# Economic Impact Analysis

Proposed Revisions to the National Emission Standards for Hazardous Air Pollutants Subpart S (MACT I and MACT III) for the Pulp and Paper Industry

December 2011

U.S. Environmental Protection Agency Office of Air and Radiation Office of Air Quality Planning and Standards Research Triangle Park, NC 27711ii CONTACT INFORMATION
This document has been prepared by staff from the O ffice of Air Quality Planning and Standards, U.S. Environmental Protection Agency. Qu estions related to this document should be addressed to Alexander Macpherson, U.S. Environment al Protection Agency, Office of Air Quality Planning and Standards, C445-B, Research Tr iangle Park, North Carolina 27711 (email: macpherson.alex@epa.gov ).

ACKNOWLEDGEMENTS

In addition to EPA staff from the Office of Air Qua lity Planning and Standards, personnel from RTI International contributed data a nd analysis to this document. Specific sections where RTI International made contributions include the industry profile and sections describing emissions, pollution control options, th e engineering cost analysis, and potential employment impacts.iii TABLE OF CONTENTS

T ABLE OF C ONTENTS .................................................. ................................................... ............... III L IST OF T ABLES .................................................. ................................................... ........................ IV L IST OF F IGURES .................................................. ................................................... ....................... V 1 E XECUTIVE S UMMARY .................................................. ................................................... ... 1-1
1.1 I NTRODUCTION

.................................................. ................................................... ....................................... 1-1 1.2 R ESULTS

.................................................. ................................................... ................................................. 1 -1 1.3 O RGANIZATION OF THIS R EPORT

.................................................. ................................................... ............. 1-2 2 I NDUSTRY P ROFILE .................................................. ................................................... ........ 2-1
2.1 I NTRODUCTION

.................................................. ................................................... ....................................... 2-1 2.2 S UPPLY AND D EMAND C HARACTERISTICS

.................................................. ................................................. 2 -4 2.2.1 Goods and Services Used in Paper Manufacturing ....

................................................... ..................... 2-4 2.2.2 Uses and Consumers ................................

................................................... ..................................... 2-10 2.3 F IRM AND M ARKET C HARACTERISTICS

.................................................. ................................................... . 2-10 2.3.1 Location ..........................................

................................................... .............................................. 2-11 2.3.2 Production Capacity and Utilization ...............

................................................... .............................. 2-11 2.3.3 Employment ........................................

................................................... .......................................... 2-12 2.3.4 Plants and Capacity ...............................

................................................... ........................................ 2-13 2.3.5 Firm Characteristics ..............................

................................................... ........................................ 2-13 2.3.6 Size Distribution .................................

................................................... .......................................... 2-15 2.3.7 Domestic Production................................

................................................... ..................................... 2-16 2.3.8 International Trade ...............................

................................................... ......................................... 2-17 2.3.9 Market Prices .....................................

................................................... ........................................... 2-17 3 R EGULATORY P ROGRAM C OST AND E MISSIONS R EDUCTIONS ......................................... 3-1
3.1 I NTRODUCTION

.................................................. ................................................... ....................................... 3-1 3.2 E MISSIONS , E MISSIONS P OINTS , E MISSIONS C ONTROLS , AND R EGULATORY O PTIONS ................................. 3-1 3.3 E STIMATED E MISSIONS R EDUCTIONS AND E NGINEERING C OST A NALYSIS

.................................................. 3-3 4 E CONOMIC I MPACT A NALYSIS .................................................. ......................................... 4-1
4.1 I NTRODUCTION

.................................................. ................................................... ....................................... 4-1 4.2 M ARKET A NALYSIS

.................................................. ................................................... ................................ 4-1 4.2.1 Market Analysis Methods ...........................

................................................... .................................... 4-2 4.2.2 Model Baseline ....................................

................................................... ........................................... 4-4 4.2.3 Model Parameters ..................................

................................................... ......................................... 4-6 4.2.4 Entering Estimated Annualized Engineering Complianc e Costs into Economic Model ................... 4-8 4.2.5 Model Results .....................................

................................................... .......................................... 4-11 4.2.6 Limitations .......................................

................................................... ............................................. 4-14 4.3 S MALL B USINESS I MPACTS A NALYSIS

.................................................. ................................................... .. 4-15 4.3.1 Small Business National Overview ..................

................................................... ............................ 4-15 4.3.2 Small Entity Economic Impact Measures .............

................................................... ........................ 4-17 4.3.3 Small Entity Economic Impact Analysis and Conclusio ns ................................................ .............. 4-18 4.4 E MPLOYMENT I MPACTS A NALYSIS

.................................................. ................................................... ....... 4-20 5 R EFERENCES .................................................. ................................................... ................... 5-1iv LIST OF TABLES

Table 2-1 Key Statistics: Paper Manufacturing (NAICS 322) ...

................................................... ...................... 2-1 Table 2-2 Industry Data: Paper Manufacturing (NAICS 322) ....

................................................... ..................... 2-2 Table 2-3 Costs of Goods and Services Used in the Paper Manuf acturing Industry (NAICS 322) .................... 2-6 Table 2-4 Key Goods and Services Used in the Paper Manufactur ing Industry (NAICS 322) ($millions, $2007)

2-7 Table 2-5 Energy Used in Paper Manufacturing (NAICS 322) ...

................................................... ................... 2-8 Table 2-6 Estimated Energy Sources for the U.S. Pulp and Pape r Industry ........................................ ............... 2-9 Table 2-7 Demand by Sector: Paper Manufacturing Industry (NAI CS 322) ($millions, $2007) ..................... 2- 10 Table 2-8 Largest U.S. Paper and Forest Products Companies: 2 006 ............................................... ............... 2-14 Table 2-9 Distribution of Economic Data by Enterprise Size: P aper Manufacturing (NAICS 322) ................ 2-1 5 Table 2-10 Small Business Size Standards: Paper Manufacturing (NAICS 322) ....................................... ........ 2-16 Table 3-1 Number of Mills Using Various Condensate Treatment Methods ........................................... .......... 3-3 Table 3-2 Regulatory Options, Affected Facilities, and Associ ated HAP Emission Reductions ...................... . 3-3 Table 3-3 Kraft Condensate Options: Estimated Costs, Emission s Reductions, and Cost Effectiveness (costs in

2010 dollars) .....................................

................................................... ............................................... 3-4 Table 3-4 Summary Nationwide Costs Emissions Reductions, and Cost Effectiveness (costs in 2010 dollars) 3-5 Table 4-1 Baseline Paper Market Data, 2010 (in 2010 dollars)

................................................... ....................... 4-5 Table 4-2 Products Used for Price Information ...............

................................................... ................................ 4-6 Table 4-3 Demand Elasticity Estimates .......................

................................................... .................................... 4-7 Table 4-4 Supply Elasticity Estimates .......................

................................................... ...................................... 4-8 Table 4-5 Estimated Annualized Engineering Compliance Costs b y Paper Product across Regulatory Options

(thousands 2010 dollars) ..........................

