United States Office Of Air Quality EPA-452/D-00-002
Environmental Protection Planning And standards May 2000
Agency Research Triangle Park, NC27711
Air
Economic Impact Analysis for the Proposed
Miscellaneous Cellulose Manufacturing Industry NESHAP
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Economic Impact Analysis
for the Proposed
Miscellaneous Cellulose
Manufacturing Industry NESHAP
EPA-452/D-00-002
Prepared for
Eric L. Crump
Innovative Strategies and Economics Group
Office of Air Quality Planning and Standards
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
Prepared by
Robert H. Beach
George L. Van Houtven
Mark C. Buckley
Brooks M. Depro
Research Triangle Institute
Center for Economics Research
Research Triangle Park, NC 27709
EPA Contract No. 68-D-99-024
May 2000
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CONTENTS
Section
Executive Summary ES-1
1 Introduction 1-1
1.1 Agency Requirements for an EIA 1-1
1.2 Scope and Purpose 1-2
1.3 Organization of this Report 1-3
2 Industry Profile 2-1
2.1 Production Overview 2-3
2.1.1 Viscose Category Production Process 2-3
2.1.2 Cellulose Ether Category Production Process 2-6
2.1.3 Costs of Production 2-6
2.2 The Demand Side 2-8
2.2.1 Characteristics of Miscellaneous Cellulose Products 2-8
2.2.2 Consumption and Uses of Miscellaneous Cellulose Products.. . 2-8
2.2.3 Substitution Possibilities in Consumption 2-9
2.3 Industry Organization 2-10
2.3.1 Market Structure 2-10
2.3.2 Manufacturing Plants 2-11
2.3.3 Companies 2-13
2.3.3.1 Employment and Sales Distribution 2-13
2.3.3.2 Identifying Small Businesses 2-13
2.3.3.3 Issue of Vertical and Horizontal Integration 2-14
2.3.2.4 Trends 2-15
2.4 Market Data 2-16
2.4.1 Cellulose Food Casings NA
2.4.2 Rayon NA
in
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2.4.3 Cellulosic Sponges NA
2.4.4 Cellulose Ethers NA
3 Engineering Cost Analysis 3-1
4 Economic Impact Analysis: Methods And Results 4-1
4.1 Full-Cost Absorption 4-2
4.2 Market Analysis 4-2
4.2.1 Fiber, Food Casing, and Cellulosic Sponge Markets 4-2
4.2.2 Market Supply 4-2
4.2.3 Market Demand 4-3
4.2.4 Baseline and With-Regulation Equilibrium 4-4
4.2.5 Market Analysis Results 4-6
4.2.5.1 Market-Level Impacts NA
4.2.5.2 Industry-Level Impacts NA
4.3 Social Costs Estimates 4-6
4.4 Small Business Impacts NA
4.4.1 Identifying Small Businesses NA
4.4.2 Screening-Level Analysis NA
4.4.3 Economic Analysis NA
5 Assumptions and Limitations of the Economic Model 5-1
References R-l
Appendix A: Economic Model of the Miscellaneous Cellulose Industry A-l
IV
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LIST OF FIGURES
Number
2-1 Generic Process Diagram for the Viscose Category 2-5
2-2 Cellulose Ether Manufacturing Process 2-7
2-3 Geographic Distribution of Miscellaneous Cellulose Manufacturing
Plants in the United States 2-12
2-4 Chain of Ownership 2-14
2-5 Distribution of Miscellaneous Cellulose Companies by Size 2-15
4-1 Supply Curves for Miscellaneous Cellulose Manufacturing Facilities 4-3
4-2 Demand Curve for Miscellaneous Cellulose Products 4-4
4-3 Market Equilibrium Without and With Regulation 4-5
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LIST OF TABLES
Number
ES-1 Full-Cost Absorption: Facility-Level Annualized Compliance
Cost-to-Sales Ratios ES-2
ES-2 Market-Level Impacts ES-3
ES-3 Distribution of Social Costs ES-4
2-1 Contains CAA CBI, and is therefore not included.
2-2 Contains CAA CBI, therefore not included.
2-3 Miscellaneous Cellulose Manufacturing Facilities 2-11
2-4 Contains CAA CBI, and is therefore not included.
2-5 Contains CAA CBI, and is therefore not included.
2-6 Contains CAA CBI, and is therefore not included.
2-7 Contains CAA CBI, and is therefore not included.
2-8 Contains CAA CBI, and is therefore not included.
2-9 Contains CAA CBI, and is therefore not included.
2-10 Contains CAA CBI, and is therefore not included.
2-11 Contains CAA CBI, and is therefore not included.
2-12 Contains CAA CBI, and is therefore not included.
2-13 Contains CAA CBI, and is therefore not included.
2-14 Contains CAA CBI, and is therefore not included.
2-15 Contains CAA CBI, and is therefore not included.
3-1 Control Costs for Viscose Process Facilities ($) 3-3
3-2 Control Costs for Cellulose Ether Facilities ($) 3-4
4-1 Contains CAA CBI, and is therefore not included.
4-2 Contains CAA CBI, and is therefore not included.
4-3 Contains CAA CBI, and is therefore not included.
4-4 Contains CAA CBI, and is therefore not included.
4-5 Contains CAA CBI, and is therefore not included.
4-6 Contains CAA CBI, and is therefore not included.
4-7 Contains CAA CBI, and is therefore not included.
4-8 Contains CAA CBI, and is therefore not included.
4-9 Contains CAA CBI, and is therefore not included.
VI
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Vll
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EXECUTIVE SUMMARY
This report analyzes the economic impacts of a proposed air pollution regulation to
reduce emissions of several hazardous air pollutants (HAPs) generated in the manufacturing
of miscellaneous cellulose products. There are two major categories of cellulose products:
the viscose category and the ether category. The viscose category is composed of cellulose
food casings, cellophane, rayon, and cellulosic sponges. The various types of ethers are
grouped together under the ether heading. The HAPs emitted differ between the two
categories. Carbon disulfide (CS2) is the primary HAP emitted during the production of
viscose products, but hydrogen sulfide is generated as well. For the ethers, the main
pollutants emitted during production are methanol, methyl chloride, ethylene oxide, and
propylene oxide.
How do emissions of HAPs occur in the production of miscellaneous cellulose products?
Emissions of HAPs from the production of miscellaneous cellulose products originate
from the transfer and storage of CS2; equipment leaks from piping and tanks; process vents
(e.g., xanthation, regeneration/washing, acid/salt recovery, and solvent coating operations);
and wastewater.
Which markets are affected by the regulation?
The major affected markets are those for food casings; fibers; sponges; flexible
packaging materials; and binders, viscosifiers, and thickeners. Although the proposed
regulation affects only the cellulose products in these markets, its impact is expected to be
felt in the broader markets in which these products compete. The amount cellulose producers
are willing to sell is expected to decrease after the regulation; as a result, the prices of both
the cellulose product and its substitutes should increase.
Which producers will be affected?
The directly affected producers are the 14 miscellaneous cellulose manufacturing
facilities that are currently (using a 1998 baseline) classified as major sources of HAPs. Both
new and existing facilities will be affected. A total of 11 companies are identified as owners
of the 14 existing facilities.
ES-1
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How many small businesses will be affected?
Based on Small Business Administration (SBA) definitions, there is one small
company in this industry that owns and operates a single facility.
What are the compliance costs associated with the regulation?
The costs that each facility will incur include capital costs; operating and maintenance
costs; monitoring, recordkeeping, and reporting costs; and lost production costs (operating
costs and lost profits while process changes are implemented). These costs are partially
offset for the viscose category by the savings due to increased recapture of CS2 under the
regulation. On an annualized basis, the net compliance costs for viscose plants operating in
1998 were estimated at $7.7 million for regulatory alternative (RA) I and $14.3 million under
the more stringent RA II. For cellulose ether plants operating in 1998, the compliance costs
were estimated at $289,000 under RA I and $402,000 under RA II.
How large are the compliance costs relative to sales for the entire industry?
Cost-to-sales ratios (CSRs) were calculated by dividing the regulatory compliance
costs by facility revenue. For RA I, 8 of the 14 facilities have CSRs below 1 percent, 4 have
CSRs between 1 and 3 percent, and 2 facilities have CSRs above 3 percent. For RA II, 7
facilities have CSRs below 1 percent, 3 have CSRs between 1 and 3 percent, and 4 have
CSRs of greater than 3 percent. Table ES-1 presents summary statistics for these ratios.
Table ES-1. Full-Cost Absorption: Facility-Level Annualized Compliance Cost-to-Sales
Ratios
Regulatory Alternative 1
Regulatory Alternative 2
Variable Compliance
Ratio
Minimum
0.01%
-0.05%
Cost-to-Sales
Maximum
1.52%
1.19%
Total Compliance
Ratio
Minimum
0.02%
0.04%
Cost-to-Sales
Maximum
4.52%
6.60%
ES-2
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What are the overall expected effects on prices, output, and profits?
