the capacity constraints on domestic producers and the role of foreign
imports. The supply of foundry coke is characterized by a domestic step supply function
augmented by foreign supply, with foreign suppliers being the high cost producers in the
market. Because foreign suppliers are the high cost producers, they determine the market
price and an upward shift in the domestic supply curve does not affect the equilibrium price
or quantity. This implies that domestic foundry coke producers are not able to pass along
any of the cost of the regulation. In addition, because there is no price change in the foundry
coke market, the production of iron castings in unaffected by the regulation.
4.3.2 Industry-Level Impacts
Industry revenue, costs, and profitability change as prices and production levels
adjust to increased production costs. As shown in Table 4-3, the economic model projects
that profits for directly affected integrated iron and steel producers will decrease by $22.4
million, or 3.0 percent. However, because the price increase exceeds the average cost
increase, industry-level profits for U.S. merchant furnace coke producers are expected to
increase by $9.7 million, or 8.3 percent. In contrast, industry-level profits for U.S. merchant
foundry coke producers are expected to decline by $5.0 million, or 5.0 percent. These
producers cannot pass along any of the control costs of the regulation because there is no
price increase. Those domestic suppliers not subject to the regulation experience windfall
gains with non-integrated steel mills (i.e., minimills) increasing profits by $7.4 million.
4-9
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Table 4-2. Market-Level Impacts of the Final Coke MACT: 2000
Furnace Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production3
Imports
Foundry Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Steel Mill Products
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Integrated producers
Nonintegrated steel millsb
Imports
Iron Castings
Market price ($/short ton)
Market output (103 tpy)
Domestic production"
Cupola furnaces
Electric furnaces0
Imports
Baseline
$112.00
12,004
8,904
3,100
$161.00
1,385
1,238
147
$489.45
147,007
109,050
57,153
51,897
37,957
$1,028.50
8,793
8,692
5,210
3,482
101
Changes From
Absolute
$3.00
-91.8
-347.9
256.1
0.0
0.0
0.0
0.0
$0.14
-26.4
-191.9
-244.6
52.7
165.5
$0.00
0.0
0.0
0.0
0.0
0.0
Baseline
Percent
2.68%
-0.76%
-3.91%
8.26%
0.00%
0.00%
0.00%
0.00%
0.03%
-0.02%
-0.18%
-0.43%
0.10%
0.44%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
a Includes minimills.
b Excludes captive production.
c Includes electric arc or electric induction furnaces.
4-10
-------
Table 4-3. National-Level Industry Impacts of the Final Coke MACT: 2000
Integrated Iron and Steel Mills
Total revenues ($106/yr)
Steel mill products
Market coke operations
Total costs ($106/yr)
Control costs
Steel production
Captive coke production
Market coke production
Production costs
Steel production
Captive coke production
Market coke consumption
Market coke production
Operating profits ($106/yr)
Iron and steel facilities (#)
Coke batteries (#)
Employment (FTEs)
Coke Producers (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Baseline
$28,430.5
$27,973.6
$456.9
$27,690.8
$0.0
$0.0
$0.0
$0.0
$27,690.8
$25,327.3
$746.6
$1,249.5
$367.4
$739.7
20
37
66,603
$521.8
$404.5
$0.0
$404.5
$117.4
17
774
$245.5
$148.7
$0.0
$148.7
$96.8
12
2,486
Changes
Absolute
-$99.9
-$111.62
$12.44
-$76.81
$9.91
$0.00
$7.43
$2.48
-$86.72
-$110.43
-$0.06
$23.71
$0.06
-$22.38
0
0
-323
-$28.76
-$38.45
$3.13
-$41.57
$9.68
-2
-193
$0.56
$5.54
$5.54
$0.00
-$4.98
0
0
From Baseline
Percent
-0.35%
-0.40%
2.72%
-0.28%
NA
NA
NA
NA
-0.315
-0.44%
-0.01%
1.90%
0.02%
-3.02%
0.00%
0.00%
-0.48%
-5.51%
-9.51%
NA
-10.28%
8.25%
-11.76%
-34.94%
0.23%
3.73%
NA
0.00%
-5.15%
0.00%
0.00%
(continued)
4-11
-------
Table 4-3. National-Level Industry Impacts of the Final Coke MACT: 2000
(continued)
Nonintegrated Steel Millsa
Operating profits ($106/yr)
Cupola Furnaces
Operating profits ($106/yr)
Captive
Merchant
Affected
Unaffected
Electric Furnaces'5
Operating profits ($106/yr)
Captive
Merchant
Affected
Unaffected
Baseline
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Changes
Absolute
$7.4
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
From Baseline
Percent
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Includes minimills.
Includes iron foundries that use electric arc or electric induction furnaces.
4.3.2.1 Changes in Profitability
For integrated steel mills, operating profits decline by $22 million. This is the net
result of three effects:
• Net decrease in revenue ($99 million): Steel mill product revenue decreases as a
result of reductions in output. However, these losses were mitigated by increased
revenues from furnace coke supplied to the market as a result of higher prices.
• Net decrease in production costs ($87 million): Reduction in steel mill and
market coke production costs occur as output declines. However, producers also
experience increases in costs associated with the higher price of inputs (i.e.,
furnace coke).
• Increase in control costs ($10 million): The costs of captive production of
furnace coke increase as a result of regulatory controls.
Industry-wide profits for merchant furnace coke producers increase by $10 million as
a result of the following:
4-12
-------
• Decreases in revenue ($29 million): Reductions in output outweigh revenue
increases as a result of higher market prices.
• Reduction in production costs ($42 million): Reduction in coke production costs
occurs as output declines.
• Increased control costs ($3 million): The cost of producing furnace coke
increases as a result of regulatory controls.
Industry-wide profits for merchant foundry coke producers fall by $5 million under
the regulation:
• Increase in revenue ($0.5 million): Given that we project no price changes for
foundry coke, foundry coke revenue remains unchanged. However, small
revenue increases occur because some batteries also produce small amounts of
furnace coke.
• Reduction in production costs ($0 million): No change in coke production costs
occur as output remains unchanged.
• Increased control costs ($5.6 million): The cost of producing foundry coke
increases as a result of regulatory controls.
Lastly, domestic producers that are not subject to the regulation benefit from higher
prices without additional control costs. As mentioned above, profits increase are projected
for nonintegrated steel mills.
Additional distributional impacts of the rule within each producer segment are not
necessarily apparent from the reported decline or increase in their aggregate operating
profits. The regulation creates both gainers and losers within each industry segment based
on the distribution of compliance costs across facilities. As shown in Table 4-4, a substantial
subset of the merchant coke facilities are projected to experience profit increases (i.e., 13
furnace coke batteries and 1 foundry coke battery, or 62 percent). However, two merchant
batteries are projected to cease market operations as they are the highest-cost coke batteries
with the additional regulatory costs.
A majority of directly affected integrated iron and steel facilities (i.e., 16 plants, or 80
percent) are projected to become less profitable with the regulation with a total loss of $33.9
million. However, four integrated mills are projected to benefit from higher prices and
experience a total profit gain of $11.5 million. These mills typically own furnace coke
batteries with low production costs and lower per-unit compliance costs. In addition, a high
proportion of their coke inputs are supplied internally.
4-13
-------
Table 4-4. Distribution Impacts of the Final Coke MACT Across Directly Affected
Producers: 2000
With Regulation
Integrated Iron and Steel Mills
Facilities (#)
Steel production
Total (103tpy)
Average (tons/facility)
Steel compliance costs
Total ($106/yr)
Average ($/ton)
Coke production
Total (103tpy)
Average (tons/facility)
Coke compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106/yr)
Coke Plants (Merchant Only)
Furnace
Batteries (#)
Production (103 tpy)
Total (103tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106/yr)
Foundry
Batteries (#)
Production
Total (103 tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average
Change in operating profit ($106/yr)
Increased
Profits
4
6,232
1,558
$0.00
$0.00
5,729
1,432
$0.17
$0.03
$11.47
13
3,979
306
$2.1
$0.52
$9.89
1
476
476
$0.021
$0.04
$0.54
Decreased
Profits
16
50,922
3,183
$0.00
$0.00
6,915
432
$9.74
$1.41
-$33.85
2
391
196
$1.3
$3.42
-$0.16
11
1,181
107
$5.524
$4.68
-$5.52
Closure
0
0
0
$0.00
$0.00
0
0
$0.00
$0.00
$0.00
2
267
134
$1.340
$5.01
-$0.04
0
0
0
$0.00
$0.00
$0.00
Total
20
57,153
2,858
$0.00
$0.00
12,644
632
$9.91
$0.78
-$22.38
17
4,637
273
$4.738
$1.02
$9.68
12
1,657
138
$5.545
$3.35
-$4.98
4-14
-------
4.3.2.2 Facility Closures
EPA estimates two merchant batteries supplying furnace coke are likely to
prematurely close as a result of the regulation. In this case, these batteries are the highest-
cost producers of furnace coke with the regulation.
4.3.2.3 Changes in Employment
As a result of decreased output levels, industry employment is projected to decrease
by less than 1 percent, or 516 full-time equivalents (FTEs), with the regulation. This is the
net result of employment losses for integrated iron and steel mills totaling 323 FTEs and
merchant coke plants of 193 FTEs. Although EPA projects increases in output for producers
not subject to the rule, which would likely lead to increases in employment, the Agency did
not develop quantitative estimates for this analysis.
4.3.3 Social Cost
The social impact of a regulatory action is traditionally measured by the change in
economic welfare that it generates. The social costs of the final rule will be distributed
across consumers and producers alike. Consumers experience welfare impacts due to
changes in market prices and consumption levels associated with the rule. Producers
experience welfare impacts resulting from changes in profits corresponding with the changes
in production levels and market prices. However, it is important to emphasize that this
measure does not include benefits that occur outside the market, that is, the value of reduced
levels of air pollution with the regulation.
The national compliance cost estimates are often used as an approximation of the
social cost of the rule. The engineering analysis estimated annual costs of $20.1 million. In
this case, the burden of the regulation falls solely on the affected facilities that experience a
profit loss exactly equal to these cost estimates. Thus, the entire loss is a change in producer
surplus with no change (by assumption) in consumer surplus. This is typically referred to as
a "full-cost absorption" scenario in which all factors of production are assumed to be fixed
and firms are unable to adjust their output levels when faced with additional costs.
In contrast, the economic analysis accounts for behavioral responses by producers
and consumers to the regulation (i.e., shifting costs to other economic agents). This
approach results in a social cost estimate that differs from the engineering estimate and also
provides insights on how the regulatory burden is distributed across stakeholders. As shown
in Table 4-5, the economic model estimates the total social cost of the rule to be
4-15
-------
Table 4-5. Distribution of the Social Costs of the Final Coke MACT: 2000
Change in Consumer Surplus ($106/yr) -$20.87
Steel mill product consumers -$20.87
Domestic -$19.94
Foreign -$0.93
Iron casting consumers $0.00
Domestic $0.00
Foreign $0.00
Change in Producer Surplus ($106/yr) $2.25
Domestic producers -$10.31
Integrated iron and steel mills -$22.38
Nonintegrated steel mills" $7.37
Cupola furnaces $0.00
Electric furnaces" $0.00
Furnace coke (merchant only) $9.68
Foundry coke (merchant only) -$4.98
Foreign producers $12.56
Iron and steel $2.86
Castings $0.00
Furnace coke $9.69
Foundry coke $0.00
Change in Total Social Surplus ($106/yr)c -$18.62
a Includes minimills.
b Includes electric arc or electric induction furnaces.
c The negative change in total social surplus indicates the social cost of the regulation is $18.62 million
$18.6 million. This difference occurs because society reallocates resources through the
predicted market adjustments that result from the regulation-induced increase in coke
production costs.
In the final product markets, higher market prices lead to consumers of steel mill
products experiencing losses of $20.9 million. Although integrated iron and steel producers
are able to pass on a limited amount of cost increases to their final consumers, e.g.,
automotive manufactures and construction industry, the increased costs result in a net decline
in profits at integrated mills of $22.4 million.
4-16
-------
In the coke industry, low-cost merchant producers of furnace coke benefit at the
expense of consumers and higher-cost coke batteries resulting in an industry-wide increase in
profits. Furnace coke profits at merchant plants increase in aggregate by $9.7 million. In
contrast, foundry coke profits at merchant plants decline in aggregate by $5 million.
Lastly, domestic producers not subject to the regulation (i.e., nonintegrated steel mills
and electric furnaces) as well as foreign producers experience unambiguous gains because
they benefit from increases in market price under both alternatives.
4-17
-------
SECTION 5
SMALL BUSINESS IMPACTS
This regulatory action will potentially affect the economic welfare of owners of coke
batteries. These individuals may be owners/operators who directly conduct the business of
the firm or, more commonly, investors or stockholders who employ others to conduct the
business of the firm on their behalf through privately held or publicly traded corporations.
The legal and financial responsibility for compliance with a regulatory action ultimately rests
with plant managers, but the owners must bear the financial consequences of the decisions.
Although environmental regulations can affect all businesses, small businesses may have
special problems complying with such regulations.
The Regulatory Flexibility Act (RFA) of 1980 requires that special consideration be
given to small entities affected by federal regulations. The RFA was amended in 1996 by the
Small Business Regulatory Enforcement Fairness Act (SBREFA) to strengthen its analytical
and procedural requirements. Under SBREFA, the Agency must perform a regulatory
flexibility analysis for rules that will have a significant impact on a substantial number of
small entities.
This section focuses on the compliance burden of the small businesses with the coke
manufacturing industry and provides a screening analysis to determine whether this final rule
is likely to impose a significant impact on a substantial number of the small entities
(SISNOSE) within this industry. The screening analysis employed here is a "sales test" that
computes the annualized compliance costs as a share of sales for each company. In addition,
it provides information about the impacts on small businesses after accounting for producer
responses to the final rule and the resulting changes in market prices and output.
5.1 Identifying Small Businesses
The SBA released guidelines effective October 2000 that provide small business
thresholds based on NAICS codes that replace the previous thresholds based on SIC codes.
Under these new guidelines, SBA establishes 1,000 or fewer employees as the small business
threshold for Iron and Steel Mills (i.e., NAICS 331111), while coke ovens not integrated
with steel mills are classified under All Other Petroleum and Coal Products Manufacturing
5-1
-------
(i.e., NAICS 324199) with a threshold of 500. Based on these SB A size definitions for the
affected industries and reported sales and employment data, as described in Section 2, the
Agency has identified three of the 14 companies as small businesses (i.e., 21 percent). The
following businesses were identified as small for the purpose of this analysis:
• Citizen's Gas and Coke,
• Shenango Group, Inc., and
• Tonawanda Coke Corporation.
Each of these small companies owned and operated a coke plant with a total of seven coke
batteries, or roughly 14 percent of all the coke batteries operated in 2002.
5.2 Screening-Level Analysis
To assess the potential impact of this rule on small businesses, the Agency calculated
the share of annual compliance costs relative to baseline sales for each company. When a
company owns more than one affected facility, EPA combined the costs for each facility for
the numerator of the test ratio. Annual compliance costs include annualized capital costs and
operating and maintenance costs imposed on these companies.1 They do not include changes
in production or market adjustments.
Small businesses represent 21 percent of the companies within the source category
and are expected to incur 19 percent of the total industry compliance costs of $20.2 million
(see Table 5-1). The average total annual compliance cost is projected to be $1.3 million per
small company, while the average for large companies is projected to be $1.5 million per
company. The mean (median) cost-to-sales ratio for small businesses is 2.0 percent (1.8
percent), with a range of 0.3 to 5.0 percent. EPA estimates that one of the two small
businesses may experience an impact between 1 percent and 3 percent of sales, and one small
business will experience an impact greater than 3 percent of sales. In contrast, all of the
large companies are affected at less than 1 percent of sales.
'Annualized capital costs include purchased equipment costs (PEC), direct costs for installation (DCI), and
indirect costs for installation (ICI) related to engineering and start up. Operating and maintenance costs
include direct annual costs (DAC), such as catalysis replacement, increased utilities, and increased labor,
and indirect annual costs (IAC), such as costs due to tax, overhead, insurance, and administrative burdens.