................................................... ....................................... 4-9 Table 4-6 Estimated Annualized Engineering Compliance Costs b y Paper Product across Regulatory Options,

after Redistributing Estimated Costs to Pulp Produc ers (thousands 2010 dollars) ...................... ..... 4-10 Table 4-7 Annualized Engineering Compliance Costs per Ton Pro duct Produced at National Level across

Regulatory Options (in 2010 dollars) ..............

................................................... .............................. 4-11 Table 4-8 Summary of Market Impacts (%) Across Products and R egulatory Option .................................. ... 4-12 Table 4-9 Change in Price and Quantity (#) across Products an d Regulatory Options (costs in 2010 dollars) 4-13 Table 4-10 Summary of Consumer and Producer Surplus Changes: 2 010 (in millions of 2010 dollars) ........... 4-14 Table 4-11 Number of Firms, Total Employment, and Estimated Sa laries ............................................ ............ 4-17 Table 4-12 Potentially Affected Small Entities: Employees and Sales, 2010........................................ ............. 4-19 Table 4-13 Estimated Annualized Engineering Costs for Potentia lly Affected Small Entities across Regulatory

Options (costs in 2010 dollars) ...................

................................................... ................................... 4-19 Table 4-14 Labor-based Employment Estimates for Operating and Maintaining Control Equipment

Requirements, Proposed NESHAP Options .............

................................................... ..................... 4-22v LIST OF FIGURES
Figure 2-1 Distribution of Value of Shipments within Paper Man ufacturing (NAICS 322): 2007 ..................... 2-4 Figure 2-2 Distribution of Employment within Paper Manufacturi ng (NAICS 322): 2007 .............................. .. 2-4 Figure 2-3 Electrical Power Use Trends in the Paper Manufactur ing Industry: 1997–2005 ........................... .... 2-9 Figure 2-4 Establishment Concentration in Paper Manufacturing Industry (NAICS 322): 2002 ...................... 2 -11 Figure 2-5 Capacity Utilization Trends in the Paper Manufactur ing Industry (NAICS 322) .......................... .. 2-12 Figure 2-6 Employment Concentration in the Paper Manufacturing Industry (NAICS 322): 2002 .................. 2-13 Figure 2-7 Capacity Trends in the Paper Manufacturing Industry (NAICS 322) ...................................... ........ 2-14 Figure 2-8 Industrial Production Trends in the Paper Manufactu ring Industry (NAICS 322): 1997–2009 ...... 2-17 Figure 2-9 International Trade Trends in the Paper Manufacturi ng Industry (NAICS 322) ........................... .. 2-18 Figure 2-10 Producer Price Trends in the Paper Manufacturing In dustry (NAICS 222) ................................ .... 2-181-1 1 EXECUTIVE SUMMARY

1.1 Introduction
EPA is performing a Risk and Technology Review (RTR ) that focuses on the National Emission Standards for Hazardous Air Pollutants (NE SHAP) Subpart S. Subpart S controls hazardous air pollutant (HAP) emissions from the pu lp and paper production areas of mills using the kraft, sulfite, semi-chemical, and soda pulp pr ocesses (MACT I) and HAP emissions from pulp and paper production areas of mills using mech anical, secondary fiber, and non-wood pulping, and papermaking systems at all mills (MACT III). As of this review, a total of 171 pulp and paper major sources are subject to MACT I and I II.

Under this proposal, affected pulp and paper facil ities will be required to implement control measures and absorb regulatory costs. As pa rt of the regulatory process, EPA is required to develop an economic impact analysis (EIA) and sm all entity impacts analysis for the potentially affected industries. This report docum ents the methods and results of this EIA.

1.2 Results
EPA estimates the program will result in very small increases in market prices and very small reductions in output of paper and paperboard products produced by the affected industries. The economic approach and engineering cost approach yield approximately the same estimate of the total change in surplus under the regulatory pr ogram. However, the economic approach identifies important distributional impacts among s takeholders. The key results of the EIA are as
follows:

• Engineering Cost Analysis: Total annualized engineering costs measure the cost s incurred by affected industries annually. The annua lized engineering costs for the proposed regulatory alternative are estimated to be $6.2 million in 2010 dollars.

• Market Analysis: The proposed option induces minimal changes in the average national price of paper and paperboard products. Paper and paperboard product prices increase less than 0.01% on average, while production levels decrease less that 0.01% on average, as a result of the proposed option.

• Economic Welfare Analysis: The economic analysis identifies important transito ry impacts across stakeholders as paper and paperboard product markets adjust to higher production costs. Consumers see reductions in econ omic welfare of about $3.3 million as the result of higher prices and reduced consumption . Although producers’ welfare losses1-2

are mitigated to some degree by higher prices, mark et conditions limit their ability to pass on all of the compliance costs. As a result, they a lso experience a loss in economic welfare of about $2.9 million.

• Small Business Analysis: EPA performed a screening analysis for impacts on s mall businesses by comparing estimated annualized engine ering compliance costs at the company-level to company sales. The screening anal ysis found that the ratio of compliance cost to company revenue falls below 1% f or the three small companies that are likely to be affected by the proposed option. B ased upon this analysis, we conclude there is no significant impact on a substantial num ber of small entities (SISNOSE) arising from the proposed NESHAP amendments.

• Employment Impact Analysis: EPA estimated the annual labor required to comply w ith the requirements of the proposal. To do this, EPA first estimated the labor required for emission control equipment operation and maintenanc e, as well as reporting and recordkeeping, then converted this number to full-t ime equivalents (FTEs) by dividing by 2,080 (40 hours per week multiplied by 52 weeks). The upfront (one-time) and ongoing, annual labor required for complying with the propos ed option is estimated at about 2.5 and 9.1 FTEs, respectively. EPA notes that this typ e of FTE estimate cannot be used to make assumptions about the specific number of peopl e involved or whether new jobs are created for new employees.

1.3 Organization of this Report
The remainder of this report details the methodolog y and the results of the EIA. Section 2 presents the industry profile of the papermaking industry. Section 3 describes the emissions points, controls, regulatory options evaluated in t he EIA, emissions reduction estimates, and engineering costs analysis. Section 4 presents the economic, small business, and employment impacts analyses. Section 5 lists references cited throughout the EIA.2-1 2 INDUSTRY PROFILE

2.1 Introduction

The paper manufacturing subsector is an essential c omponent of all business operations worldwide. Broadly speaking, paper and paperboard are manufactured by converting timber or other recycled material into products such as print ing and writing papers, newsprint, tissue, and containerboard (Benwart 2006). The subsector has b een experiencing a decline in shipments as of late. From 1997 to 2007, shipments in the indus try declined 7%, and employment declined by 27% (Table 2-1). While total payroll dropped 26% o ver this time, annual payroll per employee
rose 2% from 1997 to 2007 because of the decline in the number of employees (Table 2-2). Shipments per employee grew 28% from 1997 to 2007, with much of that growth taking place between 2002 and 2006 (Table 2-2).