Market models including effects on prices and output were estimated for three
markets that include cellulose products: fiber (i.e., rayon, cotton, polyester), food casings, and
cellulosic sponges. Compliance costs in the other two cellulose product markets (cellophane
and cellulose ethers) were judged to be too small to justify modeling their marketwide
impacts. RA I is expected to increase prices by less than 0.2 percent in each of the three
modeled markets, leading to a decrease in output of less than 0.2 percent and a decrease in
operating profits of 2.1 percent for food casings, 17.5 percent for sponges, and 23.7 percent
for fiber (see Table ES-2). Under RA II, prices are expected to increase by less than 0.2
percent for all three markets; output is expected to decrease by less than 0.2 percent; and
operating profits are expected to decrease by 3.9 percent for food casings, 17.5 percent for
sponges, and 56.0 percent for fiber.
Table ES-2. Market-Level Impacts
Regulatory Alternative I
Regulatory Alternative II
Fiber (rayon, cotton, polyester)
Market price ($/lb)
Market quantity (106 Ibs/yr)
Domestic
Directly affected
Indirectly affected
Foreign
Food Casings
Market price ($/lb)
Market quantity (106 Ibs/yr)
Domestic
Directly affected
Indirectly affected
Foreign
Cellulosic Sponges
Market price ($/unit)
Market quantity (106 units/yr)
Domestic
Directly affected
Indirectly affected
Foreign
-0.19%
0.19%
-0.19%
-0.28%
-0.55%
0.19%
0.19%
0.14%
-0.14%
-0.14%
-0.20%
0.14%
NA
0.01%
-0.01%
-0.01%
-0.79%
0.01%
0.01%
0.14%
-0.14%
-0.21%
-0.42%
0.14%
0.14%
0.14%
-0.14%
-0.14%
-0.20%
0.14%
NA
NA = Not available
ES-3
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What are the predicted effects of the regulation on employment in the industry?
Employment is expected to decrease by seven individuals under RAI and by 12
individuals under RA II.
Are any facilities predicted to close under the regulation?
With respect to the modeled baseline conditions, no product-line or facility closures
are predicted because of either RA I or II. However, if rayon producers continue to face the
declining market trends of recent years, closures in this category may occur (even without the
proposed regulation).
What are the total social costs of this regulation?
The total social costs of this regulation are estimated to be $8.0 million for RA I and
$14.7 million for RA II. For RA I, a breakdown of the social costs for the three products
used in the market model (fiber, food casings, sponges) reveals a consumer surplus loss of
$1.2 million, while these directly affected producers suffer a $7.1 million producer surplus
loss, indirectly affected domestic producers gain $0.4 million in producer surplus, and foreign
producers gain $0.2 million (see Table ES-3). There is also a producer surplus loss of $0.3
million to the directly affected cellophane and ether producers. For RA II, the consumer
surplus loss of the regulation was estimated to be $1.4 million, while directly affected
producers face a $13.9 million loss in producer surplus, indirectly affected domestic
producers are expected to gain $0.8 million in producer surplus, and foreign producers are
expected to gain $0.2 million. There is also a producer surplus loss of $0.4 million for
cellophane and cellulose ether producers.
ES-4
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Table ES-3. Distribution of Social Costs
Regulatory Alternative I
Consumer Surplus Loss/Gain
Producer Surplus Loss/Gain
Directly affected"
Indirectly affected
Social Costs of Regulation
-$1.2
-$6.8
-$7.4
$0.6
-$8.0
Regulatory
-$1.4
-$13.3
-$14.7
Alternative II
-$14.3
$1.0
a Includes producer surplus loss for ether and cellophane producers where the change in producer surplus =
engineering cost estimate.
ES-5
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SECTION 1
INTRODUCTION
Miscellaneous cellulose products include goods such as sponges, rayon, ethers,
cellophane, and food casings that are used directly by consumers and indirectly in the
manufacture of a variety of other products. These goods are produced by a heterogeneous
group of facilities that share cellulose as their primary input. Although the products of the
miscellaneous cellulose manufacturing industry are valued by their users, their production
results in the release of hazardous air pollutants (HAPs) into the environment. Under Section
112 of the Clean Air Act (CAA), the U.S. Environmental Protection Agency (EPA) is
required by November 15, 2000, to promulgate national emission standards for hazardous air
pollutants (NESHAP) for the source category that manufactures miscellaneous cellulose
products. To inform this rulemaking, EPA's Innovative Strategies and Economics Group
(ISEG) has developed an economic impact analysis (EIA) to estimate the potential social
costs of the regulation. This report presents the results of this analysis in which a market
model was used to analyze the impacts of the air pollution rule on society.
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. In addition, Executive
Order (EO) 12866 requires a more comprehensive analysis of benefits and costs for proposed
significant regulatory actions.1 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. The Agency's Economic Analysis Resource
'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.
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Document provides detailed instructions and expectations for economic analyses that support
rulemaking (EPA, 1999). These requirements are fulfilled by examining the effect of the
regulatory alternatives on the following:
• miscellaneous cellulose manufacturing facility-level impacts,
• miscellaneous cellulose manufacturing company-level impacts,
• miscellaneous cellulose manufacturing product market-level impacts, and
• societal-level impacts.
1.2 Scope and Purpose
This report evaluates the economic impacts of pollution control requirements in the
production of miscellaneous cellulose products. These control requirements are designed to
reduce releases of HAPs into the atmosphere. Emissions of HAPs from this source category
originate from the transfer and storage of carbon disulfide (CS2) and equipment leaks from
piping and tanks; process vents (e.g., xanthation, regeneration/washing, acid/salt recovery,
and solvent coating operations); and wastewater (Schmidtke and Holloway, 1999).
The proposed NESHAP will apply to all existing and new major sources that
manufacture miscellaneous cellulose products. A major source is defined as a stationary
source or group of stationary sources located within a contiguous area and under common
control that emits, or has the potential to emit, 10 tons or more of any one HAP or 25 tons or
more of any combination of HAPs. EPA has identified 17 facilities manufacturing
miscellaneous cellulose products and has determined that 14 of them are major sources of
HAPs.
To reduce emissions of HAPs, the Agency establishes maximum achievable control
technology (MACT) standards. The term "MACT floor" refers to the minimum control
technology on which MACT standards can be based. For existing major sources, the MACT
floor is the average emissions limitation achieved by the best performing 12 percent of
sources (if there are 30 or more sources in the category or subcategory). If there are fewer
than 30 sources in a category, the Clean Air Act states that emission standards for existing
sources must be determined based on the average emissions limitation of the best performing
five existing sources. In this particular case, there are categories with fewer than five
sources, so the Agency based the MACT on the emissions limitation of the best performing
source or sources rather than using the average across the sources. This was done because
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otherwise there is the possibility of averaging a well-controlled source with a couple of
uncontrolled sources and having a low average emissions limitation. The MACT can be
more stringent than the floor, considering costs and health and environmental impacts. The
estimated costs for individual plants to comply with the MACT are inputs into the EIA
presented in this report.
This report analyzes the economic effects of the MACT standard on existing sources.
Although the MACT standard is the same for both new and existing sources, the economic
impact on new sources is expected to be minimal. Given the current poor financial health of
the industry, it is unlikely that there would be entry, whether or not the regulation goes into
effect. Even if entry does occur, newly installed equipment is expected to be in compliance
with the MACT standard already, so no add-on control equipment will be necessary.
Therefore, this report does not explicitly discuss the impact of the proposed regulation on
new sources. However, equipment that meets the standards is presumably more expensive
and will discourage entry because it will be more costly to enter this industry, making
potential entrants more likely to undertake alternative opportunities for investment.
1.3 Organization of this Report
The remainder of this report is divided into four sections that support and detail the
methodology and the results of the EIA of the miscellaneous cellulose manufacturing
NESHAP summarized above:
• Section 2 presents a summary profile of the affected industry by characterizing the
production processes, the users and consumers, and the organization of the
industry. Data are presented on market volumes and prices, manufacturing plants,
and the companies that own and operate these plants.
• Section 3 summarizes the regulatory control options and associated costs of
compliance. This section is based on EPA's engineering analysis conducted in
support of the proposed NESHAP.
• Section 4 describes the methodology for assessing the economic impacts of the
proposed NESHAP and the results of the analysis, which include market, industry,
and social cost impacts. It reports the impacts on facilities, markets, and society.
• Section 5 details the assumptions used in this analysis.
In addition to these sections, Appendix A describes the model used to predict the
economic impacts of the NESHAP and discusses how welfare effects were calculated.