5-2
-------
Table 5-1. Summary Statistics for SBREFA Screening Analysis: 2000
Total Number of Companies
Total Annual Compliance Costs (TACC)
($106/yr)
Average TACC per company ($106/yr)
Compliance Cost-to-Sales Ratios
Average
Median
Minimum
V Maximum
Compliance costs are <1% of sales
Compliance costs are > 1 to 3% of sales
Compliance costs are >3% of sales
Small
3
$3.8
$1.3
2.04%
1.83%
0.31%
4.97%
Number Share
1 33%
1 33%
1 33%
Large
11
$16.4
$1.5
0.09%
0.08%
<0.01%
0.25%
Number Share
11 100%
0 0%
0 0%
All Companies
14
$20.2
$1.4
0.51%
0.13%
<0.01%
3.97%
Number Share
12 86%
1 7%
1 7%
Note: Assumes no market responses (i.e., price and output adjustments) by regulated entities.
-------
5.3 Economic Analysis
The Agency also analyzed the economic impacts on small businesses under with-
regulation conditions expected to result from implementing the MACT. Unlike the screening
analysis, this approach examines small business impacts in light of the behavioral responses
of producers and consumers to the regulation. As shown in Table 5-2, the economic model
projects operating profits increase by $0.3 million for the furnace coke plant operated by a
small business. For this plant, furnace coke price increases outweigh the additional costs
associated with the MACT. In contrast, the model projects operating profits decrease by
$2.4 million for foundry coke plants operated by small firms. In this case, foundry coke
plants fully absorb additional control costs. No batteries (furnace or foundry) are projected
to prematurely close as a result of the additional control costs associated with the regulation.
5.4 Assessment
Based on the Quarterly Financial Report (QFR) from the U.S. Bureau of the Census,
the average return to sales for all reporting companies within the iron and steel industry
ranged from 3.2 to 4.6 percent (U.S. Bureau of the Census, 1998).2 In addition, Dun &
Bradstreet reports the median return on sales as 3.7 percent for SIC 3312—Steel Works,
Blast Furnaces (including Coke Ovens), and Rolling Mills (Dun & Bradstreet, 1997).
Although this industry is typically characterized by average profit margins, the Agency's
analysis indicated that none of the coke manufacturing facilities owned by small businesses
are at risk of closure because of the final rule. In fact, the furnace coke plant is projected to
become more profitable in profits because of market feedbacks related to higher costs
incurred by competitors, while the six plants manufacturing foundry coke are projected to
experience a decline in profits of slightly less than 5 percent. In summary, this analysis
supports certification under the RFA because, while a few small firms may experience initial
impacts greater than 1 percent of sales, the Agency's economic analysis indicates no
significant impacts on their viability to continue operations and remain profitable.
furthermore, the QFR reports that companies within the iron and steel industry of less than $25 million in
assets reported an average return to sales ranging from 6.8 to 9.8 percent.
5-4
-------
Table 5-2. Small Business Impacts of the Final Coke MACT: 2000
Changes From Baseline
Coke Plants (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Total
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Baseline
$42.7
$40.9
$0.0
$40.9
$1.8
1
175
$139.3
$86.8
$0.0
$86.8
$52.4
6
1,760
$182.0
$127.7
$0.0
$127.7
$54.3
7
1,935
Absolute
$1.1
$0.9
$0.9
$0.0
$0.3
0
0
$0.6
$2.9
$2.9
$0.0
-$2.4
0
0
$1.7
$3.8
$3.8
$0.0
-$2.1
0
0
Percent
2.7%
2.2%
NA
0.0%
13.9%
0.0%
0.0%
0.4%
3.4%
NA
0.0%
-4.5%
0.0%
0.0%
0.9%
3.0%
NA
0.0%
-3.9%
0.0%
0.0%
5-5
-------
REFERENCES
Agarwal, Jay, Francis Brown, David Chin, Gregory Stevens, Richard Clark, and David
Smith. 1996. "The Future Supply of Coke." New Steel 12(3):88.
Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory of Iron and Steel
Plants: Volume 1 Plants and Facilities." Pittsburgh, PA: AISE.
American Metal Market. 1998. "LTV, USW Eye Coke Plant Site." 106(37):3.
Bingham, T.H., and TJ. Fox. 1999. "Model Complexity and Scope for Policy Analysis."
Public Administration Quarterly 23(3).
Dun & Bradstreet. 1997. Industry Norms & Key Business Ratios: Desk-Top Edition 1996-
97. Murray Hill, NJ: Dun & Bradstreet.
Engineering and Mining Journal. 1997. "A New U.S. Trend? No Leftovers—No
Problems." 198(10):WW15.
Graham, Paul, Sally Thorpe, and Lindsay Hogan. 1999. "Non-competitive Market Behavior
in the International Coking Coal Market." Energy Economics 21:195-212.
Ho, M., and D. Jorgenson. 1998. "Modeling Trade Policies and U.S. Growth: Some
Methodological Issues." Presented at USITC Conference on Evaluating APEC Trade
Liberalization: Tariff and Nontariff Barriers. September 11-12, 1997.
Hogan, William T., and Frank T. Koelble. 1996. "Steel's Coke Deficit: 5.6 Million Tons
and Growing." New Steel 12(12):50-59.
Lankford, William T., Norman L. Samways, Robert F. Craven, and Harold E. McGannon,
eds. 1985. The Making, Shaping and Treating of Steel. Pittsburgh: United States
Steel, Herbick & Held.
National Steel. Web homepage, . As obtained in
September 1998.
New Steel. August 1997a. "LTV will Close Pittsburgh Coke Plant."
New Steel. June 1997b. "National will Sell Ecorse Coke Battery."
New Steel. August 10, 1998a. " Bethlehem Sells Coke Battery."
New Steel. January 1998b. "Bethlehem will Shut Down Coke Division."
Ninneman, Patrick. 1997. "Less Coke and More Coal in the Blast Furnace." New Steel
13(7):38-45.
R-l
-------
U.S. Bureau of the Census. 1998. Quarterly Financial Report for Manufacturing, Mining,
and Trade Corporations. First Quarter, Series QFR 98-1. Washington, DC:
Government Printing Office.
U.S. Department of Energy. 1996. Coal Industry Annual 1995. Washington, DC: Energy
Information Administration.
U.S. Department of Energy. "AER Database: Coke Overview, 1949-1997." Washington,
DC: Energy Information Administration, . As obtained on September 14, 1998a.
U.S. Department of Energy, Energy Information Administration. 2001. Electric Power
Annual 2000.
U.S. Department of Energy, Energy Information Administration. 2002. Quarterly Coal
Report: January-March 2002. Washington, DC: U.S. Department of Energy.
.
U.S. Department of Labor, Bureau of Labor Statistics. BLS LABSTAT Database:
Employment and Earnings, SIC 33. . Obtained in September
1998.
U.S. Environmental Protection Agency. 1979. Technical Approach for a Coke Production
Cost Model. Prepared by Research Triangle Institute, Research Triangle Park, N.C.
U.S. Environmental Protection Agency. 1988. Benzene Emissions form Coke By-Product
Recovery Plants-BackGround Information for Proposed Standards. Office of Air
Quality Planning and Standards, Research Triangle Park, NC.
U.S. Environmental Protection Agency. 1991. Controlling Emissions from By-Product
Coke Oven Charging, Door Leaks, and Topside Leaks: An Economic Impacts
Analysis. Prepared by Research Triangle Institute, Research Triangle Park, NC.
U.S. Environmental Protection Agency. 1998. Coke Industry Responses to Information
Collection Request (ICR) Survey. Database prepared for EPA's Office of Air Quality
Planning and Standards. Research Triangle Park, NC.
U.S. Environmental Protection Agency (EPA). 1999. OAQPS Economic Analysis Resource
Document. Durham, NC: Innovative Strategies and Economics Group.
U.S. International Trade Commission. 1994. Metallurgical Coke: Baseline Analysis of the
U.S. Industry and Imports. Publication No. 2745. Washington, DC: U.S.
International Trade Commission.
U.S. International Trade Commission (USITC). July 2000. "Foundry Coke: A Review of
the Industries in the United States and China."
-------
U.S. International Trade Commission (USITC). 2001a. Memorandum to the Commission
from Craig Thomsen, John Giamalua, John Benedetto, Joshual Levy, International
Economists. Investigation No. TA-201-73: STEEL—Remedy Memorandum.
November 21,2001.
U.S. International Trade Commission (USITC). 2001b. "Foundry Coke from China."
Investigation No. 731-ta-891 (Final) Publication 3449; September 2001.
.
U.S. International Trade Commission (USITC). 2001c. "Blast Furnace Coke from China
and Japan." Investigations Nos. 73 l-TA-951-952 (Preliminary) Publication 3444;
August 2001. .
R-3
-------
APPENDIX A
ECONOMIC IMPACT ANALYSIS METHODOLOGY
This appendix provides the methodology for analyzing the economic impacts of the
coke ovens, integrated iron and steel MACT, and iron foundry MACT standards to ensure
consistency across the EIAs for each of these MACT standards. Implementation of this
methodology provided the economic data and supporting information that EPA requires to
support its regulatory determination. This approach is firmly rooted in microeconomic
theory and the methods developed for earlier EPA studies to operationalize this theory. The
Agency employed a computerized market model of the coke, steel mill products, and iron
castings industries to estimate the behavioral responses to the imposition of regulatory costs
and, thus, the economic impacts of the standard. The market model captures the linkages
between these industries through changes in equilibrium prices and quantities.
This methodology section describes the conceptual approach selected for this EIA.
For each product market included in the analysis, EPA derived facility-level supply functions
and demand functions that are able to account for the behavioral response and market
implications of the regulatory costs. Finally, this appendix presents an overview of the
specific functional forms that constitute the Agency's computerized market model.
A.I Overview of Economic Modeling Approach
In general, the EIA methodology needs to allow EPA to consider the effect of the
different regulatory alternatives. Several types of economic impact modeling approaches
have been developed to support regulatory development. These approaches can be viewed as
varying along two modeling dimensions:
• the scope of economic decision making accounted for in the model, and
• the scope of interaction between different segments of the economy.
Each of these dimensions was considered in selecting the approach used to model the
economic impact of the regulation. Bingham and Fox (1999) provide a useful summary of
these dimensions as they relate to modeling the outcomes of environmental regulations.
A-l
-------
For this analysis, prices and quantities are determined in perfectly competitive
markets for furnace coke, foundry coke, steel mill products, and iron castings. The Agency
analyzed the impact of the regulation using a market modeling approach that incorporates
behavioral responses in a multiple-market partial equilibrium model. Multiple-market partial
equilibrium analysis accounts for the interactions between coke, steel mill product, and iron
castings markets into the EIA to better estimate the regulation's impact. The modeling
technique is to link a series of standard partial equilibrium models by specifying the
interactions between the supply and demand for products and then solving for changes in
prices and quantities across all markets simultaneously.
Figure A-l summarizes the market interactions included in the Agency's EIA
modeling approach. Changes in the equilibrium price and quantity due to control costs
associated with individual MACTs were estimated simultaneously in four linked markets:
• market for furnace coke,
• market for foundry coke,
• market for steel mill products, and
• market for iron castings.
As described in Section 2 of this EIA report, many captive coke plants supply their
excess furnace coke to the market. Merchant coke plants and foreign imports account for the
remaining supply to the furnace coke market. Furnace coke produced at captive coke plants
and shipped directly to integrated iron and steel mills owned by their parent companies does
not directly enter the market for furnace coke. However, compliance costs incurred by these
captive, or "in-house," furnace coke batteries indirectly affect the furnace coke market
through price and output changes in the steel mill products market.
The market demand for furnace coke is derived from integrated mills producing steel
mill products. Integrated iron and steel mills that need more coke than their captive batteries
can produce will purchase furnace coke from the market. Integrated mills' market demand
for furnace coke depends on their production levels as influenced by the market for steel mill
products. Steel mill products are supplied by three sources: integrated iron and steel mills,
nonintegrated steel mills (primarily minimills), and imports. Domestic consumers of steel
mill products and exports account for the market demand.
A-2
-------
Consumers of Steel
Mill Products
Imports
Exports
Imports
Exports
Integrated Iron
and Steel Mills
• Finishing Mills '
• Steelmaking Furnace j^-.
• Blast Furnace |
.....1......
i
Captive Coke Plants f^"
1
Figure A-l. Market Linkages Modeled in the Economic Impact Analysis
Domestic merchant plants are the primary suppliers of foundry coke to the market.
However, the U.S. International Trade Commission (2000) has documented an increasing
trend in foreign imports of foundry coke from China. Therefore, we have included a single
import supply curve to characterize this supply segment.
In addition to furnace and foundry coke, merchant and captive coke plants sell a by-
product referred to as "other coke" that is purchased as a fuel input by cement plants,
chemical plants, and nonferrous smelters. Because "other coke" is a by-product and
represented only 2 percent of U.S. coke production in 1997 it is not formally characterized
by supply and demand in the market model. Revenues from this product are accounted for
by assuming its volume is a constant proportion of the total amount of coke produced by a
battery and sold at a constant price.
A-3
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A.2 Conceptual Market Modeling Approach
This section examines the impact of the regulations on the production costs for
affected facilities, both merchant and captive. It provides an overview of the basic economic
theory of the effect of regulations on facility production decisions and the concomitant effect
on market outcomes. Following the OAQPS Economic Analysis Resource Document (EPA,
1999), we employed standard concepts in microeconomics to model the supply of affected
products and the impacts of the regulations on production costs and the operating decisions.
The approach relies heavily on previous economic analyses, employs a comparative static
approach, and assumes certainty in relevant markets. The three main elements of the
analysis are regulatory effects on the manufacturing facility, market responses, and
facility-market interactions. The remainder of this section describes each of these main
elements.
A. 2.1 Facility-level Responses to Control Costs
Individual plant-level production decisions were modeled to develop the market
supply and demand for key industry segments in the analysis. Production decisions were
modeled as intermediate-run decisions, assuming that the plant size, equipment, and
technologies are fixed. For example, the production decision typically involves (1) whether
a firm with plant and equipment already in place purchases inputs to produce output and (2)
at what capacity utilization the plant should operate. A profit-maximizing firm will operate
existing capital as long as the market price for its output exceeds its per-unit variable
production costs, since the facility will cover not only the cost of its variable inputs but also
part of its capital costs. Thus, in the short run, a profit-maximizing firm will not pass up an
opportunity to recover even part of its fixed investment in plant and equipment.
The existence of fixed production factors gives rise to diminishing returns to those
fixed factors and, along with the terms under which variable inputs are purchased, defines
the upward-sloping form of the marginal cost (supply) curve employed for this analysis.
Figure A-2 illustrates this derivation of the supply function at an individual mill based on the
classical U-shaped cost structure. The MC curve is the marginal cost of production, which
intersects the facility's average variable (avoidable) cost curve (AVC) and its average total
cost curve (ATC) at their respective minimum points. The supply function is that portion of
the marginal cost curve bounded by the minimum economically feasible production rate (qm)
and the technical capacity (qM). A profit-maximizing producer will select the output rate
where marginal revenue equals price, that is, at [P*, q*]. If market price falls below ATC,
A-4
-------
Figure A-2. Product Supply Function at Facility
then the firm's best response is to cease production because total revenue does not cover total
costs of production.
Now consider the effect of the regulation and the associated compliance costs.
These fall into one of two categories: avoidable variable and avoidable nonvariable. These
final costs are characterized as avoidable because a firm can choose to cease operation of the
facility and, thus, avoid incurring the costs of compliance. The variable control costs include
the operating and maintenance costs of the controls, while the nonvariable costs include
compliance capital equipment. Figure A-3 illustrates the effect of these additional costs on
the facility supply function. The facility's AVC and MC curves shift upward (to AVC' and
MC') by the per-unit variable compliance costs. In addition, the nonvariable compliance
costs increase total avoidable costs and, thus, the vertical distance between ATC' and AVC'.
The facility's supply curve shifts upward with marginal costs and the new (higher) minimum
operating level (q) is determined by a new (higher) ps.