Table 2-1 Key Statistics: Paper Manufacturing (NAIC S 322)

1997 2002 2006 2007 Shipments ($2007, millions) $188,496 $175,983 $174, 887 $175,806 Payroll ($2007, millions) $27,983 $24,561 $21,188 $ 20,804 Employees 574,274 489,367 414,049 416,886
Establishments 5,868 5,495 NA 4,803

NA = Not available. Sources: U.S. Census Bureau; generated by RTI Inter national; using American FactFinder; “Sector 31: An nual Survey of Manufactures: General Statistics: Statist ics for Industry Groups and Industries: 2006 and 20 05.” <http://factfinder.census.gov>; (July 8, 2008). U.S. Census Bureau; generated by RTI International ; using American FactFinder; “Sector 00: All Sector s: Core Business Statistics Series: Comparative Statis tics for the United States and the States (1997 NAI CS Basis): 2002 and 1997.” <http://factfinder.census.g ov>; (July 8, 2008). U.S. Census Bureau; generated by Kapur Energy and Environment; using American FactFinder; “Sector 00: EC0700A1: All Sectors: Geographic Area Series: Economy-Wide Key Statistics: 2007.” Accessed on December 28, 2009. [Source for 2007 numbers]2-2

Table 2-2 Industry Data: Paper Manufacturing (NAICS 322)

Industry Data 1997 2002 2006 2007 Total shipments ($2007, millions) $188,496 $175,983 $174,887 $175,806 Shipments per establishment ($2007, thousands) $32, 123 $32,026 NA $36,603 Average Shipments per employee ($2007) $328,233 $35 9,614 $422,381 $421,712 Average Shipments per $ of payroll ($2007) $6.74 $7 .17 $8.25 $8.45 Average Annual payroll per employee ($2007) $48,727 $50,189 $51,174 $49,904 Average Employees per establishment 98 89 NA 87

NA = Not available. Sources: U.S. Census Bureau; generated by RTI Inter national; using American FactFinder; “Sector 31: An nual Survey of Manufactures: General Statistics: Statist ics for Industry Groups and Industries: 2006 and 20 05.” <http://factfinder.census.gov>; (July 8, 2008). U.S. Census Bureau; generated by RTI International ; using American FactFinder; “Sector 00: All Sector s: Core Business Statistics Series: Comparative Statis tics for the United States and the States (1997 NAI CS Basis): 2002 and 1997.” <http://factfinder.census.g ov>; (July 8, 2008). U.S. Census Bureau; generated by Kapur Energy and Environment; using American FactFinder; “Sector 00: EC0700A1: All Sectors: Geographic Area Series: Economy-Wide Key Statistics: 2007.” <http://factfinder.census.gov>. Accessed on Decembe r 28, 2009. [Source for 2007 numbers]

The U.S. Census Bureau categorizes this industry’s facilities into two categories: pulp, paper, and paperboard manufacturing and converted p aper product manufacturing. These are further divided into the following types of facilit ies as defined by the U.S. Census Bureau (2001):

 Pulp, Paper, and Paperboard:

– Pulp Mills (NAICS 32211): This industry comprises e stablishments primarily engaged in manufacturing pulp without manufacturing paper or paperboard. The pulp is made by separating the cellulose fibers fro m the other impurities in wood or other materials, such as used or recycled rags, linters, scrap paper, and straw.

– Paper Mills (NAICS 32212): This industry comprises establishments primarily engaged in manufacturing paper from pulp. These est ablishments may manufacture or purchase pulp. In addition, the esta blishments may convert the paper they make. The activity of making paper class ifies an establishment into this industry regardless of the output.

– Paperboard Mills (NAICS 32213): This industry compr ises establishments primarily engaged in manufacturing paperboard from pulp. These establishments may manufacture or purchase pulp. In addition, the establishments may also convert the paperboard they make.2-3  Converted Paper Products:

– Paperboard Containers Manufacturing (NAICS 32221): This industry comprises establishments primarily engaged in converting pape rboard into containers without manufacturing paperboard. These establishme nts use corrugating, cutting, and shaping machinery to form paperboard into conta iners. Products made by these establishments include boxes; corrugated shee ts, pads, and pallets; paper dishes; and fiber drums and reels.

– Paper Bag and Coated and Treated Paper Manufacturin g (NAICS 32222): This industry comprises establishments primarily engaged in one or more of the following manufacturing activities: cutting and coa ting paper and paperboard; cutting and laminating paper and paperboard and oth er flexible materials (except plastics film to plastics film); bags or multiwall bags or sacks of paper, metal foil, coated paper, or laminates or coated combinations o f paper and foil with plastics film; laminated aluminum and other converted metal foils from purchased foils; and surface coating paper or paperboard.

– Stationary Product Manufacturing (NAICS 32223): Thi s industry comprises establishments primarily engaged in converting pape r or paperboard into products used for writing, filing, art work, and similar app lications.

– Other Converted Paper Products (NAICS 32229): This industry comprises establishments primarily engaged in one of the foll owing manufacturing activities:

• converting paper and paperboard into products (exce pt containers, bags, coated and treated paper and paperboard, and statio nery products), or

• converting pulp into pulp products, such as disposa ble diapers, or molded pulp egg cartons, food trays, and dishes.

Figure 2-1 shows that the value of shipments for co nverted paper products was 54% of the value of all paper products in 2007, while the value of shipments for pulp, paper, and paperboard products was 46%. Figure 2-2 indicates that 70% of industry employees worked in the converted paper product category of the industr y due to the labor intensive aspects of those
facilities.2-4

Figure 2-1 Distribution of Value of Shipments withi n Paper Manufacturing (NAICS 322): 2007 Source: U.S. Census Bureau; generated by Kapur Ener gy and Environment; using American FactFinder: “Sec tor 31: EC0731I1: Manufacturing: Industry Series: Detai led Statistics by Industry for the United States: 2 007.” Accessed on December 28, 2009.

Figure 2-2 Distribution of Employment within Paper Manufacturing (NAICS 322): 2007 Source: U.S. Census Bureau; generated by Kapur Ener gy and Environment; using American FactFinder; “Sec tor 31: EC0731I1: Manufacturing: Industry Series: Detai led Statistics by Industry for the United States: 2 007.” <http://factfinder.census.gov>. Accessed on Decembe r 28, 2009.

2.2 Supply and Demand Characteristics
Next, we provide a broad overview of the supply and demand sides of the paper manufacturing industry. We emphasize the economic interactions this industry has with other industries, identify the key goods and services use d by the industry, and identify the major uses and consumers of paper manufacturing products.

2.2.1 Goods and Services Used in Paper Manufacturing
In 2007, the cost of materials made up 53% of the t otal shipment value of goods in the paper manufacturing industry Table 2-3. Total comp ensation of employees represented 15% of PPP (3221) 46% CPP (3222) 54%

PPP (3221)

30%

CPP (3222) 70%2-5

the total value in 2007, down from 17% in 2005. Th e total number of employees decreased by 2% between 2005 and 2007. Meanwhile shipments incr eased by 3% over the same period.