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SECTION 2
INDUSTRY PROFILE
Cellulose is a natural polymer found in plant cell walls. The cellulose extracted from
trees or other plants provides the basic raw material for all of the commercial products
produced by the miscellaneous cellulose manufacturing industry. The miscellaneous
cellulose manufacturing industry can be divided into two major categories: the viscose
category and the cellulose ether category. Both of these categories use some type of cellulose
as the primary raw material, normally either wood pulp or cotton linters, but their production
processes differ. Although production of viscose products is not identical for all of the
viscose outputs, the processes are very similar.
Few firms are involved in the production of these miscellaneous cellulose products.
Only 17 miscellaneous cellulose manufacturing facilities are operated in the United States.
The final products of these facilities compete in markets with products made from alternative
materials, especially plastics. Cellulose products have generally been declining in market
share over time as newer noncellulose products have been introduced.
Fourteen of the 17 facilities in the United States are considered major sources of
HAPs. The primary pollutant associated with this industry is CS2, which is used in the
viscose production process and may be emitted at several steps during production. Another
pollutant generated during the viscose production process is hydrogen sulfide (H2S). The
HAP emitted during the manufacture of cellulose ethers depends primarily on the type of
cellulose ether being manufactured. Methanol, methyl chloride, ethylene oxide, and
propylene oxide are the primary HAPs released by the cellulose ether manufacturing facilities
in the United States.
This industry profile considers five outputs of miscellaneous cellulose manufacturing.
The viscose category features four types of products—cellulose food casings, rayon,
cellophane, and cellulosic sponges—and cellulose ethers are considered a single category.
Brief descriptions of each of these categories are provided below.
2-1
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• Cellulose food casings: Cellulose food casings were developed in 1925 as a
substitute for natural casings and are used in manufacturing meat products such as
sausages, hot dogs, salamis, bologna, and other processed meats. The meat is
stuffed into a casing that holds the shape of the product during processing.
Casings are commonly removed from the meat products prior to retail sale.
• Rayon: Rayon was the first man-made fiber and serves in a wide variety of uses.
It is used in apparel, household goods, and various nonwoven fabrics. Textile
fabrics may be woven of rayon alone or rayon in combination with other yarns.
Nonwoven rayon products include feminine hygiene products, baby wipes,
computer disk liners, and surgical swabs.
• Cellophane: Cellophane is a thin, transparent material used in food packaging
(especially for candy, cheese, and baked goods); adhesive tapes; and membranes
for industrial uses such as batteries.
• Cellulosic sponges: This type of artificial sponge was introduced in 1931 as an
alternative to natural sponges. Cellulosic sponges are used for cleaning purposes.
• Cellulose ethers: Various cellulose ethers are produced, including methyl
cellulose (MC), carboxymethyl cellulose (CMC), hydroxyethyl cellulose (HEC),
hydroxypropyl cellulose (HPC), and hydroxypropyl methyl cellulose (HPMC).
These cellulose derivatives are used mainly as thickeners, viscosifiers, and binders
in the food, pharmaceutical, paper, cosmetic, adhesive, detergent, and textile
industries.
The affected products are classified in the following Standard Industrial Classification
(SIC) codes:
• SIC 2823, Cellulosic Manmade Fibers;
• SIC 2869, Industrial Organic Chemicals—Not Elsewhere Classified; and
• SIC 3089, Plastics Products, Not Elsewhere Classified.
Under the North American Industry Classification System (NAICS), the codes for
miscellaneous cellulose manufacturing are the following:
• NAICS 32511, Petrochemical Manufacturing;
• NAICS 325199, All Other Basic Organic Chemical Manufacturing;
• NAICS 3252, Resin, Synthetic Rubber, and Artificial and Synthetic Fibers;
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• NAICS 326121, Unsupported Plastics Profile Product Manufacturing; and
• NAICS 326199, All Other Plastics Product Manufacturing.
In the remainder of this section, we provide a summary profile of the miscellaneous
cellulose industry in the United States as background information for understanding the
technical and economic aspects of the industry. Section 2.1 provides an overview of the
production processes for the various products of this industry. Section 2.2 discusses the
demand side of the markets for these cellulose products. Section 2.3 summarizes the
organization of the U.S. miscellaneous cellulose manufacturing industry, including a
description of U.S. manufacturing plants and the companies that own them. Finally,
Section 2.4 provides market data on U.S. production, consumption, foreign trade, and prices.
2.1 Production Overview
This section provides an overview of the various processes for manufacturing
miscellaneous cellulose products.1 Both the viscose and cellulose ether categories use some
type of cellulose as the raw material and begin the production of cellulose products by
reacting the cellulose with a sodium hydroxide (NaOH) solution and shredding the cellulose
pulp (not necessarily in that order) to produce alkali cellulose. The NaOH breaks the
cellulose pulp into shorter lengths by adding a sodium ion to the cellulose chain. This step
lowers the viscosity of the generated product (e.g., viscose solution for the viscose category)
and creates a site to add constituent groups (e.g., methyl, ethyl, or propyl groups for the
cellulose ether category). After this common initial step, the viscose and cellulose ether
categories diverge in their production methods. Therefore, process descriptions for the
viscose and cellulose ether categories are provided separately below. No major by-products
or co-products are associated with the miscellaneous cellulose manufacturing process.
2.1.1 Viscose Category Production Process
The manufacturing processes for the different products in the viscose category are
very similar. They all essentially include the same raw materials and process steps. The
main difference is simply the shape through which the viscose is extruded at the end of the
process. The raw materials used in all of the different viscose manufacturing processes
include cellulose, NaOH, CS2, and sulfuric acid (H2SO4). The steps in the process are
The majority of the information on production processes was drawn from Schmidtke and Holloway (1999).
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• production and aging of alkali cellulose,
• reaction with CS2 to produce sodium cellulose xanthate,
• production and aging of viscose solution,
• extrusion/regeneration and washing to produce the viscose product, and
• acid or salt recovery.
Figure 2-1 illustrates a generic process flow diagram for the viscose category.
The alkali cellulose is aged to decrease the degree of polymerization of the cellulose.
The amount of time for the aging step is based on the desired cellulose chain length. The
aged alkali cellulose is then reacted with CS2 to form sodium cellulose xanthate. Following
completion of the reaction, most of the viscose category facilities apply vacuum to the reactor
and/or purge the reactor with air or nitrogen (N2) to remove unreacted CS2. The CS2 levels
are the most concentrated at the beginning of the reactor evacuation and fall as evacuation
continues. The reactor area of the facility is well ventilated at most of the viscose category
facilities, helping to reduce operator exposure to CS2.
Following the reactor, the sodium cellulose xanthate is dissolved in a caustic solution
to form a viscous material referred to by the industry as "viscose." The viscose solution is
aged or "ripened" and then filtered to remove unreacted alkali cellulose. At most of the
viscose category facilities, the viscose is also deaerated to remove entrapped air and filtered
to remove any undissolved solids. The exception is sponge manufacturing facilities, which
do not include these steps. The viscose is then extruded or formed into various shapes or
products; the product forming may occur in an acid bath or by electrifying, depending on the
type of viscose manufacturing process. At the majority of the viscose manufacturing
facilities, the cellulose precipitates out of a H2SO4 solution, and the sodium atom on the
cellulose polymer reacts with the H2SO4 to generate Na^C^ (i.e., the sodium cellulose
xanthate decomposes back to cellulose and CS2). H2S is also generated in the
extrusion/regeneration steps and emitted. The acid bath for the extrusion/regeneration step
becomes diluted from the water in the viscose solution, and a portion of the acid bath solution
is treated in the acid recovery area and returned to the acid bath. In sponge plants, glauber
salts are added to the viscose prior to generation of the product and are recovered and reused
as part of the production process. The formed cellulose product is then washed, dried,
finished, and packaged.
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O
Figure 2-1. Generic Process Diagram for me^Viscose Category
Sponge manufacturers do not include the deaeration and filtering steps.
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Pollutants can be emitted into the atmosphere from several sources during viscose
processing. The primary HAP emitted from the manufacturing process is CS2. CS2 is
emitted from the reactors and can be emitted from the slurry tanks used to generate the
viscose solution. Both CS2 and H2S are emitted from the regeneration baths and the wash
steps.
2.1.2 Cellulose Ether Category Production Process
All cellulose ether processes include the following steps:
• production of alkali cellulose from cellulose and NaOH,
• reaction of the alkali cellulose with chemical compound(s) to produce a cellulose
ether product,
• washing and purification of the cellulose ether product, and
• drying of the cellulose ether product. Cellulose ether products may also be ground
to uniform size and coated or blended.
Figure 2-2 displays a simplified flow diagram of the processes used to produce cellulose
ethers.