Next consider the effect of compliance costs on the derived demand for inputs at the
regulated facility. Integrated iron and steel mills are market demanders of furnace coke,
while foundries with cupola furnaces are market demanders of foundry coke. We employ
similar neoclassical analysis to that above to demonstrate the effect of the regulation on the
demand for market coke inputs, both furnace and foundry. Figure A-4 illustrates the derived
A-5
-------
MC'
$/q
pm'
p rn
qm qm
,M
q/t
Figure A-3. Effect of Compliance Costs on Product Supply Function at Facility
demand curve for coke inputs. Each point on the derived demand curve equals the
willingness to pay for the corresponding marginal input. This is typically referred to as the
input's value of marginal product (VMP), which is equal to the price of the output (P) less
the per-unit compliance cost (c) times the input's "marginal physical product" (MPP), which
is the incremental output attributable to the incremental inputs. If, as assumed in this
analysis, the input-output relationship between the market coke input and the final product
(steel mill products or iron castings) is strictly fixed, then the VMP of the market coke is
constant and the derived demand curve is horizontal with the constant VMP as the vertical
intercept, as shown in Figure A-4. Ignoring any effect on the output price for now, an
increase in regulatory costs will lower the VMP of all inputs leading to a downward shift in
the derived demand in Figure A-4 from Dy to Dl •
A-6
-------
$/qv
D.
D
Figure A-4. Derived Demand Curve for Coke Inputs
A.2.2 Market Effects
To evaluate the market impacts, the economic analysis assumes that prices and
quantities are determined in a competitive market (i.e., individual facilities have negligible
power over the market price and thus take the price as "given" by the market). As shown in
Figure A-5(a), under perfect competition, market prices and quantities are determined by the
intersection of market supply and demand curves. The initial baseline scenario consists of a
market price and quantity (P, Q) that is determined by the downward-sloping market demand
curve (DM) and the upward-sloping market supply curve (SM) that reflects the horizontal
summation of the individual producers' supply curves.
Now consider the effect of the regulation on the baseline scenario as shown in
Figure A-5(b). In the baseline scenario without the standards, at the projected price, P, the
industry would produce total output, Q, with affected facilities producing the amount qa and
unaffected facilities accounting for Q minus qa, or qu. The regulation raises the production
costs at affected facilities, causing their supply curves to shift upward from Sa to Sa' and the
market supply curve to shift upward to SM/. At the new with-regulation equilibrium with the
regulation, the market price increases from P to P' and market output
A-7
-------
qa
Affected Facilities
P'
P
S'
Affected Facilities
+ p
= p
Unaffected Facilities
a) Baseline Equilibrium
Market
P'
p
J I
Unaffected Facilities
b) With-Regulation Equilibrium
Figure A-5. Market Equilibrium without and with Regulation
DM
Q
SM7 SM/
Q' Q
Market
A-8
-------
(as determined from the market demand curve, DM) declines from Q to Q'. This reduction in
market output is the net result from reductions at affected facilities and increases at
unaffected facilities. Unaffected facilities do not incur the increased costs due to regulation
so their response to higher product prices is to increase production. Foreign suppliers (i.e.,
imports), which also do not face higher costs, will respond in the same manner as these
unaffected producers.
The above description is typical of the expected market effects for final product
markets. The regulations would potentially affect the costs of producing steel mill products
through additional control costs and increases in the market price of furnace coke and the
cost of producing captive furnace coke. The increase in control costs, the market price, and
captive production costs for furnace coke result in an upward shift in the supply functions of
integrated iron and steel mills, while nonintegrated and foreign suppliers are unaffected.
Additionally, the regulations would potentially affect the costs of producing iron castings
through additional control costs and changes in the market price of foundry coke. This
results in an upward shift in supply functions of foundries operating cupola furnaces, while
foundries operating electric furnaces are only affected to the extent they are subject to
additional control costs.
However, there are additional impacts on the furnace and foundry coke markets
related to their derived demand as inputs to either the production of steel mill products or
iron castings. Figure A-6 illustrates, under perfect competition, the baseline scenario where
the market quantity and price of the final steel mill product or iron casting, Qx(Qx0, Px0), are
determined by the intersection of the market demand curve (Dx) and the market supply curve
(Sx), and the market quantity and price of furnace or foundry coke, Qy(Qy0, Pyo), are
determined by the intersection of the market demand curve (Dy) and market supply curve
(Sy). Given the derived demand for coke, the demanders of coke, Qy, are the individual
facilities that purchase coke for producing their final products (i.e., integrated steel mills in
the case of furnace coke or foundries with cupola furnaces in the case of foundry coke).
Imposing the regulations increases the costs of producing coke and, thus, the final
product, shifting the market supply functions for both commodities upward to Sx' and Sy',
respectively. The supply shift in the final product market causes the market quantity to fall
to Qxl and the market price to rise to Pxl in the new equilibrium. In the market for coke, the
reduced production of the final product causes a downward shift in the demand curve (Dy)
with an unambiguous reduction in coke production, but the direction of the change in market
A-9
-------
$/Qv
0x1 QxO
CL/t
(a) Market for single steel mill product or iron casting, Q
$/CL
P = P
Q
Q,,,
*y1 "'yS V*y2 '•"yO
(b) Market for coke input, Q
Qy/t
Figure A-6. Market Equilibria With and Without Compliance Costs
A-10
-------
price is determined by the relative magnitude of the demand and supply shift. If the
downward demand effect dominates, the price will fall (e.g., Pyl); however, if the upward
supply effect dominates, the price will rise (e.g., Py2). Otherwise, if the effects just offset
each other, the price remains unchanged (e.g., Py3 = Py0).
A. 2.3 Facility-Level Responses to Compliance Costs and New Market Prices
In evaluating the market effects, we must distinguish between the initial effect of the
regulations and the net effect after all markets have adjusted. The profit-maximizing
behavior of firms, as described above, may lead to changes in output that, when aggregated
across all producers, lead to changes in the market-clearing price and feedback on the firms
to alter their decisions. These adjustments are characterized as a simultaneous interaction of
producers, consumers, and markets. Thus, to evaluate the facility-market outcomes, the
analysis must go beyond the initial effect of the regulation and estimate the net effect after
markets have fully adjusted.
Given changes in the market prices and costs, each facility will elect to either
• continue to operate, adjusting production and input use based on new revenues
and costs, or
• cease production at the facility if total revenues do not exceed total costs.
This decision can be extended to those facilities with multiple product lines or operations
(e.g., coke batteries, blast furnaces, cupolas). If product revenues are less than product-
specific costs, then these product-lines or operations may be closed.
Therefore, after accounting for the facility-market interaction, the operating decisions
at each individual facility can be derived. These operating decisions include whether to
continue to operate the facility (i.e., closure) and, if so, the optimal production level based on
compliance costs and new market prices. The approach to modeling the facility closure
decision is based on conventional microeconomic theory. This approach compares the
ATC—which includes all cost components that fall to zero when production
discontinues—to the expected post-regulatory price. Figure A-3 illustrates this comparison.
If price falls below the ATC, total revenue would be less than the total costs. In this
situation, the owner's cost-minimizing response is to close the facility. Therefore, as long as
there is some return to the fixed factors of production— that is, some positive level of
profits— the firm is expected to continue to operate the facility.
A-ll
-------
If the firm decides to continue operations, then the facility's decision turns to the
optimal output rate. Facility and product-line closures, of course, directly translate into
reductions in output. However, the output of facilities that continue to operate will also
change depending on the relative impact of compliance costs and higher market prices.
Increases in costs will tend to reduce producers' output rates; however, some of this effect is
mitigated when prices are increased. If the market price increase more than offsets the
increase in unit costs, then even some affected facilities could respond by increasing their
production. Similarly, supply from unaffected domestic producers and foreign sources will
respond positively to changes in market prices.
A.3 Operational Economic Model
Implementation of the MACT standards will affect the costs of production for plants
across the United States subject to the rule. Responses at the facility-level to these additional
costs will collectively determine the market impacts of the rule. Specifically, the cost of the
regulation may induce some facilities to alter their current level of production or to cease
operations. These choices affect and, in turn are affected by, the market price of each
product. As described above, the Agency has employed standard microeconomic concepts to
model the supply and demand of each product and the impacts of the regulation on
production costs and the output decisions of facilities. The main elements of the analysis are
to
• characterize production of each product at the individual supplier and market
levels,
• characterize the demand for each product, and
• develop the solution algorithm to determine the new with-regulation equilibrium.
The following sections provide the supply and demand specifications for each product
market as implemented in the EIA model and summarize the model's solution algorithm.
Supply and demand elasticities used in the model are presented in Table A-l.
A. 3.1 Furnace Coke Market
The market for furnace coke consists of supply from domestic coke plants, both
merchant and captive, and foreign imports and of demand from integrated steel mills and
foreign exports. The domestic supply for furnace coke is modeled as a stepwise supply
function developed from the marginal cost of production at individual furnace coke batteries.
The domestic demand is derived from iron and steel production at integrated mills as
A-12
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Table A-l. Supply and Demand Elasticities Used in Analysis
Market Supply Elasticity Demand Elasticity
Furnace Coke
Domestic 2.1a Derived demand
Foreign 3.0b -0.3b
Foundry Coke
Domestic l.la Derived demand
Foreign 3.0b -0.3b
Steel Mill Products
Domestic 3.5C -0.59d
Foreign 1.5° -1.256
Iron Castings
Domestic 1.0f -0.58d
Foreign 1X/ -1.0f
a Estimate based on individual battery production costs and output.
b Graham, Thorpe, and Hogan (1999).
0 U.S. International Trade Commission (USITC). 2001a. Memorandum to the Commission from Craig
Thomsen, John Giamalua, John Benedetto, and Joshua Level, International Economists. Investigation
No. TA-201-73: STEEL—Remedy Memorandum. November 21, 2001.
d Econometric analysis (see Appendixes C and D for details).
e Ho, M., andD. Jorgenson. 1998. "Modeling Trade Policies and U.S. Growth: Some Methodological
Issues." Presented at USITC Conference on Evaluating APEC Trade Liberalization: Tariff and Nontariff
Barriers. September 11-12, 1997.
f Assumed value.
determined through the market for steel mill products and coking rates for individual
batteries. The following section details the market supply and demand components for this
analysis.
A. 3.1.1 Market Supply of Furnace Coke
The market supply for furnace coke, QSc, is the sum of coke production from
merchant facilities, excess production from captive facilities (coke produced at captive
batteries less coke consumed for internal production on steel mill products), and foreign
imports, i.e.,
QSc = q£ - qiSc - qFSC (A.I)
A-13
-------
where
q ^c = furnace coke supply from merchant plants,
sc = furnace coke supply from integrated steel mills, and
Sc = furnace coke supply from foreign sources (imports).
Supply from Merchant and Captive Coke Plants. The domestic supply of furnace
coke is composed of the supply from merchant and captive coke plants reflecting plant-level
production decisions for individual coke batteries. For merchant coke plants the supply is
characterized as
qMC = E E qMCij) (A.2)
i j
where
qJlc = supply of foundry coke from coke battery (j) at merchant plant (1).
Alternatively, for captive coke plants the supply is characterized as the furnace coke
production remaining after internal coke requirements are satisfied for production of final
steel mill products, i.e,
SE
= MAX
:_ Sc _ S _ Ss
E
j
(A.3)
where
Sc = the furnace coke production from captive battery (j) at integrated steel
mill (1);
A-14
-------
rim = ^e co^e rate ^or mte§rated steel miU OX which specifies the amount of
furnace coke input per unit of final steel mill product;1 and
qI* = supply of steel mill product from integrated mill (1).
The MAX function in Eq. (A.3) indicates that if the total captive production of furnace coke
at an integrated mill is greater than the amount of furnace coke consumption required to
produce steel mill products, then supply to the furnace coke market will equal the difference;
otherwise, the mill's supply to the furnace coke market will be zero (i.e., it only satisfies
internal requirements from its captive operations).
As stated above, the domestic supply of furnace coke is developed from plant-level
production decisions for individual coke batteries. For an individual coke battery the
marginal cost was assumed to be constant. Thus, merchant batteries supply 100 percent of a
battery's capacity to the market if the battery's marginal cost (MC) is below the market price
for furnace coke (pc), or zero if MC exceeds pc. Captive batteries first supply the furnace
coke demanded by their internal steelmaking requirements. Any excess capacity will then
supply the furnace coke market if the remaining captive battery's MC is below the market
price.
Marginal cost curves were developed for all furnace coke batteries at merchant and
captive plants in the United States as detailed in Appendix B. Production costs for a single
battery are characterized by constant marginal cost throughout the capacity range of the
battery. This yields the inverted L-shaped supply function shown in Figure A-7(a). In this
case, marginal cost (MC) equals average variable cost (AVC) and is constant up to the
production capacity given by q. The supply function becomes vertical at q because
increasing production beyond this point is not possible. The minimum economically
achievable price level is equal to p*. Below this price level, p* is less than AVC, and the
supplier would choose to shut down rather than to continue to produce coke.
'The furnace coke rate for each integrated steel mill is taken from Hogan and Koelble (1996). The coke rate is
assumed to be constant with respect to the quantity of finished steel products produced at a given mill. A
constant coke rate at each integrated mill implies a constant efficiency of use at all output levels and
substitution possibilities do not exist given the technology in place at integrated mills. Furthermore, the
initial captive share of each integrated mill's coke requirement is based on the baseline data from the EPA
estimates.
A-15
-------
$/q
AVC = MC
q/t
(a) Inverted L-Shaped Supply Function at Single-Battery Plant
$/q
MC battery 1
MC battery 2
q/t
(b) Inverted L-Shaped Supply Functions at Multibattery Plant
$/q
(c) Stepwise Market Supply Curve
Figure A-7. Facility-Level Supply Functions for Coke
A-16
-------
A stepwise supply function can be created for each facility with multiple batteries by
ordering production from least to highest MC batteries (see Figure A-7[b]). For captive coke
plants, the lowest cost batteries are assumed to supply internal demand, leaving the higher
cost battery(ies) to supply the market if MC
-------
qDc = foreign demand of furnace coke (exports).
Domestic Demand for Furnace Coke. Integrated steel mills use furnace coke as an
input to the production of finished steel products. Furnace coke demand is derived from the
final product supply decisions at the integrated steel mills. Once these final production
decisions of integrated producers have been made, the mill-specific coke input rate will
determine their individual coke requirements. Integrated steel mills satisfy their internal
requirements first through captive operations and second through market purchases. Thus,
the derived demand for furnace coke is the difference between total furnace coke required
and the captive capacity at integrated plants, i.e.,
Ss Sc
= MAX
j
r s
(A.6)
= the coke rate for integrated steel mill (1), which specifies the amount of
furnace coke input per unit of final steel mill product;
q ^ = supply of steel mill product from integrated mill (1); and
qSc = the furnace coke production from captive battery (j) at integrated steel mill
(1).
The MAX function in Eq. (A.3) indicates that if the amount of furnace coke consumption
required by an integrated mill to produce steel mill products is greater than its total captive
production, then demand from the furnace coke market will equal the difference; otherwise,
the mill's demand from the furnace coke market will be zero (i.e., it fully satisfies internal
requirements from its captive operations).
Increases in the price for furnace coke will increase the per-unit costs of final steel
products and thereby shift upward the integrated mill's supply curve for steel mill products.
The shift in the supply curve decreases the market quantity of finished steel products
produced, which subsequently reduces the quantity of furnace coke consumed at integrated
mills and shifts their demand curve downward in the furnace coke market.
Foreign Demand for Furnace Coke (Exports). Foreign demand for furnace coke is
expressed as
A-18
-------
qFDC= B/Cp'/* (A.7)
where
Bp = multiplicative demand parameter for the foreign furnace coke demand
equation, and
rip = foreign demand elasticity for furnace coke.
The multiplicative demand parameter, Bp, calibrates the foreign coke demand equation to
replicate the observed 2000 level of foreign exports based on the market price and the
foreign demand elasticity.
A. 3.2 Market for Steel Mitt Products
The market for steel mill products consists of supply from domestic mills and foreign
imports and of demand from domestic and foreign consumers. Steel mill products are
modeled as a single commodity market. The domestic supply for steel mill products includes
production from integrated mills operating blast furnaces that require furnace coke and from
nonintegrated mills that operate electric arc furnaces that do not. The coke oven NESHAP is
expected to increase the cost of furnace coke inputs. In addition, the integrated iron and steel
NESHAP will also increase the costs of production leading to similar impacts. This will
increase the cost of production at integrated mills and thereby shift their supply curves
upward and increase the price of steel mill products.
A. 3.2.1 Market Supply of Steel Mill Products
The market supply for steel mill products (QSs) is defined as the sum of the supply
from integrated iron and steel mills, nonintegrated mills, and foreign imports, i.e.,
QSs = qf - q£ + qf (A.8)
where
qjSs = supply of steel mill products from integrated mills;
= supply of steel mill products from the nonintegrated steel mills; and
A-19
-------
qFSs = supply of steel mill products from foreign suppliers (imports).