The top 10 industry groups supplying inputs to the paper manufacturing subsector accounted for 70% of the total intermediate inputs according to 2008 Bureau of Economic Analysis (BEA) data (Table 2-4). Inputs for pulp, paper, and paperboard products are notably different from inputs for converted paper products because the NAICS 3221 group represents the initial step in the paper manufacturing process; th us, its inputs include more raw resources such as wood products, forestry and logging products, na tural gas, and electricity. This becomes evident when observing inputs for converted paper p roducts: 49% of the cost of inputs comes from pulp, paper, and paperboard products.

2.3.2.1.1 Energy

. The Department of Energy (DOE) categorizes paper m anufacturing (NAICS 322) as an energy-intensive subsector. The 2008 Annual Energy Outlook predicts that the paper-producing subsector will be one of four s ubsectors experiencing positive average growth of delivered energy consumption between 2006 and 2030 (U.S. Energy Information Administration 2008)

Energy generation from the recovery boiler is often insufficient for total plant needs, so facilities augment recovery boilers with fossil fue l–fired and wood waste–fired boilers (hogged fuel) to generate steam and often electricity. Ind ustry wide, the use of pulp wastes, bark, and other papermaking residues supplies 58% of the ener gy requirements of pulp and paper companies (U.S. Environmental Protection Agency 200 2).

Likewise, Table 2-5 shows that total energy use dec reased between 1998 and 2006 by 14%. Figure 2-3 indicates that total electrical p ower use changed sporadically between 2002 and 2004 but decreased consistently and rapidly aft er 2004.2-6

Table 2-3 Costs of Goods and Services Used in the P aper Manufacturing Industry (NAICS 322)
Variable 2005 Share 2006 Share 2007 Share Total shipments ($2007, millions) $171,477 100% $17 4,887 100% $176,018 100% Total compensation ($2007, millions) $28,846 17% $2 7,791 16% $27,150 15% Annual payroll $21,792 13% $21,188 12% $20,804 12% Fringe benefits $7,054 4% $6,603 4% $6,346 4% Total employees 426,748 414,049 417,367 Average compensation per employee $67,596 $67,121 $65,051 Total production workers wages ($2007, millions) $14,965 9% $14,689 8% $14,190 8%

Total production workers 331,228 321,684 321,937 Total production hours (thousands) 716,963 691,134 680,732 Average production wages per hour $21 $21 $21 Total cost of materials ($2007, thousands) $91,897 54% $92,452 53% $94,029 53% Materials, parts, packaging $77,494 45% $78,202 45% $79,984 45% Purchase electricity $3,788 2% $3,841 2% $3,780 2% Purchased fuel ($2007) $5,537 3% $5,509 3% $5,511 3 % Other $5,078 3% $4,901 3% $4,755 3%
Sources: U.S. Census Bureau; generated by RTI Inter national; using American FactFinder; “Sector 31: An nual Survey of Manufactures: General Statistics: Statist ics for Industry Groups and Industries: 2006 and 20 05.” <http://factfinder.census.gov>; (July 8, 2008). U.S. Census Bureau; generated by Kapur Energy and Environment; using American FactFinder; “Sector 31: EC0731I1: Manufacturing: Industry Series: Detai led Statistics by Industry for the United States: 2 007.” <http://factfinder.census.gov>. Accessed on Decembe r 28, 2009. [Source for 2007 numbers]2-7

Table 2-4 Key Goods and Services Used in the Paper Manufacturing Industry (NAICS 322) ($millions, $2007)

Description BEA Code NAICS 3221 Pulp, Paper, and Paperboard NAICS 3222

Converted Paper Products Total Pulp, paper, and paperboard 3221 $4,155 $30,448 $34 ,603 Wholesale trade 4200 $3,916 $6,356 $10,273 Management of companies and enterprises 5500 $3,154 $3,838 $6,993 Forestry and logging products 1130 $5,389 $0 $5,389 Basic chemicals 3251 $3,734 $263 $3,997 Electric power generation, transmission, and distribution 2211 $2,690 $913 $3,603

Wood products 3210 $3,450 $33 $3,484 Converted paper products 3222 $1,415 $1,745 $3,159 Natural gas distribution 2212 $2,680 $345 $3,026 Truck transportation 4840 $1,428 $1,571 $2,999 Total intermediate inputs T005 $47,835 $62,690 $110 ,525
Source: U.S. Bureau of Economic Analysis (BEA). 200 8. “2002 Benchmark Input-Output Accounts: 2002 Standard Make and Use Tables at the Summary Level.” Table 2. Washington, DC: BEA.2-8

Table 2-5 Energy Used in Paper Manufacturing (NAIC S 322)

Fuel Type 1998 2002 2006 Net electricity a (million kWh) 70,364 65,503 72,518 Residual fuel oil (million bbl) 24 16 15
Distillate fuel oil b (million bbl) 2 2 2 Natural gas c (billion cu ft) 570 490 461
LPG and NGL d (million bbl) 1 2 1 Coal (million short tons) 12 11 10 Coke and breeze (million short tons) — * —
Other e (trillion BTU) 1,476 1,276 1,303 Total (trillion BTU) 2,744 2,361 2,354

a Net electricity is obtained by summing purchases, t ransfers in, and generation from noncombustible ren ewable resources, minus quantities sold and transferred ou t. It does not include electricity inputs from on-s ite cogeneration or generation from combustible fuels b ecause that energy has already been included as gen erating fuel (for example, coal).
b Distillate fuel oil includes Nos. 1, 2, and 4 fuel oils and Nos. 1, 2, and 4 diesel fuels.

c Natural gas includes natural gas obtained from uti lities, local distribution companies, and any other supplier(s), such as independent gas producers, gas brokers, mar keters, and any marketing subsidiaries of utilities

. d Examples of liquefied petroleum gases (LPG) are et hane, ethylene, propane, propylene, normal butane, butylene, ethane-propane mixtures, propane-butane mixtures, a nd isobutene produced at refineries or natural gas processing plants, including plants that fractionate raw natur al gas liquids (NGLs).

e Other includes net steam (the sum of purchases, ge neration from renewables, and net transfers), and o ther energy that respondents indicated was used to produce heat and power.
* Estimate less than 0.5. Sources: U.S. Department of Energy, Energy Informat ion Administration. 2007. “2002 Energy Consumption by Manufacturers—Data Tables.” Tables 3.2 and N3.2. <h ttp://www.eia.doe.gov/emeu/mecs/mecs2002/ data02/shelltables.html>. Washington, DC: DOE. U.S. Department of Energy, Energy Information Admi nistration. 2007b. “2006 Energy Consumption by Manufacturers—Data Tables.” Table 3.1. <http://www. eia.doe.gov/emeu/mecs/mecs2006/ 2006tables.html>. Accessed on December 27, 2009. [S ource for 2006 numbers]

Over the last 25 years, the pulp and paper subsecto r has changed its energy generation methods from fossil fuels to a greater use of proce sses such as increases in the use of wood wastes in place of fuel (Table 2-6). During the 19 72–1999 period, the proportion of total industry power generated from the combination of wo od wastes, spent liquor solids, and other self-generated methods increased from about 41% to about 56%, while coal, fuel oil, and natural gas use decreased from about 54% to about 36% (U.S. Environmental Protection Agency 2002).2-9

Figure 2-3 Electrical Power Use Trends in the Paper Manufacturing Industry: 1997– 2005
Source: Federal Reserve Board. 2009. “Industrial Pr oduction and Capacity Utilization: Electric Power U se: Manufacturing and Mining.” Series ID: G17/KW/KW.GMF .S & G17/KW/KW.G322.S. <http://www.federalreserve.gov/datadownload/>.