Following the production of alkali cellulose, the raw materials used in the cellulose
ether process vary according to the particular ether being produced. To produce MC, CMC,
HEC, and HPC, alkali cellulose is reacted with methyl chloride, chloroacetic acid, ethylene
oxide, and propylene oxide, respectively. HPMC is produced by reacting alkali cellulose
with both methyl chloride and propylene oxide. All of these raw materials (methyl chloride,
chloroacetic acid, ethylene oxide, and propylene oxide) added to the alkali cellulose to form
the various ether products are considered HAPs.
As shown in Figure 2-2, pollutants can be emitted at various points in the
manufacturing process. The primary HAP(s) emitted from the manufacturing of cellulose
ethers depends on the type of ether product being produced, as mentioned above.
2.1.3 Costs of Production
This section contains CAA confidential business information, and is therefore not
included.
2-6
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Figure 2-2. Cellulose Ether Manufacturing Process
Not all cellulose ether processes use this material or equipment.
b Some cellulose ether processes have multiple centrifuge/filter and wash steps; the solvent is reused and
flows countercurrent to the cellulose ether product.
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2,2 The Demand Side
This section describes the demand side of the market, including product
characteristics, the uses of the final products, the consumers of these products, and the
available substitution possibilities.
2.2.1 Characteristics of Miscellaneous Cellulose Products
Cellulose products have many advantageous physical attributes that led to their
introduction into various markets. Some of the useful characteristics of cellulosics include a
unique combination of toughness and transparency at relatively low cost, an almost unlimited
color range, good grease resistance, little effect on mechanical properties due to moisture, and
suitability of some grades for use with food products. One of the chief disadvantages is that
using a natural polymer base causes greater variation in properties than a truly synthetic
polymer ("Cellulose," 2000). Since the introduction of these cellulose products, advances in
plastics technology have allowed products made from synthetic polymers to enter many of
the markets in which the products comprising the miscellaneous cellulose category compete.
2.2.2 Consumption and Uses of Miscellaneous Cellulose Products
The main uses of these products vary depending on which of the outputs is being
considered. In general, the miscellaneous cellulose products under consideration are
intermediate goods serving as inputs into other production processes.
Cellulose food casings are purchased primarily by meat packers as an input in the
production of processed meat products and are used to encase hot dogs, sausages, deli meats,
and whole hams. The casing may either be left on the final product or removed following
production.
Rayon can be purchased as a continuous filament yarn or as cut (staple) fiber. Rayon
is used as an input in the production of a variety of products, but it is typically used for
producing two main categories of products: textiles and nonwoven materials. The buyers of
textile fibers produce yarn from the fiber, often as a blend with other fiber materials, and
weave the yarns into fabrics used to produce apparel and upholstery, among other things.
Nonwoven fibers are used by a variety of producers to make wipes, computer diskette liners,
and feminine hygiene products.
2-S
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Cellophane normally serves as an intermediate good as well and is purchased
primarily for packaging items such as food and confectionary products (especially candy,
cheese, and baked goods) and batteries; it is also used in adhesive tape.
Cellulosic sponges is the one category under consideration here that is not typically an
input into the production of another good, although manufacturers of sponges may sell their
output to other firms in large blocks and these firms may then cut, package, and sell the
sponges. The main use for these sponges is cleaning various surfaces, and they can be
purchased by households or businesses for this purpose.
Cellulose ethers are used as an input into a variety of goods. They are chiefly used as
thickeners, viscosifiers, and binders and are used in producing paints, personal care products,
inks, pharmaceuticals, and industrial coatings.
2.2.3 Substitution Possibilities in Consumption
The markets in which the miscellaneous cellulose outputs compete generally consist
of the cellulose product in addition to several viable alternatives. With advances in the
production of plastics, plastic alternatives to cellulose products have become increasingly
competitive over time. In many cases, the manufacturers of miscellaneous cellulose goods in
the United States have seen their market shares shrinking recently under pressure from
substitute products and foreign producers of cellulose goods.
In the food casing market, the major alternatives to cellulose are collagen and plastic.
Another category in the industry, known as fibrous, actually contains regenerated cellulose
and is considered under cellulose casings. Natural (intestine) casings are also used by some
producers, especially in making sausage. Buyers of casings make their choice as to which
type of casing will be purchased based on the type of meat product being produced, desired
shelf life, desirability of edible casings, smoke permeability, and appearance.
Many fibers, such as cotton, wool, and polyester, among others, can be used in
textiles instead of rayon. The textile mills choose which fibers to use for a particular
application based on characteristics like comfort, warmth, ease of washing and drying, and
resistance to unwanted creasing and wrinkling. As textile production has moved outside of
the United States, sales of rayon fibers for use in textiles have declined rapidly. Sales of
rayon fibers for use in nonwoven applications have shown much more strength in recent
years than sales of textile fibers (Acordis, 1998).
2-9
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Very strong substitutes exist for cellophane as well. Cellophane has been facing
increasing competition in recent years from plastics such as polypropylene and polyethylene.
Cellophane twist wrap (used for wrapping single-piece candy) fell from a position of about
85 percent of the U.S. market in 1992 to 35 percent by early 1997 (Duschene, 1997).
According to Plastics World (1995), polypropylene "has all but replaced cellophane in many
packaging applications, such as for snack food and tobacco...."
Cellulosic sponges seems to be the category where there is the least competition from
alternative products, because natural sponges are far more expensive and have a relatively
small market share. Several retailers were contacted and these retailers sold cellulose
sponges exclusively. However, substitute products for cleaning such as paper towels and
dishtowels are available.
The cellulose ethers are used in many different end uses and have numerous
substitutes, depending on the particular application for which they are being used. Some of
the possible substitutes include natural gums, starches, proteins, synthetic polymers, and
inorganic clays (Majewicz and Podlas, 1993).
2.3 Industry Organization
This section discusses the products and producers that constitute the market. The
affected facilities and parent companies are identified, and their sales and employment
distribution are summarized.
2.3.1 Market Structure
Market structure is of interest because it determines the behavior of producers and
consumers in the industry. If an industry is perfectly competitive, then individual producers
are not able to influence the price of the output they sell or the inputs they purchase. This
condition is most likely to hold if the industry has a large number of firms, the products sold
and the inputs purchased are homogeneous, and entry and exit of firms are unrestricted.
Entry and exit of firms are unrestricted for most industries except, for example, in cases
where government regulates who is able to produce, where one firm holds a patent on a
product, where one firm owns the entire stock of a critical input, or where a single firm is
able to supply the entire market.
Very few firms are involved in manufacturing each of the cellulose products under
examination, implying imperfectly competitive markets. However, there is vigorous
2-10
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competition from foreign sources in this industry. In addition, many viable substitutes for
these products exist. Therefore, despite the small number of domestic producers, the
miscellaneous cellulose manufacturing facilities are likely to behave fairly competitively.
2.3.2 Man ufacturing Plan ts
Based on facility responses to the Section 114 letters, the Agency identified 17 plants
in the United States currently manufacturing miscellaneous cellulose products. These
facilities are identified in Table 2-3. Figure 2-3 shows the geographic distribution of U.S.
miscellaneous cellulose manufacturing plants by final product. As shown, many of these
plants are concentrated in the north-central region of the United States. Since only 14 of the
17 facilities are major sources subject to the MACT standard, subsequent discussion focuses
on this subset of the miscellaneous cellulose manufacturing facilities affected by the
proposed regulation.
Table 2-3. Miscellaneous Cellulose Manufacturing Facilities
Facility
Facility Location
Major Product(s)
Devro-Teepak, Inc.
Viskase Corp.
Viskase Corp.
Acordis Cellulosic Fibers, Inc.
Lenzing Fibers Corp.
UCB Films, Inc.
Nylonge Corp.
Spontex, Inc.
3M Corp.
3M Corp.
Dow Chemical Co.
Dow Chemical Co.
Hercules Inc., Aqualon Co.
Hercules Inc., Aqualon Co.a
MAK Chemical Corp.a
Penn Carbose, Inc.a
Union Carbide Corp.
Danville, IL
Loudon, TN
Osceola, AR
Axis, AL
Lowland, TN
Tecumseh, KS
Elyria, OH
Columbia, TN
Prairie du Chien, WI
Tonawanda, NY
Midland, MI
Plaquemine, LA
Hopewell, VA
Parlin, NJ
Muncie, IN
Somerset, PA
Institute, WV
Cellulose food casings
Cellulose food casings
Cellulose food casings
Rayon
Rayon
Cellophane
Cellulosic sponges
Cellulosic sponges
Cellulosic sponges
Cellulosic sponges
Cellulose ethers (MC, HPMC)
Cellulose ethers (MC)
Cellulose ethers (CMC, HEC, HPC)
Cellulose ethers (HEC)
Cellulose ethers (crude CMC)
Cellulose ethers (crude CMC)
Cellulose ethers (HEC)
Hercules-Parlin, MAK, and Penn Carbose are area sources not subject to the MACT standard.