Supply from Integrated Mills. Supply of steel mill products from integrated iron and
steel mills is the sum of individual mill production, i.e.,
%S = E %(i) (A.9)
i
where
q Sj = quantity of steel mill products produced at an individual integrated mill (1).
Integrated producers of steel mill products vary output as production costs change.
As described above, upward-sloping supply curves were used to model integrated mills'
responses. For this analysis, the generalized Leontief technology is assumed to characterize
the production of steel mill products at each facility. This technology is appropriate, given
the fixed-proportion material input of coke and the variable-proportion inputs of labor,
energy, and raw materials. The generalized Leontief supply function is
+ E ( 1
1 2
where ps is the market price for the steel product, YI and p are model parameters, and 1
indexes affected integrated mills. The theoretical restrictions on the model parameters that
ensure upward-sloping supply curves are YI > 0 and p < 0.
Figure A-8 illustrates the theoretical supply function of Eq. (A.6). As shown, the
upward-sloping supply curve is specified over a productive range with a lower bound of zero
B2
that corresponds with a shutdown price equal to -*— and an upper bound given by the
4Y?
productive capacity of qY that is approximated by the supply parameter YI- The curvature of
the supply function is determined by the p parameter.
To specify the supply function of Eq. (A.6) for this analysis, the p parameter was
computed by substituting a market supply elasticity for the product (£), the market price of
the product (p), and the average annual production level across mills (q) into the following
equation:
A-20
-------
4Y
Figure A-8. Theoretical Supply Function for Integrated Facilities and Foundries
P= -
(A. 11)
The p parameter was calculated by incorporating market price and elasticity of supply values
intoEq. (A. 11).
The intercept of the supply function, YI, approximates the productive capacity and
varies across products at each facility. This parameter does not influence the facility's
production responsiveness to price changes as does the p parameter. Thus, the parameter YI
is used to calibrate the economic model so that each individual facility's supply equation
matches its baseline production data from 2000.
Modeling the Impact of Compliance Costs. The effect of coke oven NESHAP is to
increase the MC of producing furnace coke by the compliance costs. These costs include the
variable component consisting of the operating and maintenance costs and the nonvariable
component consisting of the control equipment required for the regulatory option.
Regulatory control costs will shift the supply curve upward for each affected facility by the
A-21
-------
annualized compliance cost (operating and maintenance plus annualized capital) expressed
per unit of coke production. Computing the supply shift in this way treats compliance costs
as the conceptual equivalent of a unit tax on output. For coke facilities, the horizontal
portion of its supply curve will rise by the per-unit total compliance costs. In this case, the
MC curve will shift by this amount to allow the new higher reservation price for the coke
battery to appropriately reflect the fixed costs of compliance in the operating decision. At a
multiple-battery facility, the change in each battery's MC may cause a reordering of the steps
because the compliance costs vary due to the technology, age, and existing controls of
individual batteries.
Compliance costs on captive furnace coke batteries will directly affect production
decisions at integrated mills, while compliance costs on merchant furnace coke batteries will
indirectly affect these decisions through the change in the market price of furnace coke. In
addition, direct compliance costs associated with the integrated iron and steel NESHAP will
directly affect production decisions at these mills. Both of these impacts were modeled as
reducing the net price integrated mills receive for steel mill products. Returning to the
integrated mill's supply function presented in Eq. (A. 10), the mill's production quantity with
compliance costs is expressed as
(A. 12)
Ss _ p
QI(1) Yl+2
1
s r c / x I s
Ps ri(l)Lai l ^ aU^J ci^
where
rim = ^e co^e ra^e ^or mte§rated steel mill (1), which specifies the amount of
furnace coke input per unit of steel mill product;
a, = the share of integrated steel mill 1's furnace coke provided by captive
batteries;
Acf = change in per-unit cost of captive coke production at integrated steel mill 1;
(l-c^) = share of integrated steel mill 1's furnace coke provided by the market;
Apc = change in the market price for furnace coke; and
A-22
-------
tel = change in per-unit compliance cost at integrated steel mill 1.
The bracketed term in the denominator represents the increased costs due to the coke ovens
NESHAP and integrated iron and steel NESHAP, i.e., both the direct and indirect effects.
The coke oven NESHAP compliance costs, ^ and Apc, are expressed per ton of furnace
coke and weighted to reflect each integrated mill's reliance on captive versus market furnace
coke.2 The change in the cost per ton of furnace coke due to the regulation is then multiplied
by the mill's coke rate to obtain the change in the cost per ton of steel mill product. The
integrated iron and steel NESHAP compliance costs /ys are also expressed in cost per ton
of steel mill product. These changes in the cost per ton of steel mill product correspond to the
shift in the affected facility supply curve shown in Figure A-5b.
Supply from Nonintegrated Mills. The supply of steel mill products from domestic
nonintegrated mills is specified as
qM = A^(ps)?- (A. 13)
where
A = multiplicative parameter for nonintegrated mill supply equation, and
^ = the nonintegrated mill supply elasticity for finished steel products.
The multiplicative supply parameter is determined by backsolving Eq. (A. 8), given baseline
values of the market price, supply elasticities, and quantities supplied by nonintegrated mills
and foreign mills.
Foreign Supply (Imports). The supply of steel mill products from foreign suppliers
(imports) is specified as
qFSs = AFs(ps)^ (A. 14)
2The captive versus market furnace coke weights are endogenous in the model because integrated mills exhaust
their captive supply of coke first; hence, changes in coke consumption typically come from changes in
market purchases, while captive consumption remains relatively constant.
A-23
-------
where
Ap = multiplicative parameter for foreign supply equation, and
£p = the foreign supply elasticity for finished steel products (assumed value = 1).
The multiplicative supply parameters are determined by backsolving Eq. (A.8), given
baseline values of the market price, supply elasticity, and level of imports.
A. 3.2.2 Market Demand for Steel Mill Products
The market demand for steel mill products, QDs, is the sum of domestic and foreign
demand, i.e.,
QDs = q? - qFDS (A.15)
where
qj°s = domestic demand for steel mill products, and
DS = foreign demand for steel mill products (exports).
Domestic Demand for Steel Mill Products. The domestic demand for steel mill
products is expressed as
qDDs= B^(p')^ (A. 16)
where
Bj? = multiplicative parameter for domestic steel mill products demand equation,
and
•pi = domestic demand elasticity for steel mill products.
The multiplicative demand parameter calibrates the domestic demand equation given
baseline data on price and demand elasticity to replicate the observed 2000 level of domestic
consumption.
A-24
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Foreign Demand for Steel Mill Products (Exports). Foreign demand (exports) for
steel mill products is expressed as
qFDs = BFs(psy* (A. 17)
where
Bp = multiplicative demand parameter for foreign steel mill products' demand
equation, and
f^, = foreign (export) demand elasticity for steel mill products.
The multiplicative demand parameter calibrates the foreign demand equation given data on
price and demand elasticities to replicate the observed 2000 level of foreign exports.
A.3.3 Market for Foundry Coke
The market for furnace coke consists of supply from domestic merchant coke plants
and imports and demand from foundries operating cupola furnaces. The domestic supply for
foundry coke is modeled as a stepwise supply function developed from the marginal cost of
production at individual foundry coke batteries. Imports are modeled using a representative
supply curve. The domestic demand is derived from iron castings production at foundries
operating cupola furnaces (domestic and foreign) as determined through the market for iron
castings and coking rates. The following section details the market supply and demand
components for this analysis.
A. 3.3.1 Market Supply of Foundry Coke
The market supply of foundry coke, Qsk, is composed of the supply from domestic
merchant plants reflecting plant-level production decisions for individual merchant coke
batteries, and a single representative foreign supply curve, i.e.,
Sk Sk
Qsk =q; ,qp =z x qSMk(U) VFk (A.
Merchant i j
where
1 = plants
A-25
-------
j = batteries
qSk = supply of foundry coke from coke battery (j) at merchant plant (1)
qpk = foundry coke supply from imports
As was the case for furnace coke batteries, the marginal cost for an individual foundry coke
battery is assumed to be constant reflecting a fixed-coefficient technology. Marginal cost
curves were developed for all foundry coke batteries at merchant plants in the United States
as detailed in Appendix B.
Foundry coke production decisions are based on the same approach used to model
furnace coke production decisions. Thus, as illustrated previously in Figure A-7, the
production decision is determined by an inverted L-shaped supply curve that is perfectly
elastic to the capacity level of production and perfectly inelastic thereafter. Foundry coke
batteries will supply 100 percent of capacity if its marginal cost is less than market price;
otherwise, it will cease production. The regulatory costs shift each affected battery's
marginal cost upward, affecting facilities' decision to operate or shut down individual
batteries.
Foreign Supply of Foundry Coke. Foreign supply of foundry coke (q,fk) is expressed
as
qFSk = AFk(pk)?" (A. 19)
where
A = multiplicative parameter for the foreign foundry coke supply equation, and
= foreign supply elasticity for foundry coke.
The multiplicative parameter (Ap) calibrates the foreign coke supply equation to replicate
the observed 2000 level of foundry coke imports based on the market price and the foreign
supply elasticity.
A-26
-------
A. 3.3.2 Market Demand for Foundry Coke
The market demand for foundry coke, QDk, is composed of domestic and foreign
demand by foundries operating cupola furnaces. Therefore, the foundry coke demand is
derived from the production of iron castings from cupola furnaces. Increases in the price of
foundry coke due to the regulation will lead to decreases in production of iron castings at
foundries operating cupola furnaces. The demand function for foundry coke is expressed as
follows:
where
^Dk Dk , Dk i Si , Dk
Q =
= derived demand for foundry coke from domestic cupola foundries;
qcFF = demand for foundry coke from foreign cupola foundries;
r^p = the coke rate for cupola foundries, which specifies the amount of foundry
coke input per unit output; and
= quantity of iron castings produced at domestic cupola foundries;
Changes in production at foundries using electric arc and electric induction furnaces to
produce iron castings do not affect the demand for foundry coke.
Foreign Demand for Foundry Coke (Exports). Foreign demand for foundry coke is
expressed as
OF* = BFk(pk)^ (A.21)
where
Bp = multiplicative demand parameter for the foreign foundry coke demand
equation, and
T^ = foreign demand elasticity for foundry coke.
A-27
-------
The multiplicative demand parameter, Bp, calibrates the foreign coke demand equation to
replicate the observed 2000 level of foreign exports based on the market price and the
foreign demand elasticity.
A. 3.4 Market for Iron Castings
The market for iron castings consists of supply from domestic foundries and foreign
imports and of demand from domestic and foreign consumers. Iron castings are modeled as
a single commodity market. The domestic supply for iron castings includes production from
foundries operating cupola furnaces that require foundry coke and from foundries that
operate electric furnaces that do not. The rule is expected to increase production costs for
selected cupola and electric foundries and thereby shift their supply curves upward and
increase the price of iron castings.
A3.4.1 Market Supply of Iron Castings
The market supply for iron castings, QSl, is defined as the sum of the supply from
domestic and foreign foundries. Domestic foundries are further segmented into operations
using foundry coke (referred to as cupola foundries) and operations using electric furnaces
(referred to as electric foundries). Supply is expressed as a function of the market price for
castings:
Qsi = q£ + <£ + qFSi (A.22)
where
= quantity of iron castings produced at domestic cupola foundries,
q|F = supply from domestic electric foundries, and
qp51 = supply from foreign foundries.
Domestic Foundries with Cupola Furnaces. The Agency used a simple supply
function to characterize the production of iron castings. Compliance costs on foundry coke
will directly affect cupola foundries' production decisions and indirectly affect these
decisions through the changes in the market price of foundry coke. This impact is modeled
as reducing the net revenue cupola foundries receive for the sales of iron castings. Each
directly affected cupola foundry's supply function is expressed as
A-28
-------
'Fl (P S - 4VCF, AP k ~ ^l)5™ (A'23)
where
= multiplicative supply parameter for foundry 1's supply equation,
ri
(fy = share of foundry 1's iron castings produced using cupola furnaces,
rJL = the coke rate for cupola furnaces, which specifies the amount of foundry
LJ1!
coke input per unit output (0.2493),
Ap k = change in the market price for foundry coke,
Acj = change in per-unit cost of iron casting production, and
g1 = supply elasticity for iron castings.
The multiplicative supply parameter, f± is determined by backsolving Eq. (A.23), given
\^r
baseline values of the market price, supply elasticity, and quantity supplied. Unaffected iron
casting output produced with cupola furnaces are modeled as a single representative cupola
foundry.
Domestic Electric Furnace Foundries. The functional form of the supply curve for
directly affected domestic foundries with electric arc or induction furnaces is specified as
q£, = AEFl (P ' - Ac,)5- (A.24)
where
AgF = multiplicative parameter for electric foundries supply equation, and
Acj = change in per-unit cost of iron casting production, and
g1 = electric foundries supply elasticity for iron castings.
A-29
-------
The multiplicative supply parameter, AgF, is determined by backsolving Eq. (A.24), given
baseline values of the market price, supply elasticity, and quantity supplied from electric
foundries. Unaffected iron casting output produced with electric furnaces are modeled as a
single representative electric foundry.
Foreign Supply (Imports). The functional form of the foreign supply curve for iron
castings is specified as
qFSi = A,1 (p ')* (A.25)
where
Ap = multiplicative parameter for foreign iron castings supply equation, and
g1 = foreign supply elasticity for iron castings.
The multiplicative supply parameter, AF, is determined by backsolving Eq. (A.25), given
baseline values of the market price, supply elasticity, and level of imports.
A. 3.4.2 Market Demand for Iron Castings
The market demand for iron castings (Q01) is the sum of domestic and foreign
demand, and it is expressed as a function of the price of iron castings:
QDi = q? + qFDi (A.26)
where
q^1 = domestic demand for iron castings, and
qi31 = foreign demand (exports) for iron castings.
Domestic Demand for Iron Castings. The domestic demand for iron castings is
expressed as
qDD1 = Bi (p ^ (A.27)
A-30
-------
where
B' = multiplicative parameter for domestic iron castings' demand equation, and
•pi = domestic demand elasticity for iron castings.
The multiplicative demand parameter calibrates the domestic demand equation given
baseline data on price and demand elasticity to replicate the observed 2000 level of domestic
consumption.
Foreign Demand for Iron Castings. Foreign demand (exports) for iron castings is
expressed as
qFDi = Bp1 (p ^ (A.28)
where
BF = multiplicative demand parameter for foreign iron castings' demand equation,
and
tj1 = foreign (export) demand elasticity for iron castings.
The multiplicative demand parameter BF is determined by backsolving Eq. (A.28), given
baseline values of market price, demand elasticity, and level of exports.
A. 3.5 Post-regulatory Market Equilibrium Determination
Integrated steel mills and iron foundries with cupola furnaces must determine output
given the market prices for their finished products, which in turn determines their furnace
and foundry coke requirements. The optimal output of steel mill products at integrated mills
also depends on the cost of producing captive furnace coke and the market price of furnace
coke; whereas iron foundries with cupolas depend on only the market price of foundry coke
because they have no captive operations. Excess production of captive furnace coke at
integrated mills will spill over into the furnace coke market; whereas an excess demand will
cause the mill to demand furnace coke from the market. For merchant coke plants, the
optimal market supply of furnace and/or foundry coke will be determined by the market
price of each coke product.
A-31
-------
Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased costs from the regulation, which initially reduce
output. The cumulative effect of these individual changes leads to an increase in the market
price that all producers (affected and unaffected) and consumers face, which leads to further
responses by producers (affected and unaffected) as well as consumers and thus new market
prices, and so on. The new equilibrium after imposing the regulation is the result of a series
of iterations between producer and consumer responses and market adjustments until a stable
market price arises where market supply equals market demand for each product, i.e., Qs =
QD-
The Agency employed a Walrasian auctioneer process to determine equilibrium price
(and output) associated with the increased production costs of the regulation. The auctioneer
calls out a market price for each product and evaluates the reactions by all participants
(producers and consumers), comparing total quantities supplied and demanded to determine
the next price that will guide the market closer to equilibrium (i.e., where market supply
equals market demand). Decision rules are established to ensure that the process will
converge to an equilibrium, in addition to specifying the conditions for equilibrium. The
result of this approach is a vector of prices with the regulation that equilibrates supply and
demand for each product.
