Economic Impact Analysis for the Wood
Building Products NESHAP
Final Report
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EPA452/R-03-003
January 2003
Economic Impact Analysis for the Wood Building Products NESHAP
By:
Robert H. Beach
RTI
Research Triangle Park, North Carolina
Prepared for:
John L. Sorrels, Project Officer
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group, C339-01
Research Triangle Park, NC 27711
Contract No. 68-D9-9024
Task Order No. 3-84
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
Research Triangle Park, NC 27711
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CONTENTS
Section Page
1 Introduction 1-1
2 Screening-Level Analysis 2-1
3 References 3-1
in
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LIST OF TABLES
Number
2-1 Summary Statistics for SBREFA Screening Analysis: Impacts
of the Regulations of Surface Coating of Wood Building Products 2-2
2-2 Profit Margins With and Without Regulation 2-3
IV
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SECTION 1
INTRODUCTION
The environmental regulation of the wood building products (WBP) industry
potentially affects large and small manufacturers engaged in the surface coating of WBP, but
small firms may encounter special problems with compliance. The Regulatory Flexibility
Act (RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of
1996 (SBREFA), requires the U.S. Environmental Protection Agency (EPA) to consider the
economic impacts of this regulatory action on these small entities. Therefore, RTI completed
a preliminary screening analysis to assist the Agency in determining whether this rule is
likely to impose a significant impact on a substantial number of small businesses. This
analysis consists of a "sales test" and a "profit test." The "sales test" involves computing the
annualized compliance cost as a share of sales for each company and comparing the
distribution of these costs across large and small companies. The "profit test" involves
comparing the company profit margins with and without regulation, assuming full cost
absorption by industry. The analysis provides the following insights:
• Number of facilities directly affected: There are 42 major source facilities in the
WBP project database that would be subject to the proposed NESHAP. However,
the project database represents only a subset of the industry. Extrapolating from
the project database using information collected by EPA, RTI estimates that 215
major sources in the United States would be directly affected by the proposed
regulation (Dail, 2003a).
• Number of small businesses: The Small Business Administration (SB A) size
standard for the WBP industry (Standard Industrial Classification [SIC] codes
2426, 2431, 2435, 2439, and 2493) is 500 employees for each of the SIC codes in
this industry. Of the 17 companies in the project database that own and operate
the 42 major source WBP manufacturing plants included in the database, four
companies can be classified as small using this definition. Assuming that the
major sources in our database are a representative sample, we can scale the
number of companies included in the database to get an estimate of the total
number of affected companies in the United States. The total number of
companies expected to be affected by the regulation is estimated by extrapolating
from the number of companies in the database operating in each of the five
subcategories of WBP (doors, windows, and miscellaneous; flooring; interior wall
paneling and tileboard; other interior panels; and exterior siding and primed
doorskins) using independent scaling factors for each subcategory (Dail, 2003a).
1-1
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For those companies that own facilities in more than one of the subcategories, the
scaling factors for the subcategories in which they operate were averaged to
provide the scaling factor for that company. Based on this method of
extrapolation, approximately 112 companies in the United States own major
sources affected by this rule, and about 28 of those are expected to be small
companies.
Engineering costs: The engineering analysis estimates that the aggregate annual
compliance cost for small businesses in the WBP database is $0.47 million, or
approximately 10 percent of the total annual industry costs of $4.67 million.
Extrapolating the engineering costs to the total estimated population of WBP
facilities implies that the total annual cost to all WBP facilities is estimated to
equal $22.5 million (Dail, 2003b).
Sales test: A simple "sales test," in which the annualized compliance costs are
computed as a share of sales for each company, shows that no company (small or
large) in the database for which cost data are available is expected to incur costs
greater than 1 percent of their sales. In fact, the largest cost-to-sales ratio (CSR)
estimated for any company in the database is 0.62 percent. However, the coatings
usage and material costs for one large company are considered confidential
business information (CBI), so no CSR was calculated for this company. In
addition, the WBP project database includes only a subset of WBP firms expected
to be affected by this regulation. Nonetheless, assuming the database is
representative of the universe of companies that will be affected, it appears
unlikely that companies will incur costs greater than 1 percent of their sales.