2-11
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Figure 2-3. Geographic Distribution of Miscellaneous Cellulose Manufacturing Plants
in the United States
2-12
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This section contains CAA confidential business information, and is therefore not
included..
2.3.3 Companies
Companies that are directly affected by the regulation include entities that own
miscellaneous cellulose manufacturing plants. As shown in Figure 2-4, the chain of
ownership may be as simple as one plant owned by one company or as complex as multiple
plants owned by subsidiary companies. Based on survey and publicly available source data,
the Agency identified 11 ultimate parent companies that own and operate the 14 directly
affected facilities. For the economic analysis, EPA obtained sales and employment data from
one of the following secondary data sources:
• Hoover's Company Profiles (Hoover's, 2000),
• Business and Company ProFile (Information Access Corporation, 2000),
• Ward's Business Directory (Gale Research, 1998), and
• Wrights Research Service (Winthrop Corporation, 2000).
2.3.3.1 Employment and Sales Distribution
This section contains CAA confidential business information, and is therefore not
included.
2.3.3.2 Identifying Small Businesses
The RFA of 1980, as amended by SBREFA of 1996, requires that the Agency give
special consideration to small entities affected by federal regulation. Companies operating
miscellaneous cellulose manufacturing plants can be grouped into small and large categories
using Small Business Administration (SBA) general size standard definitions. The SBA
defines a small business in terms of the sales or employment of the owning entity, and these
thresholds vary by industry classification (SIC code) of the affected company. For this
analysis, the Agency identified three primary SIC codes with small business definition ranges
as follows:
• 2823 and 2869—1,000 or fewer employees and
• 3089—500 or fewer employees.
2-13
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Parent Company
>
\
Other Companies
or Legal Entities
>
{
Subsidiaiy
Company
(Direct Owner)
>
(
Facility
Parent Company
>
k
Subsidiary
Company
(Direct O^ner)
t
Facility"
Parent Company
(Direct Owner)
>
^
Facilit\r
A
Figure 2-4. Chain of Ownership
Based on the reported company employment and SIC size standard, one company can be
classified as small, or 9.1 percent of the total (see Figure 2-5).
2-14
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2.3.3.3 Issue of Vertical and Horizontal Integration
Small
1 (9%)
Large
10(91%)
Figure 2-5. Distribution of Miscellaneous Cellulose Companies by Size
Vertical integration is a potentially important dimension in analyzing firm-level
impacts because the regulation could affect a vertically integrated firm on more than one
level. The regulation may affect companies for whom cellulose manufacturing is only one of
several processes in which the firm is involved. For example, a company may produce
cellulose products as part of a vertical operation that manufactures and assembles the final
commodity. Increased production costs of cellulose manufacturing will affect the cost of the
final products that use these as intermediate inputs.
Horizontal integration is also an important dimension in firm-level impact analysis
because diversified firms may own facilities in unaffected industries. This may give them
resources to spend on complying with this regulation—if they so choose. Several of the
larger firms are involved in several different industries other than cellulose manufacturing.
For example, Total Fina S.A.'s other operations include petroleum, natural gas, and tires,
2-15
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while 3M provides pharmaceutical, automotive, and dental productions (Hoover's, 2000;
Information Access Corporation, 2000).
2.3.3.4 Trends
This section contains CAA confidential business information, and is therefore not
included.
2.4 Market Data
This section contains CAA confidential business information, and is therefore not
included.
2-16
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SECTION 3
ENGINEERING COST ANALYSIS
The Agency identified 17 producers of miscellaneous cellulose products in the United
States and estimated the costs of complying with the proposed NESHAP for the production
of miscellaneous cellulose products. Fourteen of these producers are considered major
sources and will therefore be affected by the MACT standards. For each process category,
this EIA discusses two regulatory options: Regulatory Alternative (RA) I consists of the
MACT floor control options and RA II consists of a combination of MACT floor options as
well as options achieving greater emissions reduction. All alternatives are combinations of
HAP control techniques.
Five possible HAP emission control techniques are available for viscose and cellulose
ether processes:
• carbon adsorbers,
• scrubbers,
• nitrogen unloading systems,
• thermal oxidizers, and
• leak detection and repair (LDAR) programs.
Carbon adsorbers and scrubbers act to filter HAPs from an airflow directed through
the unit. Nitrogen unloading systems react nitrogen with CS2 in the exhaust to remove the
CS2 from the air flow. Another viable emissions control device is a thermal oxidizer.
Thermal oxidizers preheat air containing solvents and then pass the air into a combustion
chamber. The combustion products are carbon dioxide and water. A flow of natural gas is
necessary to maintain combustion. Thermal oxidizers can be either recuperative, in which a
heat exchanger is used to preheat the air, or they can be regenerative, in which ceramics are
used to improve the heat-sustaining efficiency. The final option is LDAR programs, which
reduce emissions from existing systems by sealing all leaks in the airflow channel.
3-1
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Costs associated with controlling emissions at miscellaneous cellulose manufacturing
facilities are reported in five categories. Total capital investment is the total cost of capital
equipment for emissions control. The capital costs account for life of the capital equipment,
and they are annualized and reported as capital recovery, the annual capital expense. Other
fixed costs are included under general annual costs, which include overhead, administrative
charges, insurance, and property taxes. Variable annual costs include labor, materials,
utilities, replacement parts, and watewater treatment disposal. Recovery credits for carbon
adsorbers also affect the variable cost of emissions control. All annual costs are summed for
total annual costs.
The total annualized control costs for major sources under the viscose process
category are $7.7 million under RA I, and $14.3 million under RA II, as shown in Table 3-1.
Under both alternatives, Lenzing has the highest variable and annualized capital costs. The
other rayon manufacturer, Acordis, experiences the greatest increase in variable and annual
capital costs in the move from RA I to RA II. The sponge and cellophane manufacturing
facilities experience no increase in costs moving from RA I to RA II.
The total annualized control costs for major sources under the ether process category
are $0.3 million for RA I and $0.4 million under RA II (see Table 3-2). Union Carbide has
the highest total annual costs under both alternatives for this subset of major sources.
Hercules has the largest increase in costs moving from RA I to II.
3-2
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Table 3-1. Control Costs for Viscose Process Facilities ($)
Facility Name
Regulatory Alternative I
Devro-Teepak, Inc.
Viskase Corp.
Viskase Corp.
Acordis Cellulosic Fibers
Inc.
Lenzing Fibers Corp.
UCB Films, Inc.
Nylonge Corp.
Spontex, Inc.
3M Corp.
3M Corp.
Total
Regulatory Alternative II
Devro-Teepak, Inc.
Viskase Corp.
Viskase Corp.
Acordis Cellulosic Fibers
Inc.
Lenzing Fibers Corp.
UCB Films, Inc.
Nylonge Corp.
Spontex, Inc.
3M Corp.
3M Corp.
Total
Facility Location
Danville, IL
Loudon, TN
Osceola, AR
Axis, AL
Lowland, TN
Tecumseh, KS
Elyria, NY
Columbia, TN
Prairie du Chien, WI
Tonawanda, NY
Danville, IL
Loudon, TN
Osceola, AR
Axis, AL
Lowland, TN
Tecumseh, KS
Elyria, NY
Columbia, TN
Prairie du Chien, WI
Tonawanda, NY
Total Capital
Investment
1,423,503
2,677,569
2,160,399
2,559,069
16,643,012
11,570
1,568,050
3,066,983
845,867
1,191,367
32,147,390
5,352,224
5,858,159
4,114,865
17,873,129
24,648,462
11,570
1,568,050
3,066,983
845,867
1,191,367
64,530,675
Annual
Variable Cost
39,180
702,017
368,324
91,553
1,313,797
7,181
47,487
304,200
58,119
28,611
2,960,469
335,084
895,643
468,228
1,714,865
2,197,512
7,181
47,487
304,200
58,119
28,611
6,056,931
Recovery
Credits Total
—
-14,692
-6,643
—
-1,103,760
—
—
-131,238
-39,844
—
-1,296,177
-407,021
-367,441
-166,131
-631,596
-1,907,052
—
—
-131,238
-39,844
—
-3,650,322
Annualized
Capital Costs
207,418
305,282
246,302
366,077
2,216,898
2,822
225,696
399,882
116,083
170,640
4,257,099
729,636
737,850
519,345
2,393,792
3,236,752
2,822
225,696
399,882
116,083
170,640
8,532,496
Annual
General
Cost
73,690
193,782
154,000
138,513
820,321
8,562
83,033
191,344
53,751
59,585
1,776,581
289,115
357,196
261,703
884,619
1,212,063
8,562
83,033
191,344
53,751
59,585
3,400,970
Annual
Total
Cost
320,288
1,186,390
761,982
596,142
3,247,256
18,565
356,216
764,188
188,108
258,835
7,697,973
946,814
1,623,248
1,083,145
4,361,680
4,739,275
18,565
356,216
764,188
188,108
258,835
14,340,074
-------
Table 3-2. Control Costs for Cellulose Ether Facilities ($)
Facility Name
Regulatory Alternative I
Dow Chemical Co.