The algorithm for deriving the with-regulation equilibria in all markets can be
generalized to five recursive steps:
1. Impose the control costs for each affected facility, thereby affecting their supply
decisions.
2. Recalculate the production decisions for coke products and both final steel mill
products and iron castings across all affected facilities. The adjusted production
of steel mill products from integrated steel mills and iron castings from foundries
with cupola furnaces determines the derived demand for furnace and foundry
coke through the input ratios. Therefore, the domestic demand for furnace and
foundry coke is simultaneously determined with the domestic supply of final steel
mill products and iron castings from these suppliers. After accounting for these
adjustments, recalculate the market supply of all products by aggregating across
all producers, affected and unaffected.
3. Determine the new prices via a price revision rule for all product markets.
4. Recalculate the supply functions of all facilities with the new prices, resulting in a
new market supply of each product, in addition to derived (domestic) demand for
furnace and foundry coke. Evaluate domestic demand for final steel mill products
A-32
-------
and iron castings, as well as import supply and export demand for appropriate
products given the new prices.
5. Go to Step #3, resulting in new prices for each product. Repeat until equilibrium
conditions are satisfied in all markets (i.e., the ratio of supply to demand is
approximately one for each and every product).
A.3.6 Economic Welfare Impacts
The economic welfare implications of the market price and output changes with the
regulation can be examined using two slightly different tactics, each giving a somewhat
different insight but the same implications: changes in the net benefits of consumers and
producers based on the price changes and changes in the total benefits and costs of these
products based on the quantity changes. This analysis focuses on the first measure—the
changes in the net benefits of consumers and producers. Figure A-9 depicts the change in
economic welfare by first measuring the change in consumer surplus and then the change in
producer surplus. In essence, the demand and supply curves previously used as predictive
devices are now being used as a valuation tool.
This method of estimating the change in economic welfare with the regulation
divides society into consumers and producers. In a market environment, consumers and
producers of the good or service derive welfare from a market transaction. The difference
between the maximum price consumers are willing to pay for a good and the price they
actually pay is referred to as "consumer surplus." Consumer surplus is measured as the area
under the demand curve and above the price of the product. Similarly, the difference
between the minimum price producers are willing to accept for a good and the price they
actually receive is referred to as "producer surplus" or profits. Producer surplus is measured
as the area above the supply curve and below the price of the product. These areas can be
thought of as consumers' net benefits of consumption and producers' net benefits of
production, respectively.
In Figure A-9, baseline equilibrium occurs at the intersection of the demand curve, D,
and supply curve, S. Price is P[ with quantity Qj. The increased cost of production with the
regulation will cause the market supply curve to shift upward to S'. The new equilibrium
price of the product is P2. With a higher price for the product, there is less consumer welfare,
all else being unchanged as real incomes are reduced. In Figure A-9(a), area A represents the
dollar value of the annual net loss in consumers' benefits with the increased price. The
rectangular portion represents the loss in consumer surplus on the quantity still consumed,
A-33
-------
S'
(a) Change in Consumer Surplus with Regulation
$/Q
Q, Q,
Q/t
(b) Change in Producer Surplus with Regulation
$/Q
Q2 Q,
Q/t
(c) Net Change in Economic Welfare with Regulation
Figure A-9. Economic Welfare Changes with Regulation: Consumer and Producer
Surplus
A-34
-------
Q2, while the triangular area represents the foregone surplus resulting from the reduced
quantity consumed, Qi~Q2
In addition to the changes in consumer welfare, producer welfare also changes with
the regulation. With the increase in market price, producers receive higher revenues on the
quantity still purchased, Q2. In Figure A-9(b), area B represents the increase in revenues due
to this increase in price. The difference in the area under the supply curve up to the original
market price, area C, measures the loss in producer surplus, which includes the loss
associated with the quantity no longer produced. The net change in producer welfare is
represented by area B-C.
The change in economic welfare attributable to the compliance costs of the regulation
is the sum of consumer and producer surplus changes, that is, - (A) + (B-C). Figure A-9(c)
shows the net (negative) change in economic welfare associated with the regulation as area
D. However, this analysis does not include the benefits that occur outside the market (i.e.,
the value of the reduced levels of air pollution with the regulation). Including this benefit
may reduce the net cost of the regulation or even make it positive.
A-35
-------
APPENDIX B
DEVELOPMENT OF COKE BATTERY COST FUNCTIONS
This appendix outlines EPA's method for estimating 2000 baseline production costs
for coke batteries. The Agency used a coke production cost model developed in support of
the 1993 MACT on coke ovens. EPA's Technical Approach for a Coke Production Cost
Model (EPA, 1979) provides a more detailed description of this model. For this analysis, the
model was updated with reported technical characteristics of coke batteries from the
Information Collection Request (ICR) survey responses and available price data (see
Table B-l). In addition, the Agency incorporated estimates of MACT pollution abatement
costs developed for the 1993 MACT on coke ovens (EPA, 1991).
B.I Variable Costs
Coke batteries use four variable inputs during the manufacturing process—
metallurgical coal, labor, energy, and other materials/supplies. Metallurgical coal is
essentially the only raw material used in the production of coke. Labor transports and
delivers the raw materials as well as final products. Coke ovens and auxiliary equipment
consume energy and supplies during the production process and periodic maintenance and
repair of the coke batteries.
Coke production requires a fixed amount of each variable input per ton of coke, and
these inputs are not substitutable. Accordingly, the total variable cost function is linear in the
output and input prices, or, in other words, the average variable cost function is independent
of output. Therefore, the average variable cost function (expressed in dollars per short ton of
coke) can be written as
AVC = AV_CI«PC + AV_LI«w + AV_EI»Pe + AV_OI«P0 (B.I)
where AV_CI, AV_LI, AV_EI, and AV_OI are the fixed requirements per ton of coke of
metallurgical coal, labor, energy, and other material and supplies. Pc, w, Pe, and P0 are the
prices of each variable input, respectively. As shown above, the contribution of each
variable input to the per-unit coke cost is equal to the average variable input (fixed
requirement of the input per ton of coke) times the price of the input. For example, the
B-l
-------
Table B-l. Key Parameter Updates for Coke Production Cost Model: 2000a
Variable
Rl
R2
R3
R4
R7
R8
R9
RIO
Rll
R12
R13
R14
R14*
R15
R16
R17
R18
R19
R20
R21
R22
R23
R25
Description
Steam Cost
Cooling Water
Electricity
Underfire Gas
Calcium Hydroxide
Sulfuric Acid
Sodium Carbonate
Sodium Hydroxide
Coal Tar Credit
Crude Light Oil
BTX Credit
Ammonium Sulfate Credit
Anhydrous Ammonia Credit
Elemental Sulfur Credit
Sodium Phenolate Credit
Benzene Credit
Toluene Credit
Xylene Credit
Naphalene Credit
Coke Breeze Credit
Solvent Naptha Credit
Wash Oil Cost
Phosphoric Acid (commercial)
Industrial Coke Price
Units
$71,000 Ib steam
$71,000 gal
$7kWh
$71 03 eft
$/ton
$/ton
$/ton
$/ton
$/gal
$/gal
$/gal
$/ton
$/ton
$/ton
$/ton
$/gal
$/gal
$/gal
$/lb
$/ton
$/gal
$/gal
$/ton
$/ton
2000
8.97
0.26
Varies by state
1.06
74.00
79.00
537.00
315.00
0.82
1.27
0.94
40.04
239.21
287.48
864.12
1.21
0.85
0.75
0.27
45.62
0.88
1.29
711.31
112.00
This table provides price update for the coke production cost model (EPA, 1979, Table 2-3).
contribution of labor to the cost per ton of coke (AV_LI) is equal to the labor requirement
per ton of coke times the price of labor (w).
The variable costs above include those costs associated with by- and co-product
recovery operations associated with the coke battery. To more accurately reflect the costs
specific to coke production, the Agency subtracted by- and co-product revenues/credits from
Eq. (B.I). By-products include tar and coke oven gas among others, while co-products
include coke breeze and other industrial coke. Following the same fixed coefficient
B-2
-------
approach, these revenues or credits (expressed per ton of coke) are derived for each
recovered product at the coke battery by multiplying the appropriate yield (recovered product
per ton of coke) by its price or value. The variable cost components and by-/co-product
credits are identified below.
B.1.1 Metallurgical Coal (AVCI, Pc)
The ICR survey responses provided the fixed input requirement for metallurgical coal
at each battery. Based on the responses from the survey, U.S. coke producers require an
average of 1.36 tons of coal per ton of coke produced. This fixed input varies by type of
producer. Integrated, or captive, producers require an average of 1.38 tons of coal per ton of
coke produced, while merchant producers require an average of 1.31 tons of coal per ton of
coke produced. The U.S. Department of Energy provides state-level coal price data for
metallurgical coal. For each coke battery, EPA computed the cost of coal per short ton of
coke by multiplying its input ratio times the appropriate state or regional price. As shown in
Table B-2, the average cost of metallurgical coal per ton of coke in 2000 was $61.23 for
captive producers and $57.98 for merchant producers.
Table B-2. Metallurgical Coal Costs by Producer Type: 2000 ($/ton of coke)
Number of batteries
Average
Minimum
Maximum
Captive
40
$61.23
$56.21
$71.98
Merchant
18
$57.98
$52.17
$68.39
All Coke Batteries
58
$60.22
$52.17
$71.98
B.1.2 Labor (AVLI, w)
The cost model provides an estimate of the fixed labor requirement for operation,
maintenance, and supervision labor at each battery. The Agency used these estimates to
derive the average variable labor cost for each individual battery given its technical
characteristics and the appropriate state-level wage rates obtained from the U.S. Bureau of
Labor Statistics (2002). As shown in Table B-3, average labor costs per ton of coke are
significantly lower for captive producers (e.g., $17.18 per ton of coke) relative to merchant
B-3
-------
Table B-3. Labor Costs by Producer Type: 2000 ($/ton of coke)
Number of batteries
Average
Minimum
Maximum
Captive
40
$17.18
$9.19
$38.35
Merchant
18
$28.95
$11.07
$44.63
All Coke Batteries
58
$20.83
$9.19
$44.63
producers (e.g., $28.95 per ton of coke). Captive batteries are typically larger capacity
batteries and therefore require fewer person-hours per ton of coke.
B.I.3 Energy (AVEI, Pe)
The cost model estimates the fixed energy requirements (i.e., electricity, steam, and
water) for each battery. These estimates are used to derive the energy costs per ton of coke
for each battery. Captive producers have a lower electricity requirement (i.e., 47.58 kWh per
ton of coke) relative to merchant producers (i.e., 50.96 kWh per ton of coke). As shown in
Table B-4, the average energy cost per ton of coke across all coke batteries is $5.77.
Average energy costs per ton of coke are lower for captive producers (e.g., $5.51 per ton of
coke) relative to merchant producers (e.g., $6.34 per ton of coke). This difference reflects
lower state/regional electricity prices in regions where captive batteries produce coke.
Table B-4. Energy Costs by Producer Type: 2000 ($/ton of coke)
Captive
Merchant
All Coke Batteries
Number of batteries
Average
Minimum
Maximum
40
$5.51
$3.91
$16.11
18
$6.34
$4.31
$15.41
58
$5.77
$3.91
$16.11
B-4
-------
B.1.4 Other Materials and Supplies (A VOI, P0)
The fixed requirements for other materials and supplies associated with the
production of coke include
• chemicals,
• maintenance materials,
• safety and clothing, and
• laboratory and miscellaneous supplies.
As shown in Table B-5, the cost model estimates the average cost for these items across all
coke batteries is $4.76 per short ton of coke, ranging from $3.26 to $7.69 per ton of coke.
These costs vary by producer type, with merchant producers averaging $5.53 per ton of coke
versus captive producers who average $4.42 per ton of coke.
Table B-5. Other Costs by Producer Type: 2000 ($/ton of coke)
Number of batteries
Average
Minimum
Maximum
Captive
40
$4.42
$3.27
$7.69
Merchant
18
$5.53
$3.26
$7.42
All Coke Batteries
58
$4.76
$3.26
$7.69
B.1.5 By- and Co-product Credits
In addition to the variable cost inputs described above, by- and co-products are
associated with the manufacture of coke products. Therefore, the Agency modified Eq. (B.I)
by subtracting (1) revenues generated from the sale of by-/co-products and (2) credits
associated with using of coke oven gas as an energy input in the production process. The
following cost function adjustments were made to the engineering model to incorporate by-
and co-products into the cokemaking cost function:
• Coke breeze—ICR survey responses provided coke breeze output per ton of coke
for each battery.
B-5
-------
• Other industrial coke—ICR survey responses provided other industrial coke
output per ton of coke for each battery.
• Coke oven gas—Based on secondary sources and discussions with engineers,
furnace coke producers were assumed to produce 8,500 ft3 per ton of coal, and
foundry producers were assumed to produce 11,700 ft3 per ton of coal (Lankford
et al., 1985; EPA, 1988).
As shown in Table B-6, the average by-/co-product credit is $19.54 per ton of coke for
captive producers and $24.05 per ton of coke for merchant producers.
Table B-6. By-/Co-Product Credits by Producer Type: 2000 ($/ton of coke)
Number of batteries
Average
Minimum
Maximum
Captive
40
$19.54
$16.09
$35.99
Merchant
18
$24.05
$10.69
$51.78
All Coke Batteries
58
$20.94
$10.69
$51.78
B.2 MACT/LAER Pollution Abatement Costs
The 1990 Clean Air Act Amendments mandated two levels of control for emissions
from coke ovens. The first control level, referred to as MACT, specified limits for leaking
doors, lids, offtakes, and time of charge. This level of control was to be attained by 1995.
The second level of control, Lowest Achievable Emissions Rate (LAER), specified more
stringent limits for leaking doors and offtakes. Estimates of the MACT and LAER costs
associated with these controls were developed for EPA's Controlling Emissions from By-
Product Coke Oven Charging, Door Leaks, and Topside Leaks: An Economic Impacts
Analysis (EPA, 1991).1 Table B-7 provides summary statistics for the projected costs
associated with each level of control. However, the Agency determined that industry actions
undertaken in the interim period to comply with the MACT limits have enabled them to also
meet the LAER limits. Therefore, only the MACT-related pollution abatement costs have
'The Agency estimated costs for the LAER control level using two scenarios. The first (LAER-MIN) assumed
all batteries will require new doors and jambs. The second (LAER-MAX) also assumed all batteries will
require new doors and jambs and in addition assumed batteries with the most serious door leak problems
would be rebuilt. This analysis reports cost estimates for the LAER-MIN scenario.
B-6
-------
Table B-7. Pollution Abatement Costs by Producer Type: 2000 ($/ton of coke)
Number of batteries
MACT
Average
Minimum
Maximum
LAER
Average
Minimum
Maximum
Captive
40
$0.83
$0.00
$2.59
$1.64
$0.07
$2.63
Merchant
18
$2.34
$0.00
$11.14
$2.44
$0.94
$6.07
All Coke Batteries
58
$1.30
$0.00
$11.14
$1.88
$0.07
$6.07
been incorporated to determine the appropriate baseline costs for the 2000 economic model.
As shown in Table B-7, the average MACT pollution abatement cost across all coke batteries
is $1.30 per short ton of coke. The projected costs for captive producers range from zero to
$2.59 per ton of coke, while projected costs for merchant producers range from zero to
$11.14 per ton of coke.
B.3 Fixed Costs
Production of coke requires the combination of variable inputs outlined above with
fixed capital equipment (e.g., coke ovens and auxiliary equipment). It also includes other
overhead and administrative expenses. For each coke battery, the average fixed costs per ton
of coke can be obtained by dividing the total fixed costs (TFC) estimated by the coke model
by total battery coke production. Therefore, the average fixed cost function (expressed in
dollars per ton of coke) can be written as
AFC = (PTI + ASF +PYOH+ PLOH)/Q
(B.2)
where
property taxes and insurance (PTI) = (0.02)«($225«Coke Capacity). This category
accounts for the fixed costs associated with property taxes and insurance for the
battery. The cost model estimates this component as 2 percent of capital cost.
Capital costs are estimated to be $225 per annual short ton of capacity based on
reported estimates of capital investment cost of a rebuilt by-product coke-making
facility (USITC, 1994). As shown in Table B-8, the average PTI cost across all
batteries is $4.47 per ton of coke.