Table 2-6 Estimated Energy Sources for the U.S. Pul p and Paper Industry Energy Source 1972 1979 1990 1999

Purchased steam 5.4% 6.7% 7.3% 1.5%

Coal 9.8% 9.1% 13.7% 12.5%

Fuel oil 22.3% 19.1% 6.4% 6.3% Natural gas 21.5% 17.8% 16.4% 17.6% Other purchased energy — — — 6.7% Waste wood and wood chips (hogged fuel) and bark 6.6% 9.2% 15.4% 13.5%

Spent liquor solids 33.7% 37.3% 39.4% 40.3% Other self-generated power 0.6% 0.8% 1.2% 1.6%
Source: U.S. Environmental Protection Agency. 2002 . “Profile of the Pulp and Paper Industry.” Sector Notebook Project. <http://www.epa.gov/Compliance/resources/p ublications/assistance/sectors/notebooks/ index.html>. 90 92 94 96 98 100 102 104 106 108Jan-97Jul-97Jan-98Jul-98Jan-99Jul-99Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Index Value (Jan-97=100)

Manufacturing Paper2-10

2.2.2 Uses and Consumers Products manufactured in the NAICS groups 3221 and 3222 have different, but complementary, consumer profiles. NAICS 3221 suppl ies a significant portion of NAICS 3222 demand (37% of total commodity output). Both indus tries specialize in products with intermediate uses, with an average of 92% of sales between the two going toward this purpose. NAICS 3222 has a very diverse assortment of subsect or groups from which it receives demand. Food manufacturing makes up 21% of the demand, maki ng members of this industry the largest consumer of converted paper products (Table 2-7). Pulp, paper, and paperboard products have a large trade deficit, while converted paper products have a very small trade surplus.

Table 2-7 Demand by Sector: Paper Manufacturing Ind ustry (NAICS 322) ($millions, $2007)

Sector BEA Code 3221 Pulp, Paper, and Paperboard 3222

Converted Paper Products Total Converted paper product manufacturing 3222 $30,448 $1,745 $32,193 Food manufacturing 3110 $638 $18,782 $19,421 Printing and related support activities 3230 $13,32 0 $3,874 $17,194 General state and local government services S007 $6,065 $7,792 $13,857

Pulp, paper, and paperboard mills 3221 $4,155 $1,41 5 $5,569 Newspaper, periodical, book, and directory publishers 5111 $4,851 $168 $5,018

Plastics and rubber products manufacturing 3260 $1,249 $3,403 $4,651

Wholesale trade 4200 $990 $2,619 $3,609 Food services and drinking places 7220 $1,510 $2,59 7 $4,107 Total intermediate use T001 $76,729 $80,862 $157,59 1 Personal consumption expenditures F010 $11,882 $9,2 95 $21,177 Exports of goods and services F040 $7,724 $5,799 $1 3,523 Imports of goods and services F050 −$15,284 −$5,720 −$21,005 Total final uses (GDP) T004 $4,996 $9,607 $14,604 Total commodity output T007 $81,725 $90,469 $172,19 5
Source: U.S. Bureau of Economic Analysis (BEA). 200 8. “2002 Benchmark Input-Output Accounts: 2002 Standard Make and Use Tables at the Summary Level.” Table 2. Washington, DC: BEA.

2.3 Firm and Market Characteristics This section describes geographic, production, and market data. These data provide the basis for further analysis, and depict recent histo rical trends of production and pricing.2-11

2.3.1 Location
As Figure 2-4 illustrates, as of 2002, California w as home to the most paper manufacturing establishments in the United States, followed by Illinois and some bordering
northeastern states. The location of establishment s in the paper manufacturing industry varies a great deal by subsector. Wisconsin and New York ha d the most pulp, paper, and paperboard establishments, while California dominated with ove r 500 converted paper product establishments. Overall, as of 2002, the United St ates had 561 pulp, paper, and paperboard establishments and 4,956 converted paper product es tablishments.

Figure 2-4 Establishment Concentration in Paper Man ufacturing Industry (NAICS 322): 2002 Source: U.S. Census Bureau; generated by RTI Intern ational; using American FactFinder; “Sector 31: Manufacturing: Geographic Area Series: Industry Sta tistics for the States, Metropolitan and Micropolit an Statistical Areas, Counties, and Places: 2002.” <ht tp://factfinder.census.gov>; (July 23, 2008).

2.3.2 Production Capacity and Utilization Capacity utilization of the paper manufacturing sub sector has been experiencing a steady decline, similar to the decline of the total manufa cturing sector. However, paper manufacturing has managed to use its capacity at a consistently h igher rate than the average for manufacturing industries (Figure 2-5).

Establishments
Fewer than 50
50 - 99
100 - 199
200 - 300
More than 3002-12

Figure 2-5 Capacity Utilization Trends in the Paper Manufacturing Industry (NAICS 322)
Source: Source: Federal Reserve Board. 2009. “Indus trial Production and Capacity Utilization: Capacity Utilization.” Series ID: G17/CAPUTL/CAPUTL.GMF.S & G17/CAPUTL/CAPUTL.G322.S. <http://www.federalreserve.gov/datadownload/>.

2.3.3 Employment Wisconsin has the largest number of employees in th e paper manufacturing subsector with over 38,008 reported in the 2002 census follow ed by 29,379 in California (Figure 2-6). The converted paper products group has more employees p er establishment, 283, than the pulp, paper, and paperboard group, 67.

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Jan-97Jul-97Jan-98Jul-98Jan-99Jul-99Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Percentage Capacity Utilization

Manufacturing Paper (NAICS 322)2-13

Figure 2-6 Employment Concentration in the Paper Ma nufacturing Industry (NAICS 322): 2002 Source: U.S. Census Bureau; generated by RTI Intern ational; using American FactFinder; “Sector 31: Manufacturing: Geographic Area Series: Industry Sta tistics for the States, Metropolitan and Micropolit an Statistical Areas, Counties, and Places: 2002.” <ht tp://factfinder.census.gov>; (July 23, 2008).

2.3.4 Plants and Capacity
While the manufacturing sector has been growing con sistently since 1997, the paper manufacturing sector has not experienced the same a mount of success in the same period. Despite a small amount of growth in capacity betwee n 1997 and 2001, the paper manufacturing subsector’s capacity has declined to as much as 7% below 1997 capacity levels (Figure 2-7).