Dow Chemical Co.
Hercules Inc.
Union Carbide Corp.
Total
Regulatory Alternative II
Dow Chemical Co.
Dow Chemical Co.
Hercules Inc.
Union Carbide Corp.
Total
Facility Location
Midland, MI
Plaquemine, LA
Hopewell, VA
Institute, WV
Midland, MI
Plaquemine, LA
Hopewell, VA
Institute, WV
Total Capital
Investment
13,622
13,730
13,028
1,053,841
1,094,221
24,434
13,730
34,652
1,053,841
1,126,657
Annual Variable
Cost
10,364
13,641
13,208
16,420
53,632
23,435
13,641
93,815
16,420
147,312
Annualized
Capital Costs
3,322
3,349
3,178
151,037
160,886
6,865
3,349
17,087
151,037
178,337
Annual General
Cost
6,763
8,734
8,446
50,588
74,530
7,204
8,734
9,345
50,588
75,871
Annual Total Cost
20,449
25,723
24,831
218,045
289,048
37,505
25,723
120,247
218,045
401,520
-------
3-5
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SECTION 4
ECONOMIC IMPACT ANALYSIS: METHODS AND RESULTS
The proposed NESHAP requires producers of miscellaneous cellulose products (i.e.,
rayon, food casings, cellulosic sponges, cellophane, and cellulose ethers) to meet emission
standards for the release of HAPs into the environment. To meet these standards, firms will
have to install equipment to capture pollutants or change to less pollution-intensive methods.
These changes result in higher costs of production for the affected producers and may induce
some owners to change their current operating rates. Owners may even choose to close down
their operations if the costs are large enough. The regulation has broader societal
implications because these effects are transmitted through market relationships to indirectly
affected producers and consumers of these products and other related products.
EPA evaluated the economic impacts of the rule using two different assumptions
regarding behavioral responses to the regulation. Under the first assumption, producers
"fully absorb" the compliance costs, and their production choice is limited to compliance at
the current operating rates or closure. Unlike a market model approach, there are no market
feedback effects (i.e., change in market prices) under this full-cost absorption model. This
approach assumes that all factors of production are fixed, leaving the directly affected entity
with no means to respond to changes in its costs. The second approach involves developing a
market model that analyzes the production (consumption) choices of producers (consumers)
in response to changes in costs and market prices associated with the regulation. The Agency
determined that a market approach was appropriate for three miscellaneous cellulose
products—rayon, food casings, and cellulosic sponges. Given limited market data, small
market shares for the affected facilities,1 and small facility control costs, the Agency used the
less complex full-absorption model for the remaining two affected products—cellophane and
cellulose ethers. The following sections discuss these approaches in more detail and describe
'The market shares are small compared to the broader markets in which the goods compete, although these
facilities may produce large shares of the cellulose products. For example, there is only one cellophane plant
in the U.S., but cellophane has only a small share of the market for flexible packaging in which it competes.
4-1
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methods for developing quantitative estimates of the economic impacts resulting from the
NESHAP.
4.1 Full-Cost Absorption
This section contains CAA confidential business information, and is therefore not
included.
4.2 Market Analysis
As noted in Section 2, Information Collection Request (ICR) survey responses and
publicly available sources provided the market-level data necessary to develop a market
analysis for three cellulose products. The main elements of the analysis are identified below:
• identification of baseline conditions in the miscellaneous cellulose commodity
markets,
• characterization of the regulated facilities and baseline supply,
• determination of baseline demand,
• development of a model that evaluates the behavioral responses of these economic
agents to the regulation, and
• presentation and interpretation of economic impact estimates projected by the
model.
4.2.1 Fiber, Food Casing, and Cellulosic Sponge Markets
This section contains CAA confidential business information, and is therefore not
included.
4.2.2 Market Supply
EPA developed unit cost curves for each miscellaneous cellulose product given
estimates of baseline outputs and market prices (see Appendix A for the operational model
details). Given the capital in place, each facility was characterized by an upward-sloping
supply function, as shown in Figure 4-1. In this case, the supply function is that portion of
the marginal cost curve bounded by zero and the production line's technical capacity. The
facility owners select their commodity output according to this schedule as long as the market
price is sufficiently high to cover average variable costs (i.e., greater than C0 in Figure 4-1).
If the market price falls below average variable costs, then the firm's best response is to cease
4-2
-------
$/q
q/year
Figure 4-1. Supply Curves for Miscellaneous Cellulose Manufacturing Facilities
production because total revenue does not cover total variable costs of production. In this
scenario, producers experience losses on operations as well as capital. By shutting down, the
firm avoids additional operating losses. The individual supply decisions of all the firms in
the industry are then aggregated (i.e., horizontally summed) to develop the market supply
curve.
4.2.3 Market Demand
For the economic analysis, EPA modeled each commodity market as having a single
aggregate consumer with a downward-sloping demand curve that is consistent with the theory
of demand (see Figure 4-2). This simply indicates that consumption of cellulose products is
high at low prices and low at high prices, reflecting the opportunity costs of purchasing
miscellaneous cellulose products. The Agency constructed this curve for each product using
baseline quantity, price data, and assumptions about the responsiveness to changes in price
(demand elasticity). For this analysis, EPA assumed a demand elasticity of-1.0 (i.e., a
1 percent change in the price of miscellaneous cellulose commodities would result in a
1 percent change in quantity demanded).
4-3
-------
D
q/year
Figure 4-2. Demand Curve for Miscellaneous Cellulose Products
4.2.4 Baseline and With-Regulation Equilibrium
The Agency modeled a competitive market for each of these three miscellaneous
cellulose products such that buyers and sellers exert no individual influence on market prices.
Price is set by the collective actions of buyers and sellers of miscellaneous cellulose products,
who take the market price as a given in making their production and consumption choices.
Under this assumption, prices and quantities of miscellaneous cellulose products are
determined by the intersection of market supply and demand curves (see Figure 4-3[a]). The
baseline 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 sum of the individual supply curves of miscellaneous cellulose facilities.
Any individual supplier would produce amount q (at price p), and the miscellaneous cellulose
facilities would collectively produce amount Q, which equals market demand.
4-4
-------
+ P
= P
Facilities
Directlv Affected
Facilities
Indirect!*- Affected
Q
Market
a) Basdiue Equili.brinm
P'
P
q' q
Facilities
Directlv Affected
q qf
S.
P'
P
In directh- Affected
sM7 SMJ
Q'' Q
Market
b) Witb-RegnlatioB Equilibrium
Figure 4-3. Market Equilibrium Without and With Regulation
4-5
-------
With the regulation, the costs of production increase for suppliers using the
miscellaneous cellulose production process. These additional costs include a variable
component consisting of the operating and maintenance costs and the fixed component that
does not vary with output (i.e., control devices such as a thermal oxidizer). Incorporating
these regulatory control costs is represented by an upward shift (from S to S') in the
individual supply curves by the per-unit variable compliance cost, causing the market supply
curve to shift upward to SM.
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'
(see Figure 4-3 [b]). This reduction in market output is the net result of output reductions at
directly affected miscellaneous cellulose facilities and output increases at facilities that do not
face control costs.
4.2.5 Market Analysis Results
This section contains CAA confidential business information, and is therefore not
included.
4.3 Social Costs Estimates
This section contains CAA confidential business information, and is therefore not
included.
4-6
-------
SECTION 5
ASSUMPTIONS AND LIMITATIONS OF THE ECONOMIC MODEL
In developing the economic model of the cellulose manufacturing industry, several
assumptions were necessary to make the model operational. In this section, each operational
assumption is listed and explained. Possible impacts and limitations of the model resulting
from each assumption are then described.
Assumption: The domestic markets for all of the cellulose products are perfectly
competitive.
Explanation: Assuming that the markets for these products are perfectly competitive implies
that individual producers are not capable of unilaterally affecting the prices they receive for
their products. Under perfect competition, firms that raise their price above the competitive
price are unable to sell at that higher price because they are a small share of the market and
consumers can easily buy from one of a multitude of other firms that are selling at the
competitive price level. Individual firms could sell at a price lower than the competitive
price, but since they are already selling all of their output at the competitive price, they would
just be selling the same quantity at a lower price. This would lower their profits and
therefore would not be chosen as a strategy by rational firm managers. There are very few
firms involved in miscellaneous cellulose manufacturing in the United States, which suggests
imperfect competition. However, because of the large number of substitute products
available and the presence of strong foreign competition, the assumption of perfect
competition is appropriate.