Profit data: Data on net income as a percentage of sales were available for six
large parent companies owning major sources in the WBP project database, and
this measure of the profit ratio ranged from 0.4 to 7.5 percent. No net income
information was available for the other five large parent companies or any of the
six small parent firms that would potentially incur costs under this regulation.
Data on industrywide profitability from Dun & Bradstreet (1997) indicate that the
median return on sales for the SIC codes affected by this regulation ranges from
2.8 to 4.7 percent. Using the actual profit ratio if available and the median profit
margin for the primary parent company SIC code if company-level data are not
available, we estimate that no companies would have a negative profit margin as a
result of the regulation under a full-cost absorption scenario.
1-2
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SECTION 2
SCREENING-LEVEL ANALYSIS
For the purposes of assessing the potential impact of this rule on affected small
businesses, RTI calculated the ratio of annual compliance costs to baseline sales for each
company. For companies owning multiple facilities, the costs for each of the facilities are
summed to develop the total costs for that company. For this analysis, annual compliance
costs were defined as the costs of changing the coating materials (including monitoring,
recordkeeping, capital, and material costs). They do not reflect changes in the production
process that may occur in response to imposition of these costs and the resulting market
adjustments. Company revenue was collected from American Business Information, Inc.
(2000), Gale Research, Inc. (1998), General Business File International (1999), Hoover's
Incorporated (2000), and Yahoo! Finance (2000). Table 2-1 shows the average, minimum,
and maximum CSR for companies affected by the proposed regulation. The CSRs for major
source small businesses range from 0.08 to 0.62 percent, while those for large companies
range from 0.0003 to 0.08 percent (excluding one large company for which cost data are
CBI). No companies, either large or small, have a CSR greater than 1 percent, but the CSR
is only calculated for those companies in the database. However, assuming the database is a
representative sample of the universe of affected firms, it is reasonable to expect that the
remaining affected companies in the United States will have a similar distribution of CSRs.
In addition to computing the CSRs, RTI also computed the companies' expected
profit margins with the regulation, assuming that revenues would remain unchanged and
costs would be fully absorbed by the affected companies. For those companies without
profit margin data, the profit margin without the regulation was assumed to equal the median
profit margin for the four-digit SIC code industry in which that company operates. The
profit margin with the regulation was calculated as the profit margin without the regulation
minus the CSR. If profit margins fall below zero, a company may consider shutting down all
operations in the long run. Note that, because the profit margins considered here are for the
entire company, it is possible that the costs of regulation may result in the closure of affected
facilities even if the parent company remains in business. Table 2-2 shows that no
companies are expected to have negative profit margins as a result of the regulation. The
median profit margin for all companies decreases from 2.80 percent to 2.77 percent, while
the average profit margin falls from 3.31 percent to 3.22 percent, with small companies being
2-1
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to
Table 2-1. Summary Statistics for SBREFA Screening Analysis: Impacts of the Regulation of Surface Coating of
Wood Building Products
Small Large All Companies
Total Number of Companies
Annual Compliance Costs ($106/yr)
4 13 17
$0.47 $4.20 $4.67
Number Share Number Share Number Share
Companies with Sales and Cost Data
Compliance costs are <1% of sales
Compliance costs are > 1 to 3% of sales
Compliance costs are >3% of sales
Compliance Cost-to-Sales Ratios
Average
Median
Maximum
Minimum
4 12a 16
4 100% 12 100% 16 100%
0 0% 0 0% 0 0%
0 0% 0 0% 0 0%
0.26% 0.02% 0.08%
0.18% 0.01% 0.03%
0.62% 0.08% 0.62%
0.08% <0.00% <0.00%
Note: Assumes no market responses (i.e., price and output adjustments) by regulated entities.
^Statistics for large companies do not include one company whose costs are CBI.