2.3.5 Firm Characteristics
In 2006, the top 10 paper and forest product compan ies produced over $75 billion in sales, with the top two companies—International Pap er and Weyerhaeuser—generating nearly $22 billion each (Figure 2-8). The top two compani es’ revenue consists of 58% of the revenue of the top 10 companies in Standard & Poor’s (S&P’s ) list (Benwart 2006). Although these numbers do not exclusively reflect paper products, they do convey the market environment in which firms in this sector compete.

Employment Fewer than 3,000 3,000 - 5,999 6,000 - 11,999 12,000 - 24,000 More than 24,0002-14

Figure 2-7 Capacity Trends in the Paper Manufacturi ng Industry (NAICS 322) Source: Federal Reserve Board. 2009. “Industrial P roduction and Capacity Utilization: Industrial Capa city.” Series ID: G17/CAP/CAP.GMF.S & G17/CAP/CAP.G322.S. <http:/ /www.federalreserve.gov/datadownload/>.

Table 2-8 Largest U.S. Paper and Forest Products Co mpanies: 2006 Company Revenues ($millions) a International Paper 21,995 Weyerhaeuser 21,896
Smurfit-Stone 7,157
MeadWestvaco 6,530 Temple-Inland 5,558

Bowater 3,530
Grief Inc. 2,628
Louisiana-Pacific 2,235 Packaging Corp. 2,187
Plum Creek 1,627

a Includes revenues from operations other than paper and forest products in certain cases. Sources: Benwart, S.J. 2006. “Paper & Forest Produc ts. Standard and Poor’s Industry Surveys.” 176(28). U.S. and international sales data from company rep orts.

90 100 110 120 130 140 1501997-011997-071998-011998-071999-011999-072000-012000-072001-012001-072002-012002-072003-012003-072004-012004-072005-012005-072006-012006-072007-012007-072008-012008-072009-012009-07Index Value (Jan-97=100)

Manufacturing Paper (NAICS 322)2-15

2.3.6 Size Distribution
The primary criterion for categorizing a business a s small is the number of employees, using definitions by the SBA for regulatory flexibi lity analyses. According to SUSB reports for 2002, large companies dominated revenue-generating transactions in the paper manufacturing subsector; 80% of receipts were generated by compan ies with 500 employees or more (Table 2-9). This was especially true in the pulp, paper, and paperboard group, in which large companies generated 92% of receipts. The number of employees in the small business cutoff varies according to six-digit NAICS codes (Table 2- 10). The cutoff for all subsectors in the pulp, paper, and paperboard group is 750 employees, while the cutoff for most converted paper product groups is 500 employees.

Table 2-9 Distribution of Economic Data by Enterpri se Size: Paper Manufacturing (NAICS 322)

Enterprises with

Variable Total 1 to 20 Employees a 20 to 99

Employees 100 to 499

Employees 500 to 749

Employees 750 to 999

Employees 1,000 to

1,499 Employees

Firms 3,538 1,482 1,200 476 43 22 33
Establishments 5,546 1,488 1,271 755 83 69 138 Employment 495,990 11,325 52,334 78,402 13,293 12,496 23,283 Receipts ($millions ) $154,746 $2,218 $9,483 $17,620 $3,034 $3,951 $6,798 Receipts/firm ($thousands) $43,738 $1,497 $7,903 $37,017 $70,561 $179,577 $206,001 Receipts/establishment ($thousands) $27,902 $1,491 $7,461 $23,338 $36,556 $57,256 $49,261 Receipts/employment ($) $311,994 $195,850 $181,203 $224,742 $228,250 $316,157 $291,974

a Excludes SUSB employment category for zero employee s. These entities only operated for a fraction of t he year.
Source: U.S. Census Bureau. 2008. “Firm Size Data f rom the Statistics of U.S. Businesses: U.S. Detail Employment Sizes: 2002.” <http://www.census.gov/csd /susb/download_susb02.htm>.2-16

Table 2-10 Small Business Size Standards: Paper Man ufacturing (NAICS 322) NAICS NAICS Description Employees 322110 Pulp Mills 750 322121 Paper (except Newsprint) Mills 750 322122 Newsprint Mills 750 322130 Paperboard Mills 750 322211 Corrugated and Solid Fiber Box Manufacturing 500 322212 Folding Paperboard Box Manufacturing 750 322213 Setup Paperboard Box Manufacturing 500 322214 Fiber Can, Tube, Drum, and Similar Products Manufacturing 500 322215 Non-Folding Sanitary Food Container Manufact uring 750 322221 Coated and Laminated Packaging Paper Manufac turing 500 322222 Coated and Laminated Paper Manufacturing 500 322223 Coated Paper Bag and Pouch Manufacturing 500 322224 Uncoated Paper and Multiwall Bag Manufacturi ng 500 322225 Laminated Aluminum Foil Manufacturing for Fl exible, Packaging

Uses 500

322226 Surface-Coated Paperboard Manufacturing 500 322231 Die-Cut Paper and Paperboard Office Supplies , Manufacturing 500 322232 Envelope Manufacturing 500 322233 Stationery, Tablet, and Related Product Manu facturing 500 322291 Sanitary Paper Product Manufacturing 500 322299 All Other Converted Paper Product Manufactur ing 500
Source: U.S. Small Business Administration (SBA). 2 008. “Table of Small Business Size Standards Matche d to North American Industry Classification System Codes .” Effective August 22, 2008. <http://www.sba.gov/services/contractingopportuniti es/sizestandardstopics/size/index.html>.

2.3.7 Domestic Production
Similar to industry capacity rates, subsector produ ction rates for paper manufacturing have witnessed a decreasing rate of production comp ared to the steady increase in production for the manufacturing sector since 1997 (Figure 2-8). It seems that the paper manufacturing sector was not able to return to its former levels of grow th following the 2001 recession; it has experienced a downward production trend since then.2-17

Figure 2-8 Industrial Production Trends in the Pape r Manufacturing Industry (NAICS 322): 1997–2009
Source: Federal Reserve Board. 2009. “Industrial Pr oduction and Capacity Utilization: Industrial Produ ction.” Series ID: G17/IP_MAJOR_INDUSTRY_GROUPS/IP.GMF.S & G17/IP_MAJOR_INDUSTRY_ GROUPS/IP.G322.S. <http://www.federalreserve.gov/da tadownload/>.

2.3.8 International Trade
Since 1997, paper manufacturing products, both pulp , paper, and paperboard products and converted paper products, have contributed to a n increasing trade surplus in this sector (Figure 2-9). Imports and exports have been changi ng at similar rates since 1999.