B-7
-------
Table B-8. Average Fixed Costs by Producer Type: 2000 ($/ton of coke)
Number of batteries
Property taxes and insurance
Average
Minimum
Maximum
Administrative and sales expense
Average
Minimum
Maximum
Payroll overhead
Average
Minimum
Maximum
Plant overhead
Average
Minimum
Maximum
Captive
40
$4.41
$3.20
$6.78
$4.96
$3.60
$7.63
$3.44
$1.84
$7.67
$10.18
$5.73
$21.83
Merchant
18
$4.58
$3.55
$6.11
$5.16
$4.00
$6.87
$5.79
$2.21
$8.93
$18.91
$7.92
$28.62
All Coke Batteries
58
$4.47
$3.20
$6.78
$5.02
$3.60
$7.63
$4.17
$1.84
$8.93
$12.89
$5.73
$28.62
administration and sales expense (ASE) = (0.02)«($225«Coke capacity). This
category accounts for the fixed costs associated with administrative and sales
expenses for the coke battery. The cost model also calculates this component as 2
percent of capital cost. As shown in Table B-8, the average cost across all coke
batteries for ASE is $5.02 per ton of coke.
payroll overhead (PYOH) = (0.2)» (Total labor costs). Payroll overhead is
modified as 20 percent of total labor costs. Payroll overhead is used to capture
fringe benefits because wage rates obtained from the Bureau of Labor Statistics
exclude fringe benefits. As shown in Table B-8, the average payroll overhead is
$3.44 per ton of coke for captive producers and $5.79 per ton of coke for
merchant producers, reflecting the different labor requirements by producer type.
plant overhead (PLOH) = (0.5)»(Total payroll + Total other expenses). The cost
model computes plant overhead as 50 percent of total payroll and total other
expenses by producer type. As shown in Table B-8, the average plant overhead
cost is $10.18 for captive producers and $18.91 for merchant producers. As with
B-8
-------
payroll overhead, this difference reflects differences in labor requirements for
captive and merchant producers.
B.4 Summary of Results
Table B-9 summarizes each cost component and aggregates them to estimate the
average total costs per ton of coke by producer type. As shown, the average total cost (ATC)
across all coke batteries is $98.49 per short ton of coke. The ATC for captive producers is
$92.62 per short ton of coke and is significantly lower than the ATC for merchant producers
at $111.52. This difference reflects both economies of scale and lower production costs
associated with the production of furnace coke. These differences are also consistent with
observed market prices for furnace coke $112 (produced mainly by captive producers) and
for foundry coke $161 (produced solely by merchant producers with some furnace coke)
(USITC, 2001b, 2001c). A correlation analysis of these cost estimates shows that ATC is
negatively correlated with coke battery capacity (correlation coefficient of -0.70) and
start/rebuild date (correlation coefficient of -0.63). Therefore, average total costs are lower
for larger coke batteries and those that are new or recently rebuilt. Tables B-10 and B-l 1
present cost estimates for individual captive and merchant coke batteries, respectively.
B.5 Nonrecovery Cokemaking
Several substitute technologies for by-product cokemaking have been developed in
the United States and abroad. In the United States, the nonrecovery method is the only
substitute that has a significant share of the coke market. This technology is relatively new,
and, as a result, the original coke production cost model did not include estimates for these
types of coke-making batteries. The nonrecovery process is less costly than the by-product
process because of the absence of recovery operations and a lower labor input requirement
per ton of coke. Therefore, the Agency modified the model to reflect these cost advantages
in the following manner:
• No expenses/credits associated with by- and co-product recovery.
• Reduced labor input—labor requirement estimates generated by the model were
multiplied by a factor of 0.11, which represents the ratio of employment per ton
of coke at merchant batteries to employment per ton of coke at nonrecovery
batteries.
B-9
-------
Table B-9. Cost Summary by Producer Type: 2000 ($/ton of coke)
Number of batteries
Average variable costa
Average
Minimum
Maximum
MACT
Average
Minimum
Maximum
Average fixed cost
Average
Minimum
Maximum
Average total cost
Average
Minimum
Maximum
Captive
40
$68.80
$57.95
$82.94
$0.83
$0.00
$2.59
$22.99
$15.61
$43.91
$92.62
$73.87
$127.07
Merchant
18
$74.74
$39.80
$91.00
$2.34
$0.00
$11.14
$34.44
$17.91
$48.34
$111.52
$69.92
$141.84
All Coke Batteries
58
$70.64
$39.80
$91.00
$1.30
$0.00
$11.14
$26.55
$15.61
$48.34
$98.49
$69.92
$141.84
""Includes by-/co-product credits.
• Exceed current standards of pollution abatement (Engineering and Mining
Journal, 1997)—MACT compliance costs were excluded.
As shown in Table B-12, the ATC for nonrecovery coke-making facilities is $69.25 per ton
of coke, which is significantly lower than the average ATC of captive and merchant
producers. These costs vary slightly across these batteries ranging from $67.51 to $70.12 per
ton of coke. Table B-13 presents cost estimates for individual nonrecovery cokemaking
batteries.
B-10
-------
Table B-10. Cost Data Summary for Captive Coke Batteries: 2000
Facility Name
Acme Steel
Acme Steel
AK Steel
AK Steel
AK Steel
Bethlehem Steel
Bethlehem Steel
Bethlehem Steel
Bethlehem Steel
Geneva Steel
Geneva Steel
Geneva Steel
Geneva Steel
Gulf States Steel
Gulf States Steel
LTV Steel
LTV Steel
National Steel
National Steel
National Steel
Producer
Location Type3
Chicago, IL
Chicago, IL
Ashland, KY
Ashland, KY
Middletown, OH
Burns Harbor, IN
Burns Harbor, IN
Lackawanna, NY
Lackawanna, NY
Provo, UT
Provo, UT
Provo, UT
Provo, UT
Gadsden, AL
Gadsden, AL
Chicago, IL
Warren, OH
Ecorse, MI
Granite City, IL
Granite City, IL
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
Capacity
Coke (short
Typeb tons/yr)
1 250
1 250
1 634
1 366
1 429
1 948
1 929
1 375
1 375
1 200
1 200
1 200
1 200
1 250
1 250
1 615
1 549
1 924
1 300
1 300
,000
,000
,000
,000
,901
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,839
,931
,931
Start/
Rebuild
Date
1979
1978
1978
1953
1952
1972
1983
1962
1952
1944
1944
1944
1944
1942
1965
1982
1979
1992
1982
1980
AVCC
($/short
ton)
$74
$74
$66
$69
$74,
$58
$59
$65
$65
$77
$78
$78
$82
$75
$74
$63
$69
$78
$69,
$69,
.41
.26
.88
.25
.42
.99
.27
.66
.65
.49
.44
.41
.94
.28
.47
.79
.00
.68
.93
.93
MACT
($/short
ton)
$1.02
$1.02
$1.28
$1.02
$1.23
$0.72
$0.71
$1.78
$1.83
$0.27
$0.27
$0.22
$0.22
$1.71
$2.59
$0.36
$0.04
$0.27
$0.68
$0.68
AFC
($/short
ton)
$20.69
$20
$18
$21
$23
$18
$18
$21
$21
$28
$30
.69
.88
.15
.62
.11
.68
.41
.23
.62
.92
$26.47
$43
$27
$19
$18
$22
$17
$21
$21
.91
.56
.44
.38
.18
.44
.26
.26
ATC
($/short
ton)
$96.13
$95.97
$87.05
$91.42
$99.27
$77.82
$78.66
$88.86
$88.71
$106.38
$109.62
$105.10
$127.07
$104.55
$96.51
$82.52
$91.22
$96.38
$91.87
$91.88
(continued)
-------
Table B-10. Cost Data Summary for Captive Coke Batteries: 2000 (continued)
Facility Name
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
USX
Wheeling-Pitt
Wheeling-Pitt
Wheeling-Pitt
Wheeling-Pitt
aC = Captive; M =
bl = Furnace; 2 =
Location
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Clairton, PA
Gary, IN
Gary, IN
Gary, IN
Gary, IN
Follansbee, WV
Follansbee, WV
Follansbee, WV
Follansbee, WV
= Merchant.
Foundry; 3 = Both.
Producer Coke
Type" Type"
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
C 1
Capacity
(short
tons/yr)
844,610
668,680
668,680
373,395
373,395
373,395
378,505
378,505
378,505
378,505
378,505
378,505
827,820
827,820
297,110
297,110
782,000
163,000
151,000
151,000
Start/
Rebuild
Date
1982
1976
1978
1989
1989
1979
1955
1955
1955
1954
1954
1954
1976
1975
1954
1954
1977
1964
1955
1953
AVCC
($/short
ton)
$59.24
$60.62
$60.62
$63.33
$63.33
$63.33
$65.43
$65.43
$65.43
$66.39
$66.39
$66.39
$65.47
$66.41
$72.99
$73.22
$57.95
$73.58
$74.69
$74.69
MACT
($/short
ton)
$0.72
$0.00
$0.00
$0.00
$0.00
$1.04
$1.04
$1.09
$1.09
$1.09
$1.04
$0.00
$0.65
$0.65
$1.51
$1.51
$0.31
$1.36
$1.11
$1.11
AFC
($/short
ton)
$15.75
$20.32
$20.32
$21.71
$21.71
$21.71
$22.73
$22.73
$22.73
$22.46
$22.46
$22.46
$23.24
$22.60
$24.76
$25.94
$15.61
$30.00
$29.28
$29.28
ATC
($/short
ton)
$75.71
$80.94
$80.94
$85.03
$85.03
$86.07
$89.20
$89.25
$89.25
$89.94
$89.89
$88.85
$89.36
$89.67
$99.26
$100.67
$73.87
$104.93
$105.07
$105.07
-------
Table B-11. Cost Data Summary for Merchant Coke Batteries: 2000
Facility Name
ABC Coke
ABC Coke
ABC Coke
Citizens Gas
Citizens Gas
Citizens Gas
Empire Coke
Empire Coke
Erie Coke
Erie Coke
Koppers
Koppers
New Boston
Shenango
Sloss Industries
Sloss Industries
Sloss Industries
Tonawanda
aC = Captive; M =
bl = Furnace; 2 =
Location
Tarrant, AL
Tarrant, AL
Tarrant, AL
Indianapolis, IN
Indianapolis, IN
Indianapolis, IN
Holt, AL
Holt, AL
Erie, PA
Erie, PA
Monessen, PA
Monessen, PA
Portsmouth, OH
Pittsburgh, PA
Birmingham, AL
Birmingham, AL
Birmingham, AL
Buffalo, NY
= Merchant.
Foundry; 3 = Both.
Producer
Type3
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
Coke
Type"
2
3
3
3
2
2
2
2
2
2
1
1
1
1
3
1
1
2
Capacity
(short
tons/yr)
490,528
112,477
96,962
389,116
128,970
116,845
108,026
54,013
130,073
84,878
245,815
126,766
346,126
514,779
184,086
133,931
133,931
268,964
Start/
Rebuild
Date
1968
1951
1941
1979
1946
1941
1978
1978
1943
1952
1981
1980
1964
1983
1959
1952
1956
1962
AVCC
($/short
ton)
$66.46
$81.68
$86.10
$47.46
$79.85
$84.51
$88.52
$90.09
$73.99
$75.12
$79.25
$91.00
$78.73
$78.87
$44.32
$79.78
$79.78
$39.80
MACT
($/short
ton)
$1.22
$2.69
$2.56
$1.05
$2.02
$2.13
$7.38
$11.14
$1.73
$1.48
$0.12
$0.36
$1.35
$0.00
$1.61
$1.61
$1.61
$2.03
AFC
($/short
ton)
$17.91
$32.48
$36.12
$21.41
$43.85
$48.34
$38.11
$40.61
$46.76
$48.19
$30.25
$39.67
$27.76
$28.29
$25.59
$30.30
$30.30
$34.09
ATC
($/short
ton)
$85.59
$116.85
$124.78
$69.92
$125.72
$134.98
$134.01
$141.84
$122.48
$124.78
$109.63
$131.03
$107.84
$107.16
$71.52
$111.69
$111.69
$75.92
-------
Table B-12. Cost Summary for Nonrecovery Coke Batteries: 2000 ($/ton of coke)
Nonrecovery
Number of batteries
Metallurgical coal
Average
Minimum
Maximum
Labor
Average
Minimum
Maximum
Energy
Average
Minimum
Maximum
Other
Average
Minimum
Maximum
Average fixed cost
Average
Minimum
Maximum
Average total cost
Average
Minimum
Maximum
8
$47.58
$46.95
$48.21
$2.07
$1.47
$2.68
$6.45
$6.25
$6.71
$2.53
$2.44
$2.66
$10.62
$10.07
$11.13
$69.25
$67.51
$70.12
B-14
-------
Table B-13. Cost Data Summary for Nonrecovery Coke Batteries: 1997
Facility Name
Jewell Coke
and Coal
Jewell Coke
and Coal
Jewell Coke
and Coal
Jewell Coke
and Coal
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Indiana Harbor
Coke Co
Location
Vansant, VA
Vansant, VA
Vansant, VA
Vansant, VA
East Chicago, IN
East Chicago, IN
East Chicago, IN
East Chicago, IN
Producer Coke
Type3 Typeb
M 1
M 1
M 1
M 1
M 1
M 1
M 1
M 1
Capacity
(short
tons/yr)
197,000
164,000
124,000
164,000
325,000
325,000
325,000
325,000
Start/
Rebuild
Date
1966
1983
1989
1990
1998
1998
1998
1998
AVCC
($/short
ton)
$58.59
$59.31
$59.98
$59.31
$62.36
$62.36
$62.36
$62.36
MACT
($/short
ton)
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
AFC
($/short
ton)
$9.90
$10.38
$10.85
$10.38
$10.52
$10.52
$10.52
$10.52
ATC
($/short
ton)
$68.49
$69.69
$70.83
$69.69
$72.88
$72.88
$72.88
$72.88
aC = Captive; M = Merchant.
bl = Furnace; 2 = Foundry; 3 = Both.
Includes by-/co-product credits.
-------
APPENDIX C
ECONOMETRIC ESTIMATION OF THE DEMAND ELASTICITY FOR
STEEL MILL PRODUCTS
This appendix summarizes EPA's estimation of the demand elasticities for steel mill
products. These estimates are based on national-level data from 1987 through 1997 as
obtained from the AISI, U.S. Bureau of the Census, U.S. Bureau of Labor Statistics, and
other government sources. The following sections summarize the econometric procedure
and present the estimates of the demand elasticity for the following nine steel mill products:
• semi-finished products
• structural shapes and plates
• rails and track accessories
• bars
• tool steel
• pipe and tubing
• wire
• tin mill
• sheet and strip
C.I Econometric Model
A partial equilibrium market supply/demand model is specified as a system of
interdependent equations in which the price and output of a product are simultaneously
determined by the interaction of producers and consumers in the market. In simultaneous
equation models, where variables in one equation feed back into variables in other equations,
the error terms are correlated with the endogenous variables (price and output). In this case,
single-equation ordinary least squares (OLS) estimation of individual equations will lead to
biased and inconsistent parameter estimates. Thus, simultaneous estimation of this system to
C-l
-------
obtain elasticity estimates requires that each equation be identified through the inclusion of
exogenous variables to control for shifts in the supply and demand curves over time.
Exogenous variables influencing the demand for steel mill products include measures
of economic activity such as U.S. gross national and domestic production and the value of
construction activity, and the price of substitute products such as aluminum, plastics and
other nonferrous materials and building materials like cement/concrete (typically proxied by
the appropriate producer price indices). Exogenous variables influencing the level of supply
include measures of the change in the costs of iron and steel production caused by changes in
prices of key inputs like raw materials, fuel, and labor (typically proxied by the producer
price index for iron ore, coke, metallurgical coal, as well as the average hourly earnings for
the industry's production workers).
The supply/demand system for a particular steel mill product over time (t) is defined
as follows:
Qtd = f(Pt,Zt) + ut (C.I)
Qts = g(Pt,Wt) + vt (C.2)
Qtd = Qts (C.3)
Eq. (C.I) shows quantity demanded in year t as a function of price, Pt, an array of demand
factors, Zt(e.g., measures of economic activity and substitute prices), and an error term, ut.