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Table 2-2. Profit Margins With and Without Regulation
Small Large All
Companies Companies" Companies
Profit Margins before Regulation
Average
Median
Maximum
Minimum
Number of firms with profit margin less than
zero
Profit Margins with Regulation
Average
Median
Maximum
Minimum
Number of firms with profit margin less than
zero
2.9%
2.8%
3.3%
2.8%
0
2.7%
2.7%
2.7%
2.6%
0
3.4%
3.1%
7.5%
0.4%
0
3.4%
3.0%
7.5%
0.4%
0
3.3%
2.8%
7.5%
0.4%
0
3.2%
2.8%
7.5%
0.4%
0
Note: Assumes no market responses (i.e., price and output adjustments) by regulated entities.
aStatistics for large companies do not include one company whose costs are CBI.
slightly more affected than large companies although neither large nor small companies are
affected very much on average.
Based on this analysis of the subset of companies contained in the project database,
this regulation is unlikely to have a significant impact on a substantial number of small
entities. No small companies are affected above 1 percent (the largest CSR is 0.62 percent),
while the median profit margin for companies in the WBP SIC codes ranges from about 2.8
percent to 4.7 percent, implying that small entities affected by this rule will have sufficient
resources to absorb the compliance costs without causing financial distress.
2-3
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SECTION 3
REFERENCES
American Business Information, Inc. 2000. .
Dail, H. L., EPA/CCPG. January 7, 2003a. Memorandum to Docket A-97-52. "Estimated
Number of Major Sources Subject to the Wood Building Products (Surface Coating)
National Emission Standards for Hazardous Air Pollutants (NESHAP)."
Dail, H. L., EPA/CCPG. January 7, 2003b. Memorandum to Docket A-97-52. "Tabular
Cost Estimates for Wood Building Products Surface Coating National Emission
Standards for Hazardous Air Pollutants (NESHAP)."
Dun & Bradstreet. 1997. Industry Norms & Key Business Ratios: Desk-Top Edition 1996-
1997. Murray Hill, NJ: Dun & Bradstreet, Inc.
Gale Research, Inc. 1998. Ward's Business Directory of U. S. Private and Public
Companies. Detroit, MI: Gale Research, Inc.
General Business File International (formerly Business ASAP). 1999. Gale Group
Collections. As obtained from InfoTrac Web.
Hoover's Incorporated. 2000. Hoover's Company Profiles. Austin, TX: Hoover's
Incorporated, .
Yahoo! Finance. 2000. Yahoo! Finance Profiles, .
3-1
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO.
EPA-452/R-03-003
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Impact Analysis for the Wood Building Products
NESHAP-Final Report
5. REPORT DATE
January 2003
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Robert Beach, RTI
8. PERFORMING ORGANIZATION REPORT NO.
RTI Project Number 7647.004.384
9. PERFORMING ORGANIZATION NAME AND ADDRESS
10. PROGRAM ELEMENT NO.
Research Triangle Institute (RTI)
Center for Regulatory Economics and Policy Research,
Hobbs Bldg.
Research Triangle Park, NC 27709
11. CONTRACT/GRANT NO.
68-D-99-024
12. SPONSORING AGENCY NAME AND ADDRESS
Tom Curran, Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
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 to control hazardous air pollutants (HAPs)
emitted in the coating of wood building products (WBP). The estimated total annual cost for WBP facilities
to comply with the proposed maximum achievable control technology (MACT) standard is about $22.5
million across approximately 215 affected facilities. Based on the economic impact analysis, this NESHAP
would not have a significant impact on the firms in the WBP industry.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS
c. COSATI Field/Group
Economic impacts
Small business impacts
Air pollution control
Environmental regulation
Economic impact analysis
Small business screening analysis,
Maximum achievable control
technology
Wood building products
18. DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
21. NO. OF PAGES
12
20. SECURITY CLASS (Page)
Unclassified
22. PRICE
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-03 -003
Environmental Protection Air Quality Strategies and Standards Division January 2003
Agency Research Triangle Park, NC
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