Possible Impact: If the markets for miscellaneous cellulose products were in fact imperfectly
competitive, implying that individual producers can affect the prices they receive for their
products, the economic model would understate possible price increases due to the regulation
and the social costs of the regulation. Because producers would be able to pass along more
of the costs to consumers under imperfect competition, consumer surplus losses would be
higher and producer surplus losses would be smaller than under perfect competition.
5-1
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Assumption: The United States is not a price-taker on the world market for cellulose
products; that is, the United States may influence the price of these products on the
world market.
Explanation: Assuming that the United States is not a price-taker on the world market for
these products implies that the United States is "large" relative to the rest of the world. That
is, the United States produces a sufficient quantity of these products so that changes in the
volume of products imported or exported may affect prices in the world market. Thus,
producers in the United States have the ability to pass along some portion of the costs of the
regulation to consumers of miscellaneous cellulose products.
Possible Impact: If the United States were a price-taker on the world market, then producers
would not be able to pass along any of the costs of the regulation to consumers of these
products. If U.S. companies that export these products attempted to raise prices as a result of
the regulation, importers of U.S. cellulose products would start purchasing from countries
other than the United States. Similarly, U.S. companies would be unable to raise the price of
their cellulose products domestically because consumers would start buying imports at the
lower world price instead. Thus, U.S. consumers would bear none of the costs of the
regulation under this scenario.
Assumption: The baseline year of the analysis, 1998, is representative of a typical year
for the industry.
Explanation: The engineering costs of the regulation are estimated for all facilities that
produced miscellaneous cellulose products in 1998. In order for the economic model to be
consistent, all costs, prices, and quantities must be denominated in the same year.
Possible Impact: If 1998 were a good year for the miscellaneous cellulose manufacturing
industry relative to typical conditions (i.e., with high output prices and low input prices), then
the impacts of the regulation would appear to be smaller (in percentage terms) than they
would be for a typical year. Likewise, if 1998 were a relatively poor year for the industry, the
impacts of the regulation would appear greater than for a typical year.
Assumption: Rayon, cotton, and polyester are sufficiently similar that they can be
considered perfect substitutes for the markets in which they compete.
Explanation: It is assumed that in the markets where rayon is present, cotton and polyester
are perfect substitutes for rayon. This assumption limits the ability of rayon producers to pass
5-2
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along the costs of regulation to rayon consumers because rayon consumers will switch to
cotton or polyester if rayon's price increases.
Possible Impact: If cotton and polyester are not perfect substitutes for rayon, then rayon
producers will have more ability to pass cost increases on to consumers in the form of higher
rayon prices. In this case, consumer surplus losses would be higher and producer surplus
losses lower than we have estimated.
Assumption: The compliance costs placed on cellophane manufacturing and cellulose
ether manufacturing are small enough to have a negligible impact on their respective
market prices and quantities.
Explanation: This assumption implies that these firms will not take actions that have any
appreciable impact on market prices or quantities as a result of the regulation. In this case,
the compliance costs are generally so small compared with firm sales that even if they did
adjust output, the adjustment would be so small that no change in price would be observed.
Possible Impact: If these firms make significant changes to their output levels as a result of
the regulation, then there may be some noticeable market impact on prices and quantities.
These firms hold very small shares of their respective markets (flexible packaging and
thickeners, viscosifiers, and binders, respectively), however, so even if they decreased output
considerably, the selling price may not change much.
5-3
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Appendix A
Economic Model of the Miscellaneous Cellulose Industry
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The proposed NESHAP will increase the costs of production for existing
miscellaneous cellulose manufacturing plants. Facility-level responses to these additional
costs will collectively determine the market impacts of the regulation. Specifically, the cost
of the regulation may induce some facilities to alter their current level of production, or even
to close down. These choices affect, and are affected by, the market price for each product.
To model these adjustments, EPA
• characterized production of miscellaneous cellulose products at the individual
facility and market levels,
• characterized demand for each product,
• developed the solution algorithm to determine the new with-regulation
equilibrium, and
• computed values for all the impacted variables.
A.I Supply of Miscellaneous Cellulose Products
Market supply of miscellaneous cellulose products (Qs) can be expressed as the sum
of domestic and foreign supply (or imports), that is,
where qs is the domestic supply of a particular miscellaneous cellulose product type (which is
the sum of production from all domestic sources) and q1 is the foreign supply (or imports).
Each of these supply components is described below.
A. 1.1 Miscellaneous Cellulose Facilities (Directly Affected)
Producers of miscellaneous cellulose products have some ability to vary output in the
face of production cost changes. Production cost curves, coupled with market price, can be
used to determine the facility's optimal production rate, including zero (shutdown). For this
analysis, the generalized Leontief profit function was used to derive the supply curve for
miscellaneous cellulose products at each facility (see Chambers, 1988, p. 172, for a
description of the generalized Leontief). This functional form is appropriate given the fixed-
proportion material input (cellulose) and (coating and substrate) and the variable-proportion
inputs of labor, electricity, and energy. By applying Hotelling's lemma to the generalized
Leontief profit function, the following general form of the supply functions for each
miscellaneous cellulose product is obtained:
A-l
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(A.2)
where p is the market price for each product, j- and p are model parameters, and j indexes
producers (i.e., individual miscellaneous cellulose facilities). The theoretical restrictions on
the model parameters that ensure upward-sloping supply curves are YJ > 0 and p < 0.
Figure A-l illustrates the theoretical supply function of Eq. (A.2). As shown, the
upward-sloping supply curve is specified over a productive range with a lower bound of zero
P2
that corresponds with a shutdown price, pm, equal to 2
47i
and an upper bound given by the
productive capacity of qMj that is approximated by the supply parameter y^ The curvature of
the supply function is determined by the p parameter.
q
q/t
Figure A-l. Theoretical Supply Function for Miscellaneous cellulose Facilities
A-2
-------
To specify the supply function of Eq. (A.2) for each facility for this analysis, the p
parameter was computed by substituting an assumed market supply elasticity for each
miscellaneous cellulose products (£), the average annual product line production level of the
directly affected miscellaneous cellulose facilities (q), and market price of the product (p)
into the following equation:
P =-"" ^
PJ . (A3)
Absent econometric or literature estimates, the market-level supply elasticities were
assumed to be 1, reflecting a unitary elasticity (i.e., a 1 percent change in price leads to a
1 percent change in output).
Once the p parameter has been estimated, the remaining unknown parameter (y^ can
be computed for each facility using Eq. (A.2). This parameter approximates the productive
capacity for each miscellaneous cellulose product facility. Unlike the p parameter, this
parameter does not influence the facility's production responsiveness to price changes. It is
used to calibrate the model so that each miscellaneous cellulose facility's supply equation
returns the estimated baseline1 value (qDA) given the estimated market price (p).
Adjustment of Product-Specific Minimum Prices and Quantities at Facility. The area
under the product supply curve at the facility represents the facility's total variable costs of
producing that product. This area can be expressed where VCj is the total variable cost of
production at facility i, q* is the level of production at the facility,^ (q;) is the inverse supply
function, and q™ is the minimum
(A.4)
economically feasible production level at the facility, which corresponds to the price p™.
Given limited data on facility level baseline production values, in some cases the Agency used reported
shipment values to approximate production.
A-3
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q™ is unobserved but may be chosen to calibrate the shutdown points for those
facilities with reported production cost data.2 By integrating under the generalized Leontief
supply function,3 given the above relationships, we can express a facility's total variable costs
of production as a function of q* and q™:
1
1
(A.5)
where q* is known, while q™ is unknown.
The problem can be reduced further if we assume that q™ is proportional to base year
output, q*, by a factor k, so that
(A.6)
Thus, the facility's total variable costs can be expressed as
(A.7)
Facility-specific q™ and p™ may be derived by solving Eq. (A.5) for the unknown
variable k and then backsolving through Eq. (A.4) to solve for q™ and using that result with
the inverse supply function to solve for p™.
Applying this technique to the questionnaire data for each facility resulted in the
outcome summarized in Figure A-2. First, as shown in Figure A-2, the value for k is
determined to be greater than zero and less than on (i.e., 0 < k < 1). Thus, the total variable
costs as measured by the area under the facility's product supply function matches the value
reported in the Section 114 responses for that facility.
"Cost data were available for rayon and sponge facilities based on Section 114 responses. For regulated food
casing facilities, q • = 0 (by assumption), with a shutdown price p™ =
SeeEq. (A.2).
A-4
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pin
Figure A-2. Model TVC Equal to Reported Value
Regulation-Induced Shift in Supply Functions. The production decisions at these
facilities are affected by the total annual variable compliance costs as provided by EPA's
engineering analysis. Using baseline facility output rates, EPA estimated annual variable
compliance costs per miscellaneous cellulose product unit of production for each facility (Cj
These costs enter each existing facility's supply equation as a net price change (i.e.,
the net price is now p - Cj). Thus, the supply function from Eq. (A.2) becomes
for (p - cp > p ™
(A.8)
Facility Closure Decision. A facility may shut down its miscellaneous cellulose
product manufacturing operation because it is no longer profitable. The sufficient condition
for production at each facility in the short run is nonnegative operating profits (TT), that is,
7i = TR - TPC > 0
(A.9)
A-5
-------
where total revenue (TR) is the revenue from miscellaneous cellulose product sales and total
production cost (TPC) is the sum of total variable production costs (production and
compliance) and total avoidable fixed costs (annualized expenditure for compliance capital).