2.3.9 Market Prices
Prices of goods in paper manufacturing have been in creasing at a rate consistent with all manufacturing products (Figure 2-10). Producer pri ce indices (PPIs) show that producer prices for paper in 2007 increased by 20% since 1997, whil e producer prices for all manufacturing goods increased by roughly 27%. 90 100 110 120 130 140 1501997-011997-071998-011998-071999-011999-072000-012000-072001-012001-072002-012002-072003-012003-072004-012004-072005-012005-072006-012006-072007-012007-072008-012008-072009-012009-07Index Value (Jan-97=100)

Manufacturing Paper (NAICS 322)2-18

Figure 2-9 International Trade Trends in the Paper Manufacturing Industry (NAICS 322)
Source: U.S. International Trade Commission. 2008b. “U.S. Total Exports” & “U.S. Imports for Consumpti on.” <http://dataweb.usitc.gov/scripts/user_set.asp>.

Figure 2-10 Producer Price Trends in the Paper Manu facturing Industry (NAICS 222) Source: U.S. Bureau of Labor Statistics (BLS). 2009 . “Producer Price Index.” Series ID: PCU322–322– & PCUOMFG–OMFG–. <http://www.bls.gov/ppi/home.htm>. 0 5,000 10,000 15,000 20,000 25,000 30,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007$1,000,000 (2007)

Year
Paper Exports Paper Imports

75 85 95 105 115 125 135Jan-97Jul-97Jan-98Jul-98Jan-99Jul-99Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Index Value (Jan-97=100)

Manufacturing Paper (NAICS 322)3-1

3 REGULATORY PROGRAM COST AND EMISSIONS REDUCTIONS

3.1 Introduction
This Risk and Technology Review (RTR) focuses on t he National Emission Standards for Hazardous Air Pollutants (NESHAP) Subpart S. Subpar t S controls hazardous air pollutant (HAP) emissions from the pulp and paper production areas of mills using the kraft, sulfite, semichemical, and soda pulp processes (MACT I) and HAP emissions from pulp and paper production areas of mills using mechanical, seconda ry fiber, and non-wood pulping, and papermaking systems at all mills (MACT III). As of this review, a total of 171 pulp and paper major sources are subject to MACT I and III.

Under this proposal, affected pulp and paper facil ities will be required to implement control measures and absorb regulatory costs. This section presents the emission and emission points addressed in this RTR proposal, as well as t he controls, regulatory options evaluated in the EIA, estimated emission reductions, and the enginee ring cost analysis associated with each regulatory option.

3.2 Emissions, Emissions Points, Emissions Controls, an d Regulatory Options
Even though MACT I and MACT III controls HAP emiss ions from a wide variety of pulp and paper processes, the proposed RTR standard s will primarily affect HAP emissions from
kraft condensates at kraft mills. Kraft mills are those that use an alkaline cooking liquor of sodium hydroxide (NaOH) and sodium sulfide (Na 2 S) to digest wood. Kraft pulping condensates are HAP-containing liquids that condense from pulpi ng system vent streams. These HAPcontaining liquids result from the contact of organ ic compounds in the pulping process with
water or steam that condenses. HAP emissions from kraft condensates are primarily organic HAPs like methanol, acetaldehyde, and formaldehyde. Limiting HAP emissions from these kraft
condensates will also reduce HAP emissions from the handling and reuse of these liquids and
from wastewater treatment. Of the 171 major sources subject to Subpart S, 97 m ills are currently operating as kraft pulping facilities and currently subject to the kraft condensates standards under Subpart S.3-2

The current kraft condensate standard under Subpar t S and Effluent Guideline standards require facilities to either 1) recycle the condens ates back through systems controlled under lowvolume, high-concentration (LVHC) or high volume, l ow concentration (HVLC) requirements in the pulp mill or 2) remove 92% by weight of the con densates through steam stripping and incineration or biological control in a Wastewater Treatment System (hardpiping option). Because of other process considerations, kraft mill s generally chose the 92% control option for compliance demonstration for kraft condensates rath er than recycling.

For this EIA, we analyze three regulatory options for the Subpart S RTR:

Option 1: repeat air emission performance testing and retain current kraft condensate standards of 92% control Option 2 (proposed option): tightening the kraft condensate standards from 92% control option to 94% and repeat air emission performance testing
Option 3: tightening the kraft condensate standards from 92% control option to 98% and repeat air emission performance testing.
Option 1, the repeat air emissions performance tes ting option, would require air emission performance testing once every five years for facil ities complying with the standards for kraft, soda, and semichemical pulping vent gases, sulfite processes, and bleaching systems. Under this testing option, repeat air emissions testing would be required for mills complying with the kraft condensate standards using a steam stripper (or oth er equipment serving the same function) since such equipment is, by definition, part of the low-v olume, high-concentration (LVHC) gas collection system. The EPA is not considering addit ional repeat testing for biological treatment systems to comply with the kraft pulping condensate standards because more frequent quarterly sampling is already required for biological treatme nt systems. The EPA is also not considering additional repeat testing for facilities complying with the clean condensate alternative (CCA) standards due to the complexity of this compliance approach.

Options 2 and 3 would require repeat air emissions performance testing as in Option 1, but would additionally require kraft mills to furth er reduce total HAP emissions from the kraft condensates. Option 2 would require 94% total HAP control, while Option 3 would require 98%
total HAP control from kraft condensates. Various treatment methods are currently used to
reduce total HAP emissions from kraft condensates to 92% or more. Reducing total HAPs3-3

emissions from 92% to 94% or 98% will require some facilities to upgrade or replace their existing control equipment. Table 3-1 presents the various condensate treatment methods currently used by kraft mills.

Table 3-1 Number of Mills Using Various Condensate Treatment Methods

Treatment Method No. of Facilities Biotreatment 39 Recycle 5 Stripping or stripping/recycle 43 Stripping and biotreatment 9 Thermal incinerator 1 Total 97

3.3 Estimated Emissions Reductions and Engineering Cost Analysis

Table 3-2 presents the regulatory options under an alysis in the EIA and the number of
affected facilities and the associated emission red uctions under each regulatory option.

Table 3-2 Regulatory Options, Affected Facilities, and Associated HAP Emission Reductions

Option Regulatory

Control Option No. of Facilities Affected Nation-wide HAP Reduction (ton/yr) Option 1 Repeat air emission testing 114 0

Option 2 (proposed) Tightening the kraft condensate

standards from 92% to 94% and repeat air emission testing Kraft condensate 15 Repeat Testing 114 4,090
Option 3 Tightening the kraft condensate

standards from 92% to 98% and repeat air emission testing Kraft condensate 66 Repeat Testing 114 12,300

Each regulatory option requires repeat emission tes ting. No emission reductions are expected from this repeat testing requirement. How ever, it stands to reason that repeat testing would provide incentive for facilities to maintain their control systems and make periodic adjustments to ensure peak performance, thereby red ucing emissions and the potential for periodic episodes of acute risk. A total of 114 fa cilities will be affected by this requirement based on the number of chemical pulp mills and mill s that bleach with chlorinated compounds.3-4

Nationwide capital cost for repeat emission testing is estimated to be $5.4 million while the annualized cost is estimated to be $1.3 million per year.
Under Options 2 and 3, some kraft facilities would need to upgrade or replace existing control equipment. Option 2 would require 15 facili ties to reduce their total HAP from kraft condensates from 92 to 94%. Per the Pulp and Paper survey data, 82 kraft mills are currently achieving 94% emissions control. Option 3 will requ ire 66 facilities to reduce their total HAP from kraft condensates from 92 to 98%. Per the Pulp and Paper survey data, 31 kraft mills are currently achieving 98% emissions control.