Eq. (C.2) represents quantity supplied in year t as a function of price and other supply
factors, Wt (e.g., input prices), and an error term, vt, while Eq. (C.3) specifies the equilibrium
condition that quantity supplied equals quantity demanded in year t, creating a system of
three equations in three variables. The interaction of the specified market forces solves this
system, generating equilibrium values for the variables Pt* and Qt*=Qtd*=Qts*.
Since the objective is to generate estimates of the demand elasticities for use in the
economic model, EPA employed the two-stage least squares (2SLS) regression procedure to
estimate only the parameters of the demand equation. This 2SLS approach is preferred to the
three-stage least squares approach because the number of observations limits the degrees of
freedom for use in the estimation procedure. EPA specified the logarithm of the quantity
demanded as a linear function of the logarithm of the price so that the coefficient on the price
variable yields the estimate of the constant elasticity of demand for steel mill product. All
prices employed in the estimation process were deflated by the gross domestic product
(GDP) implicit price deflator to reflect real rather than nominal prices. The first stage of the
C-2
-------
2SLS procedure involves regressing the observed price against the supply and demand
"shifter" variables that are exogenous to the system. This first stage produces fitted (or
predicted) values for the price variable that are, by definition, highly correlated with the true
endogenous variable, the observed price, and uncorrelated with the error term. In the second
stage, these fitted values are then employed as observations of the right-hand side price
variable in the demand function. This fitted value is uncorrelated with the error term by
construction and thus does not incur the endogeneity bias.
C.2 Econometric Results
Table C-l provides the results of the econometric estimation for each steel mill
product demand equation. The coefficients of the price variables represent the demand
elasticity estimates for each of the nine steel mill products. As economic theory predicts, all
of these estimates are negative, reflecting reductions in quantity demanded as price increases.
The elasticities range from -0.16 for semi-finished products to -2.17 for rails and track
accessories, with a shipments weighted average elasticity for all products of-0.59. As
shown, three of the nine elasticity estimates are significant at a 90 percent confidence level.
As expected, the estimated coefficients for the demand growth variables (GDP and
value of new construction) are all positive with the exception of the equation for steel wire
drawn products. However, this estimate is not statistically significant. The regression
coefficient results generally show that the price of aluminum, nonferrous metals' producer
price index (PPI), and plastics' PPI are substitutes for the majority of the steel mill products.
Prices increases for these products result in increases in quantity demand for steel mill
products. The coefficient for the primary copper PPI is negative in the wire equation
indicating that it is a complement. A price increase for this product decreases wire
consumption. Copper and steel are both used in electric appliances; therefore, this is
consistent with these results. The regressions also show a negative coefficient for the price
of aluminum in the semi-finished products equation, the nonferrous metals' PPI in the tin
mill products equation, and the concrete products' PPI in the structural shapes and plates
equation suggesting these products are also complement products. Although these products
may be substitutes in specific applications, they are often complement products in the
production of final goods (i.e., building construction).
As a result of these econometric findings, the market model used the weighted
average demand elasticity of -0.59.
C-3
-------
Table C-l. Two Stage Least Squares Regression Estimation of Steel Mill Products Demand Equations
n
Independent Variables
Constant
In(price)
In(gdp)
ln(value_new_construct)
ln(alum_price)
ln(PPI_nonfernnetals)
ln(PPI_plast_parts_mfg)
ln(PPI_plast_sh_rd_tube)
ln(PPI_copper_prim)
ln(PPI_conc_prod)
ln(PPI_plast_prod)
Time trend squared
Semi-
finished
Products
3.42
(1.47)
-0.16
(-1.39)
1.52
(4.64)***
—
-0.20
(-2.75)**
—
—
—
—
—
—
—
Structural
Shapes
and Plates
11.24
(1.93)
-0.17
(-0.71)
1.20
(4.00)**
—
—
0.69
(1.66)
—
—
—
-1.59
(-1.25)
—
—
Rails and
Track
Accessories
1.26
(0.27)
-2.17
(-1.95)*
2.95
(4.96)***
—
0.08
(0.69)
—
—
—
—
—
—
—
Dependent Variables
Bars Tool Steel
6.56 2.06
(1.71) (0.31)
-0.66 -0.47
(-1.17) (-2.02)*
1.61 —
(6.08)***
— 0.98
(1.84)
0.27 0.09
(2.67)** (0.52)
— —
— —
— —
— —
— —
— —
— —
(In Qd)
Pipe and
Tubing
14.41
(1.11)
-1.62
(-2.14)*
—
0.13
(0.18)
—
—
—
2.09
(0.90)
—
—
—
—
Wire
22.5
(1.14)
-0.73
(-2.05)
-1.13
(-0.55)
—
—
—
—
-0.50
(-2.90)**
—
1.78
(2.46)*
-0.002
(-0.54)
Tin Mill
Products
3.66
(0.61)
-0.28
(-1.61)
1.41
(2.32)*
—
—
-0.15
(-1.59)
0.39
(1.23)
—
—
—
—
-0.002
(-2.37)*
Sheet and
Strip
6.14
(0.61)
-0.65
(-1.90)
1.92
(2.59)**
—
0.12
(1.18)
—
-0.26
(-0.29)
—
—
—
—
—
(continued)
-------
Table C-l. Two Stage Least Squares Regression Estimation of Steel Mill Products Demand Equations (Continued)
Dependent Variables
Independent Variables
R-Squared
Adjusted R-Squared
F value
Observations
Degrees of Freedom
Semi-
finished
Products
0.90
0.86
21.44***
11
7
Note: T-statistics of parameter estimates are in
n
L/T
follows:
* = 90%, ** = 95%,
*** = 99%
Structural
Shapes
and Plates
0.81
0.65
5.26**
10
5
parenthesis.
Rails and
Track
Accessories
0.82
0.75
Bars
0.84
0.77
10.87*** 12.32***
11
7
The F test analyzes
11
7
Tool Steel
0.44
0.20
1.85
11
7
(In Qd)
Pipe and
Tubing
0.51
0.30
2.41
11
7
the usefulness of the model. Asterisks
Tin Mill
Wire Products
0.98 0
0.96 0
42.23*** 1
10
4
indicate significance
.57
.14
.31
11
5
levels
Sheet and
Strip
0.93
0.88
17.47***
10
5
for these tests as
Variable Descriptions:
In(gdp)
ln(value_new_construct)
ln(alum_price)
ln(PPI_nonferrmetals)
ln(PPI_plast_parts_mfg)
ln(PPI_plast_sh_rd_tube)
ln(PPI_copper_prim)
ln(PPI_conc_prod)
ln(PPI_plast_prod)
time trend squared
real gross domestic product
real value of construction put in place
real price of aluminum
real producer price index for nonferrous metals
real producer price index for plastic parts and components for manufacturing
real producer price index for laminated plastic sheets, rods, and tubes
real producer price index for primary copper
real producer price index for concrete products
real producer price index for plastic products
time trend squared
-------
APPENDIX D
ECONOMETRIC ESTIMATION OF THE DEMAND ELASTICITY FOR
IRON CASTINGS
In this appendix, we summarize the econometric procedure used to estimate demand
elasticities and present demand elasticity estimates for iron castings. Elasticity estimates are
based on national-level annual sales and price data. In addition, individual demand elasticity
estimates are developed for three subcategories of iron castings:
• Gray iron castings
• Ductile iron castings
• Malleable iron castings
D.I Econometric Model
A partial equilibrium market supply/demand model is used to simulate the interaction
of producers and consumers in the iron and steel casting markets. The model consists of a
system of interdependent equations in which the price and output of a product are
simultaneously determined. This class of model is referred to as a simultaneous equation
model.
In simultaneous equation models, where variables in one equation feed back into
variables in another equation, the error terms in each equation are correlated with the
endogenous variables (price and output). In this case, single-equation ordinary least squares
(OLS) estimation of individual equations will lead to biased and inconsistent parameter
estimates.
We therefore use a two-stage least squares (2SLS) approach to correct for the
correlation between the error term and the endogenous variables. The 2SLS approach
requires that each equation be identified through the inclusion of exogenous variables to
control for shifts in the supply and demand curves over time.
Exogenous variables influencing the demand for iron castings include measures of
economic activity such as U.S. gross domestic production, the number of motor vehicle
D-l
-------
sales, and the price of substitute products such as plastics, nonferrous castings and forgings,
and steel mill products (typically proxied by the appropriate producer price indices).
Exogenous variables influencing the level of supply include measures of the change in the
costs of iron and steel castings production caused by changes in prices of key inputs such as
raw materials, fuel, and labor (typically proxied by the producer price index for iron ore,
coke, fuel, and electricity as well as the average hourly earnings for the industry's production
workers).
The supply/demand system for a particular iron or steel casting over time (t) is
defined as follows:
Qtd = f(Pt,Zt) + ut (D.I)
Qts = g(Pt,Wt) + vt (D.2)
Qtd = Qts (D-3)
Eq. (D.I) represents quantity demanded, Qtd in year t as a function of price, Pt, and other
demand factors, Zt(e.g., measures of economic activity and prices of substitute products),
and an error term, ut. Equation D.2 represents quantity supplied, Qts, in year t as a function
of price and other supply factors, Wt (e.g., wage rate and other input prices), and an error
term, vt. Eq. (D.3) specifies the equilibrium condition, where quantity supplied equals
quantity demanded in year t. Equation D.3 creates a system of three equations in three
variables. Solving the system generates equilibrium values for the variables Pt* and
Qt*=Qtd*=Qts*.
We use a 2SLS regression procedure to estimate the parameters and obtain the
demand elasticities.1 In the first stage of the 2SLS procedure, the observed price is regressed
against the supply and demand "shifter" variables that are exogenous to the system. The first
stage produces fitted (or imputed) values for the price variable that are, by definition, highly
correlated with the true endogenous variable (the observed price) and uncorrelated with the
error term. In the second stage, these fitted values are then employed as explanatory
variables of the right-hand side in the demand function. The imputed value is uncorrelated
with the error term by construction and thus does not incur the endogeneity bias.
'The 2SLS approach was selected over the three-stage least squares (3SLS) approach because of the limited
number of observations available for the regression analysis. The 3SLS approach requires more degrees of
freedom for the estimation procedure.
D-2
-------
The logarithm of the quantity demanded is modeled as a linear function of the
logarithm of the commodity price. This specification enables us to interpret the price
variable coefficient as a constant elasticity of demand.
D.2 Econometric Results
Demand elasticities for iron castings—and for the subcategories gray, ductile, and
malleable iron castings—are estimated based on commodity data from the U.S. Department
of Commerce, U.S. Bureau of Labor Statistics, and other government sources. The average
prices for iron and steel commodities are calculated based on value of shipments data from
1987 through 1997. Prior to estimating demand elasticities, all prices are deflated by the
gross domestic product (GDP) implicit price deflator to reflect real rather than nominal
prices.
Table D-1 provides demand elasticity estimates for iron castings. The coefficients on
the price variables, In (price), are the estimates of the demand elasticity. Demand elasticity
reflects how responsive consumers are to changes in the price of a product. For normal
goods, consumption decreases as price increases, and this negative relationship is shown by a
negative price variable coefficient. As economic theory predicts, our estimated coefficients
on the price variables are negative.
As shown in Table D-l, all of the individual elasticity estimates are inelastic,
implying that a 1 percent increase in price results in a less than 1 percent decrease in
consumption. Individual demand elasticity estimates for the iron casting subcategories range
from -0.41 for malleable iron castings to -0.67 for gray iron castings. As shown in
Table D-l, the econometrically determined demand elasticity for all iron castings was -0.58.
The estimated coefficients for the demand growth variables (GDP and motor vehicle
production volume) are all positive, with the coefficient for steel castings significant at the
95 percent level and the coefficient for iron castings significant at the 99 percent level. The
coefficients for plastic manufacturing parts and steel pipe and tube products are negative in
the ductile iron castings equation indicating that these are complements. Price increases for
these products are therefore expected to decrease consumption of ductile iron castings.
However, neither of these coefficients is significant at the 90 percent confidence level.
D-3
-------
Table D-l. Two Stage Least Squares Regression Estimation of Iron and Steel Castings Demand Equations
Dependent Variables
Iron Castings
Independent Variables
Constant
In(price)
In(gdpd)
In(motor)
ln(PPI_plast_parts_trans)
ln(PPI_nonferr_forge)
ln(PPI_nonferr_foundry)
ln(PPI_plast_parts_mfg)
ln(pipe_price)a
R-Squared
Adjusted R-Squared
F Value
Observations
Degrees of Freedom
Gray Iron
.81
(.43)
-.67
(-2.80)**
—
.91
(9.97)***
.09
(.26)
.50
(1.37)
—
—
.16
(.76)
.97
.94
33.90***
12
5
Ductile Iron
.82
(.20)
-.42
(-1.89)*
—
1.01
(4.62)***
—
—
1.83
(1.88)*
-.90
(-1.22)
-.57
(-.95)
.92
.87
17.08***
13
5
Malleable Iron
-3.12
(-1.04)
-.41
(-1.51)
—
.61
(3.79)***
—
.04
(.07)
—
1.07
(3.48)***
.14
(.41)
.89
.81
11.49***
13
5
All Iron
^2.90
(-8.15)***
-.58
(-2.52)**
5.17
(11.10)***
—
—
-2.57
(-6.33)***
—
4.58
(7.97)***
.23
(.95)
.97
.94
38.46***
12
5
Note: T-statistics of parameter estimates are in parentheses.
follows: * = 90%, ** = 95%, *** = 99%
Trice of corresponding casting.
Variable Descriptions:
real gross domestic product
U.S. motor vehicle production
real producer price index for
plastic parts for transportation
In(gdp)
In(motor)
ln(PPI_plast_parts_trans)
The F test analyzes the usefulness of the model. Asterisks indicate significance levels for these tests as
ln(PPI_nonferr_forge) real producer price index for nonferrous metal forge shop products
ln(PPI_plast_parts_mfg) real producer price index for parts and components for manufacturing
ln(pipe_price) real producer of steel mill pipe and tube products
ln(PPI_nonferr_foundry) real producer price index for nonferrous foundry shop products
-------
D.3 Summary
Based on the econometric findings, we use the following demand elasticity estimate
for iron castings in the market model:
• Iron castings = -0.58 (significant at the 95 percent level).
This value is similar to the 1997 production weighted average of the individual product
elasticity estimates presented in Table D-l (-0.52).
D-5
-------
APPENDIX E
JOINT ECONOMIC IMPACT ANALYSIS OF THE INTEGRATED IRON AND
STEEL MACT STANDARD WITH THE COKE MACT STANDARD
For this analysis, the Agency also considered the national-level economic impacts of
joint implementation of the integrated iron and steel MACT standard with the coke MACT
standard. The measures of economic impacts presented in this appendix are the result of
incorporating the costs of compliance for each affected integrated iron and steel mill under
the integrated iron and steel MACT into market models developed by the Agency to analyze
the economic impacts of the coke MACT standard. The engineering analysis estimates
annual costs for existing sources are $15.5 million under the integrated iron and steel MACT
and $20.1 million under the coke MACT. Therefore, the total national estimate for existing
sources under joint implementation are $35.6 million.
E.I Market-Level Impacts
The increased cost of coke production due to the regulation is expected to increase
the price of furnace coke and steel mill products and reduce their production and
consumption from 2000 baseline levels. As shown in Table E-l, the regulation is projected
to increase the price of furnace coke by 2.9 percent, or $3.26 per short ton. The increased
captive production costs and higher market price associated with furnace coke are projected
to increase steel mill product prices by less than 0.1 percent, or $0.19 per ton. As expected,
directly affected output declines across all producers, while supply from domestic and
foreign producers not subject to the regulation increases. Although the results show net
declines across all products (i.e., less than 1 percent decline in market output) the change in
domestic production is typically higher. This is especially true for furnace coke where
domestic production declines by 4.5 percent.