A.1.2 Miscellaneous Cellulose Facilities (Indirectly Affected)
The indirectly affected facilities do not face additional costs of production with the
regulation. However, their output decisions are affected by price changes expected to result
from the regulation. Individual facility data are not available for these facilities. Therefore,
they were modeled as a single representative supplier. Supply from these facilities (q^) can
be expressed by the following general formula:
qIA = AIA [p]5 (A 1Q)
where p is the market price for the product, d; is the domestic supply elasticity (assumed
value), and AIA is a multiplicative supply parameter that calibrates the supply equation for
this product given data on price and the supply elasticity to replicate the estimated 1998 level
of production from these facilities. Since all domestic rayon producers are directly affected
by the rule, the only indirectly affected producers are the cotton and polyester producers in
competing markets. For these producers, EPA obtained end use data and calculated estimates
for cotton and polyester production. For the casings and sponges markets, the Agency
obtained estimates of indirectly affected production from Section 114 letters and/or census
data.
A. 1.3 Foreign Supply (Imports)
Similar to indirectly affected domestic facilities, foreign producers are not directly
affected by the regulation but were included in the model as a single representative supplier
that responds to changes in the market price. Supply from foreign producers (q1) can be
expressed by the following general formula:
where p is the market price for the product, d;1 is the import supply elasticity (assumed value
of 1), and A1 is a multiplicative supply parameter that calibrates the supply equation for each
product, given data on price and the foreign supply elasticity to replicate the estimated level
of imports in the baseline year.
A-6
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A.2 Demand for Miscellaneous Cellulose Products
Market demand for miscellaneous cellulose products (Qd) can be expressed as the
sum of domestic and foreign demand, that is,
where qd is the domestic demand and qx is the foreign demand (or exports), as described
below.
A.2.1 Domestic Demand
Domestic demand for miscellaneous cellulose products can be expressed by the
following general formula:
qd = Bd [p]id (
where p is the market price, r|d is the domestic demand elasticity (assumed value of -1), and
Bd is a multiplicative demand parameter that calibrates the demand equation for
miscellaneous cellulose products, given data on price and the domestic demand elasticity to
replicate the estimated baseline year level of domestic consumption. This quantity is
estimated as follows:
qd = Qs-qx (A. 14)
A.2.2 Foreign Demand (Exports)
Foreign demand, or exports, for miscellaneous cellulose products can be expressed by
the following general formula:
qx = Bx [p]^ (A.15)
where p is the market price, rf is the assumed export demand elasticity (assumed value of
-1), and Bx is a multiplicative demand parameter that calibrates the foreign demand equation,
given data on price and the foreign demand elasticity to replicate the estimated baseline year
level of exports.
A.3 With-Regulation Market Equilibrium
Facility responses and market adjustments can be conceptualized as an interactive
feedback process. Facilities face increased production costs due to compliance, which causes
facility-specific production responses (i.e., output reduction). The cumulative effect of these
A-7
-------
responses leads to an increase in the market price that all producers (directly affected and
indirectly affected) and consumers face. This increase leads to further responses by all
producers and consumers and, thus, new market prices. The new with-regulation equilibrium
is the result of a series of these iterations between producer and consumer responses and
market adjustments until a stable market price equilibrium in which total market supply
equals total market demand (i.e., Qs = Qd).
This process for determining equilibrium price (and output) with the increased
production cost is modeled as a Walrasian auctioneer. 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 prices with the proposed regulation that equilibrate supply and demand for each
product.
The algorithm for deriving the post-compliance equilibria in all markets can be
generalized to five recursive steps:
1. Impose the control costs on each directly affected facility, thereby affecting their
supply decisions.
2. Recalculate the market supply of miscellaneous cellulose products.
3. Determine the new prices via the price revision rule for all product markets.
4. Recalculate the supply functions of all suppliers with the new prices, resulting in
a new market supply of miscellaneous cellulose products. Evaluate market
demand at the new prices.
5. Return to Step #3, resulting in new prices for miscellaneous cellulose products.
Repeat until equilibrium conditions are satisfied (i.e., the difference between
supply and demand is arbitrarily small for miscellaneous cellulose products).
A.4 Economic Welfare Impacts
The economic welfare implications of the market price and output changes with the
regulation can be examined using two different strategies, each giving a somewhat different
insight but the same implications: changes in the net benefits of consumers and producers
A-8
-------
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-3 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." 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-3, baseline equilibrium occurs at the intersection of the demand curve, D,
and supply curve, S. Price is Pl with quantity C^. 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-3(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,
Q2, while the triangular area represents the foregone surplus resulting from the reduced
quantity consumed, Q-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-3(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.
A-9
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0. Q,
Q/t
fa) Change in Consumer Surplus with Regulation
S/Q.
Q/t
jb} Change in Producer Surplus with Regulation
D
Q, Q. Q/t
{c) Net Change in Economic Welfare with Regulation
Figure A-3. Economic Welfare Changes with Regulation: Consumer and Producer
Surplus
A-10
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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-3(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-ll
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REFERENCES
Acordis. 1998. Akzo Nobel Annual Report 1998. p. 59-61.
"Cellulose." . As
obtained on January 3, 2000.
Chemical Market Reporter. 1997. "UCB to Buy Cellulose Film Plant from its Bankrupt
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Disclosure Incorporated. 1999. Worldscope [computer file]. Bethesda, MD: Disclosure
Incorporated.
Duschene, Stephanie. 1997. "Converter Casts a New Twist on Candy Wrap." Converting
Magazine 15(3): 110-114.
Gale Research. 1998. Ward's Business Directory of U.S. Private and Public Companies.
Gale Research. New York.
Hoover's Incorporated. 1999. Hoover's Company Profiles. Austin, TX: Hoover's
Incorporated, .
Hoover's Incorporated. 2000. Hoover's Company Profiles. Austin, TX: Hoover's
Incorporated, .
Information Access Corporation. 2000. Business & Company ProFile [computer file].
Foster City, CA: Information Access Corporation
InfoUSA Inc. 1999. American Business Disc. Omaha, NE.
Majewicz, Thomas G., and Thomas J. Podlas. 1993. "Cellulose Ethers." Kirk-Othmer
Encyclopedia of Chemical Technology, Fourth Edition. New York: John Wiley and
Sons.
Plastics World. 1995. "The Fundamentals of BOPP." Plastics World 53(8):35-37.
R-l
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Schmidtke, Karen, and Thomas Holloway. July 16, 1999. Memorandum to William
Schrock, EPA/ESD/OCG. Industry profile of miscellaneous cellulose manufacturing
facilities in the U.S.
U.S. Bureau of Labor Statistics. 2000. National Employment, Hours, and Earnings: EEU
30000004, 1990-98. [on-line] . Obtained February 14, 2000.
U.S. Environmental Protection Agency (EPA). EPA Survey Section 114 Responses.
U.S. Environmental Protection Agency (EPA). 1999. OAQPS Economic Analysis Resources
Document. Durham, NC. Innovative Strategies and Economics Group.
Westervelt, Robert. 1999. "Acordis, Lenzing, Discuss Venture." Chemical Week 161:16.
Winthrop Corporation. 2000. "Wright Investor's Service Corporate Information."
Bridgeport, CT. .
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO.
EPA-452/D-00-002
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Impact Analysis for the Proposed Miscellaneous
Cellulose Manufacturing Industry NESHAP
5. REPORT DATE
Prepared May 2000
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
8. PERFORMING ORGANIZATION REPORT NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
10. PROGRAM ELEMENT NO.
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group (MD-15)
Research Triangle Park, NC 27711
11. CONTRACT/GRANT NO.
68-D-99-024
12. SPONSORING AGENCY NAME AND ADDRESS
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 report - to be updated upon
promulgation of rule (if needed)
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
EPA is proposing a national emission standard for hazardous air pollutants (NESHAP) for facilities that
manufacture cellulose products. As a result of this NESHAP, facilities in the cellulose industry may incur
emission control costs. This report provides an analysis of the economic impact this NESHAP will have on
the industry.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS
c. COSATI Field/Group
Economic analysis
National emission standards for hazardous air
pollutants (NESHAP)
Air Pollution control
Cellulose
Hazardous air pollutants
18. DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
21. NO. OF PAGES
64
20. SECURITY CLASS (Page)
Unclassified
22. PRICE
EPA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE
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