In contrast, the regulation showed no impact on price or quantity in the foundry coke
market. This is due to the capacity constraints on domestic producers and the role of foreign
imports. The supply of foundry coke is characterized by a domestic step supply function
augmented by foreign supply, with foreign suppliers being the high cost producers in the
market. Because foreign suppliers are the high cost producers, they determine the market
E-l
-------
Table E-l. Market-Level Impacts of the Joint Implementation of the Integrated Iron
and Steel MACT and Coke MACT: 2000
Changes From Baseline
Furnace Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production*
Imports
Foundry Coke
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Imports
Steel Mill Products
Market price ($/short ton)
Market output (103 tpy)
Domestic production
Integrated producers
Nonintegrated steel mills'3
Imports
Iron Castings
Market price ($/short ton)
Market output (103 tpy)
Domestic production3
Cupola furnaces
Electric furnaces0
Imports
Baseline
$112.00
12,004
8,904
3,100
$161.00
1,385
1,238
147
$489.45
147,007
109,050
57,153
51,897
37,957
$1,028.50
8,793
8,692
5,210
3,482
101
Absolute
$3.26
-120.9
-399.7
278.8
—
0.0
0.0
0.0
$0.19
-36.1
-262.3
-334.3
72.0
226.3
$0.00
0.0
0.0
0.0
0.0
0.0
Percent
2.91%
-1.01%
^.49%
8.99%
0.00%
0.00%
0.00%
0.00%
0.04%
-0.02%
-0.24%
-0.58%
0.14%
0.60%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
a Includes minimills.
b Excludes captive production.
c Includes electric arc or electric induction furnaces.
E-2
-------
price and an upward shift in the domestic supply curve does not affect the equilibrium price
or quantity. This implies that domestic foundry coke producers are not able to pass along
any of the cost of the regulation. In addition, because there is no price change in the foundry
coke market, the production of iron castings in unaffected by the regulation.
E.2 Industry-Level Impacts
Industry revenue, costs, and profitability change as prices and production levels
adjust to increased production costs. As shown in Table E-2, the economic model projects
that profits for directly affected integrated iron and steel producers will decrease by $36
million, or 4.9 percent. However, because the price increase exceeds the average cost
increase, industry-level profits for U.S. merchant furnace coke producers are expected to
increase by $11.0 million, or 9.0 percent. In contrast, industry-level profits for U.S.
merchant foundry coke producers are expected to decline by $5.0 million, or 5.0 percent.
These producers cannot pass along any of the control costs of the regulation because there is
no price increase. Those domestic suppliers not subject to the regulation experience windfall
gains with non-integrated steel mills (i.e., minimills) increasing profits by $10 million.
E.2.1 Changes in Profitability
For integrated steel mills, operating profits decline by $36 million. This is the net
result of three effects:
• Net decrease in revenue ($139 million): Steel mill product revenue decreases as a
result of reductions in output. However, these losses were mitigated by increased
revenues from furnace coke supplied to the market as a result of higher prices.
• Net decrease in production costs ($128 million): Reduction in steel mill and
market coke production costs occur as output declines. However, producers also
experience increases in costs associated with the higher price of inputs (i.e.,
furnace coke).
• Increase in control costs ($25 million): The costs of captive production of
furnace coke increase as a result of regulatory controls.
Industry-wide profits for merchant furnace coke producers increase by $10 million as
a result of the following:
• Decreases in revenue ($34 million): Reductions in output outweigh revenue
increases as a result of higher market prices.
E-3
-------
Table E-2. National-Level Industry Impacts of the Joint Implementation of the
Integrated Iron and Steel MACT and Coke MACT: 2000
Integrated Iron and Steel Mills
Total revenues ($106/yr)
Steel mill products
Market coke operations
Total costs ($106/yr)
Control costs
Steel production
Captive coke production
Market coke production
Production costs
Steel production
Captive coke production
Market coke consumption
Market coke production
Operating profits ($106/yr)
Iron and steel facilities (#)
Coke batteries (#)
Employment (FTEs)
Coke Producers (Merchant Only)
Furnace
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Foundry
Revenues ($106/yr)
Costs ($106/yr)
Control costs
Production costs
Operating profits ($106/yr)
Coke batteries (#)
Employment (FTEs)
Baseline
$28,430.5
$27,973.6
$456.9
$27,690.8
$0.0
$0.0
$0.0
$0.0
$27,690.8
$25,327.3
$746.6
$1,249.5
$367.4
$739.7
20
37
66,603
$521.8
$404.5
$0.0
$404.5
$117.4
17
774
$245.5
$148.7
$0.0
$148.7
$96.8
12
2,486
Changes
Absolute
-$138.87
-$152.62
$13.75
-$102.49
$25.29
$15.39
$7.42
$2.49
-$127.78
-$151.06
-$0.20
$23.28
$0.20
-$36.39
0
0
^55
-$33.88
-$44.65
$2.95
-$47.60
$10.78
-3
-236
$0.61
$5.54
$5.54
$0.00
-$4.93
0
0
From Baseline
Percent
-0.49%
-0.55%
3.01%
-0.37%
NA
NA
NA
NA
-0.46
-0.60%
-0.03%
1.86%
0.05%
^.92%
0.00%
0.00%
-0.68%
-6.49%
-11.04%
NA
-11.77%
9.18%
-17.65%
-30.49%
0.25%
3.73%
NA
0.00%
-5.10%
0.00%
0.00%
(continued)
E-4
-------
Table E-2. National-Level Industry Impacts of the Joint Implementation of the
Integrated Iron and Steel MACT and Coke MACT: 2000 (continued)
Changes From Baseline
Nonintegrated Steel Mills3
Operating profits ($106/yr)
Cupola Furnaces
Operating profits ($106/yr)
Captive
Merchant
Affected
Unaffected
Electric Furnaces'5
Operating profits ($106/yr)
Captive
Merchant
Affected
Unaffected
Baseline
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Absolute
$10.1
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Percent
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
a Includes minimills.
b Includes iron foundries that use electric arc or electric induction furnaces.
• Reduction in production costs ($48 million): Reduction in coke production costs
occurs as output declines.
• Increased control costs ($3 million): The cost of producing furnace coke
increases as a result of regulatory controls.
Industry-wide profits for merchant foundry coke producers fall by $5 million under
the regulation:
• Increase in revenue ($0.6 million): Given that we project no price changes for
foundry coke, foundry coke revenue remains unchanged. However, small
revenue increases occur for batteries that also produce small amounts of furnace
coke.
• Reduction in production costs ($0 million): No change in coke production costs
occur as output remains unchanged.
• Increased control costs ($5.6 million): The cost of producing foundry coke
increases as a result of regulatory controls.
E-5
-------
Lastly, domestic producers that are not subject to the regulation benefit from higher
prices without additional control costs. As mentioned above, profits increase are projected
for nonintegrated steel mills.
Additional distributional impacts of the rule within each producer segment are not
necessarily apparent from the reported decline or increase in their aggregate operating
profits. The regulation creates both gainers and losers within each industry segment based
on the distribution of compliance costs across facilities. As shown in Table E-3, a substantial
subset of the merchant coke facilities are projected to experience profit increases (i.e., 13
furnace coke batteries and 1 foundry coke battery that also produces furnace coke, or
62 percent). However, two merchant batteries are projected to cease market operations as
they are the highest-cost coke batteries with the additional regulatory costs.
A majority of directly affected integrated iron and steel facilities (i.e., 16 plants, or 80
percent) are projected to become less profitable with the regulation with a total loss of $49
million. However, four integrated mills are projected to benefit from higher coke prices and
experience a total profit gain of $13 million. These mills typically own furnace coke
batteries with low production costs and lower per-unit compliance costs. In addition, a high
proportion of their coke inputs are supplied internally.
E.2.2 Facility Closures
EPA estimates three merchant batteries supplying furnace coke are likely to
prematurely close as a result of the regulation. In this case, these batteries are the highest-
cost producers of furnace coke with the regulation.
E.2.3 Changes in Employment
As a result of decreased output levels, industry employment is projected to decrease
by less than 1 percent, or 691 full-time equivalents (FTEs), with the regulation. This is the
net result of employment losses for integrated iron and steel mills totaling 455 FTEs and
merchant coke plants of 236 FTEs. Although EPA projects increases in output for producers
not subject to the rule, which would likely lead to increases in employment, the Agency did
not develop quantitative estimates for this analysis.
E.3 Social Cost
The social impact of a regulatory action is traditionally measured by the change in
economic welfare that it generates. The social costs of the final rule will be distributed
across consumers and producers alike. Consumers experience welfare impacts due to
E-6
-------
Table E-3. Distribution Impacts of the Joint Implementation of the Integrated Iron and
Steel MACT and Coke MACT Across Directly Affected Producers: 2000
With Regulation
Integrated Iron and Steel Mills
Facilities (#)
Steel production
Total (103tpy)
Average (tons/facility)
Steel compliance costs
Total ($106/yr)
Average ($/ton)
Coke production
Total (103tpy)
Average (tons/facility)
Coke compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106/yr)
Coke Plants (Merchant Only)
Furnace
Batteries (#)
Production (103 tpy)
Total (103tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average ($/ton)
Change in operating profit ($106/yr)
Foundry
Batteries (#)
Production
Total (103 tpy)
Average (tons/facility)
Compliance costs
Total ($106/yr)
Average
Change in operating profit ($106/yr)
Increased
Profits
4
6,232
1,558
$0.08
$0.01
5,729
1,432
$0.17
$0.03
$12.62
13
3,979
306
$2.1
$0.52
$10.92
1
476
476
$0.021
$0.04
$0.59
Decreased
Profits
16
50,922
3,183
$15.46
$0.30
6,915
432
$9.74
$1.41
-$49.01
1
255
255
$0.9
$3.48
-$0.06
11
1,181
107
$5.524
$4.68
-$5.52
Closure
0
0
0
$0.00
$0.00
0
0
$0.00
$0.00
$0.00
3
404
135
$1.791
$4.44
-$0.08
0
0
0
$0.00
$0.00
$0.00
Total
20
57,153
2,858
$15.54
$0.27
12,644
632
$9.91
$0.78
-$36.39
17
4,637
273
$4.738
$1.02
$10.78
12
1,657
138
$5.545
$3.35
-$4.93
E-7
-------
changes in market prices and consumption levels associated with the rule. Producers
experience welfare impacts resulting from changes in profits corresponding with the changes
in production levels and market prices. However, it is important to emphasize that this
measure does not include benefits that occur outside the market, that is, the value of reduced
levels of air pollution with the regulation.
The national compliance cost estimates are often used as an approximation of the
social cost of the rule. The engineering analysis estimated annual costs of $35.6 million. In
this case, the burden of the regulation falls solely on the affected facilities that experience a
profit loss exactly equal to these cost estimates. Thus, the entire loss is a change in producer
surplus with no change (by assumption) in consumer surplus. This is typically referred to as
a "full-cost absorption" scenario in which all factors of production are assumed to be fixed
and firms are unable to adjust their output levels when faced with additional costs.
In contrast, the economic analysis accounts for behavioral responses by producers
and consumers to the regulation (i.e., shifting costs to other economic agents). This
approach results in a social cost estimate that differs from the engineering estimate and also
provides insights on how the regulatory burden is distributed across stakeholders. As shown
in Table E-4, the economic model estimates the total social cost of the rule to be $34 million.
This difference occurs because society reallocates resources as a result of the increased cost
of coke production.
In the final product markets, higher market prices lead to consumers of steel mill
products experiencing losses of $28.5 million. Although integrated iron and steel producers
are able to pass on a limited amount of cost increases to their final consumers, e.g.,
automotive manufactures and construction industry, the increased costs result in a net decline
in profits at integrated mills of $36.4 million.
In the coke industry, low-cost merchant producers of furnace coke benefit at the
expense of consumers and higher-cost coke batteries resulting in an industry-wide increase in
profits. Furnace coke profits at merchant plants increase in aggregate by $10.8 million. In
contrast, foundry coke profits at merchant plants declines in aggregate by $5 million.
Lastly, domestic producers not subject to the regulation (i.e., nonintegrated steel mills
and electric furnaces) as well as foreign producers experience unambiguous gains because
they benefit from increases in market price under both alternatives.
E-8
-------
Table E-4. Distribution of the Social Costs of the Joint Implementation of the
Integrated Iron and Steel MACT and Coke MACT: 2000
Change in Consumer Surplus ($106/yr) -$28.52
Steel mill product consumers -$28.52
Domestic -$27.25
Foreign -$1.27
Iron casting consumers $0.00
Domestic $0.00
Foreign $0.00
Change in Producer Surplus ($106/yr) $5.27
Domestic producers -$20.47
Integrated iron and steel mills -$36.39
Nonintegrated steel millsa $10.07
Cupola furnaces $0.00
Electric furnaces'3 $0.00
Furnace coke (merchant only) $10.78
Foundry coke (merchant only) -$4.93
Foreign producers $15.20
Iron and steel $4.63
Castings $0.00
Furnace coke $10.57
Foundry coke $0.00
Change In Total Social Surplusc ($106/yr) -$33.79
a Includes minimills.
b Includes electric arc or electric induction furnaces.
c The negative change in total social surplus indicates that the social cost of the regulation is $33.79 million.
E-9
-------
APPENDIX F
FOREIGN IMPORTS SENSITIVITY ANALYSIS
The purpose of this appendix is to investigate the sensitivity of economic impact
estimates to changes in the blast furnace coke import supply elasticity parameter. To model
imports, we used a simple constant elasticity functional form to develop a supply curve for a
single foreign supplier. Graham, Thorpe, and Hogan (1999) use values of 3 and 10 in their
simulation analysis although they consider a value of 3 as being the most likely (page 204).
Therefore, the Agency used a value of 3 for the base case scenario. However, we conducted
additional sensitivity analysis for the foreign supply elasticity using an even more elastic
value of 10.
F.I Sensitivity Analysis Results
As shown in Table F-l, the market price increase falls from 2.7 to 1.1 percent and the
change in domestic market output increases from -3.9 percent to -4.5 percent, an additional
decrease of 51,000 short tons. In addition, one additional furnace coke battery is projected to
close. Foreign imports increase from 8.3 percent to 11.4 percent under this elasticity
assumption.
Table F-l. Market-Level Impacts of the Final Coke MACT: 2000
Furnace Coke
Market price (percent change)
Market output (percent change)
Domestic production
Imports
Closures (# batteries)
Imports
£ = 3.0
2.7%
-0.8%
-3.9%
8.3%
2
Imports
1.1%
-0.4%
-4.5%
11.4%
3
F-l
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In contrast the shows no market impact differences on price or quantity in the
foundry coke market. As discussed in Section 4, this is due to the capacity constraints on
domestic producers and the role of foreign imports. The supply of foundry coke is
characterized by a domestic step supply function augmented by foreign supply, with foreign
suppliers being the high cost producers in the market. Because foreign suppliers are the high
cost producers, they determine the market price and an upward shift in the domestic supply
curve does not affect the equilibrium price or quantity. This implies that domestic foundry
coke producers are not able to pass along any of the cost of the regulation. In addition,
because there is no price change in the foundry coke market, the production of iron castings
in unaffected by the regulation.
F-2
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO. 2.
EPA-452/R-02-008
4. TITLE AND SUBTITLE
Economic Impact Analysis of Final Coke Ovens NESHAP
7. AUTHOR(S)
Michael P. Gallaher and Brooks M. Depro, RTI
9. PERFORMING ORGANIZATION NAME AND ADDRESS
Research Triangle Institute (RTI)
Center for Economics Research, Hobbs Bldg.
Research Triangle Park, NC 27709
12. SPONSORING AGENCY NAME AND ADDRESS
Steve Page, Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 2771 1
3. RECIPIENT'S ACCESSION NO.
5. REPORT DATE
September 2002
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
RTI Project Number 7647.003.274
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68-D-99-024
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report evaluates the economic impacts of the final NESHAP for pushing and quenching operations at
coke plants. The social costs of the rule are estimated by incorporating the expected costs of compliance to a
partial equilibrium model of the U.S. iron and steel industry and projecting the market impacts for furnace
and foundry coke. The report also provides the screening analysis for small business impacts.
17. KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS
economic impacts
small business impacts
social costs
18. DISTRIBUTION STATEMENT
Release Unlimited
b. IDENTIFIERS/OPEN ENDED TERMS c. COSATI Field/Group
Air Pollution control
Economic Impact Analysis
Regulatory Flexibility Analysis
19. SECURITY CLASS (Report) 21. NO. OF PAGES
Unclassified 139
20. SECURITY CLASS (Page) 22. PRICE
Unclassified
EPA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE
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United States Office of Air Quality Planning and Standards Publication No. EPA 452/R-02-008
Environmental Protection Air Quality Strategies and Standards Division September 2002
Agency Research Triangle Park, NC
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