Table 3-3 presents the estimated emission reductio ns from kraft condensates across regulatory options. The estimated emission reducti ons for Options 2 and 3 includes incremental emission reductions already achieved in practice fr om mills exceeding the current standard since
these emission reductions would now be required through a change in the existing regulatory
limit.

Table 3-3 Kraft Condensate Options: Estimated Costs , Emissions Reductions, and Cost Effectiveness (costs in 2010 dollars)

No. of Facilities Affected Engineering

Capital Costs (millions) Engineering

Annualized Costs (millions) HAP Reductions

(tons per year) Option 1 0 0 0 0 Option 2 (proposed) 15 $36.2 $4.1 4,090
Option 3 66 $297.0 $33.7 12,300

Table 3-4 summarizes estimated total engineering co sts, emissions, reductions, and HAP reduction cost-effectiveness across the three regul atory options. This table includes additional reporting and recordkeeping expenses estimated to b e required of affected firms. Capital costs and annualized cists for reporting and recordkeepin g are estimated at $4,344 and $6,516 per affected facility, respectively. For the 114 affec ted firms, total national capital and annualized reporting and recordkeeping costs are estimated at $0.5 million and $0.7 million, respectively.3-5

Table 3-4 Summary Nationwide Costs Emissions Reduct ions, and Cost Effectiveness (costs in 2010 dollars)

Engineering Capital Costs (millions) Engineering

Annualized Costs (millions) Estimated HAP

Emissions Reductions Cost Effectiveness

($/ton) Option 1 $5.9 $2.1 0 N/A Option 2 (proposed) $42.1 $6.2 4,090 1,516
Option 3 $302.9 $35.7 12,300 2,9064-1 4 ECONOMIC IMPACT ANALYSIS

4.1 Introduction

The EIA is designed to inform decision makers about the potential economic consequences of a regulatory action. For the current proposed r ulemaking, EPA performed a partialequilibrium analysis of national pulp and paper pro duct markets to estimate potential paper product market and consumer and producer welfare im pacts of the regulatory alternatives. This section also presents the analysis used to support the conclusion that EPA anticipates there will be no Significant Impact on a Substantial Number of Small Entities (SISNOSE) arising from the proposed NESHAP amendments. The section concludes with estimates of the initial and annual labor required to comply with the regulatory altern atives.

4.2 Market Analysis

EPA performed a series of single-market partial-equ ilibrium analyses of national pulp and paper product markets to measure the economic conse quences of the regulatory options. With the basic conceptual model described below, we esti mated how the regulatory program affects prices and quantities for ten paper and paperboard products that, aggregated, constitute the production of the industry. We also conducted an e conomic welfare analysis that estimates the consumer and producer surplus changes associated wi th the regulatory program. The welfare analysis identifies how the regulatory costs are di stributed across two broad classes of stakeholders: consumers and producers.

While a series of partial equilibrium models was us ed to analyze the economic impacts of this proposal, EPA notes that it is currently devel oping the Industrial Sectors Integrated Solution Model (ISIS) for the U.S. pulp and paper industry. When completed, the ISIS model for the pulp and paper industry will be a dynamic engineering-ec onomic model that facilitates analysis of emission reduction strategies for multiple pollutan ts, while taking into account plant-level economic and technical factors such as the type of mill, associated capacity, location, cost of production, applicable controls, and costs. By con sidering various emission reduction strategies,4-2

the model when completed will provide information o n optimal industry operation and determine
the most cost-effective controls to meet the demand for pulp and paper products and the emission reduction requirements for a given time period of i nterest.

4.2.1 Market Analysis Methods

The models use a common analytic expression to anal yze supply and demand in a single market (Berck and Hoffmann 2002; Fullerton and Metc alf 2002) and follows EPA guidelines for conducting an EIA (U.S. Environmental Protection Ag ency 2010). We illustrate our approach for estimating market-level impacts using a simple, single partial equilibrium model. The method involves specifying a set of nonlinear suppl y and demand relationships for the affected market, simplifying the equations by transforming t hem into a set of linear equations, and then solving the equilibrium system of equations (see Fu llerton and Metcalfe (2002) for an example).

First, we consider the formal definition of the ela sticity of supply, q s , with respect to changes in own price, p , where
s 

### ε represents the market elasticity of supply:

/ / s s
s dq q dp p ε = (4.1)

Next, we can use “hat” notation to transform Eq. 1 to proportional changes and rearrange terms:



### ˆ ˆ
s s 

### q p 

### ε = (4.1a)

where 

### ˆ
s 

### q equals the percentage change in the quantity of mar ket supply, and 

### p ˆ equals the percentage change in market price. As Fullerton an d Metcalfe (2002) note, we have taken the elasticity definition and turned it into a linear b ehavioral equation for the market we are analyzing.

To introduce the direct impact of the regulatory pr ogram, we assume the per-unit cost associated with the regulatory program, c , leads to a proportional shift in the marginal cos t of production  

# ( ) mc . The per-unit costs are estimated by dividing the total estimated annualized
engineering costs accruing to producers within a gi ven product market by the baseline national4-3

production in that market. Under the assumption of perfect competition (e.g. price equaling marginal cost), we can approximate this shift at th e initial equilibrium point as follows:



0 0 c c mc mc p = = . (4.1b)

The with-regulation supply equation can now be writ ten as



###  ˆ ˆ ( )
s s 

### q p mc 

### ε = − . (4.1c)

Next, we can specify a demand equation as follows:



### ˆ ˆ d d 

### q p 

### η = (4.2)

where



### ˆ d 

### q = percentage change in the quantity of market dema nd,

d 

### η = market elasticity of demand, and


### p ˆ = percentage change in market price.
Finally, we specify the market equilibrium conditio ns in the affected market. In response to the exogenous increase in production costs, prod ucer and consumer behaviors are represented in Eq. 4-1a and Eq. 4-2, and the new equilibrium sa tisfies the condition that the change in supply equals the change in demand:



### ˆ ˆ s d 

### q q = . (4.3)

We now have three linear equations in three unknown s ( 

### p ˆ
, 

### ˆ d 

### q , and 

### ˆ
s 

### q ), and we can solve for the proportional price change in terms of the elasticity parameters (
s



### ε and d 

### η ) and the proportional change in marginal cost:


## (  

# )



 ˆ ˆ

ˆ ˆ

ˆ ˆ s d

s s d

s d s p mc p

p mc p
p p mc ε η

ε ε η
ε η ε − =

− =

− = (4.4)4-4

Given this solution, we can solve for the proportio nal change in market quantity using Eq. 4-2.

The change in consumer surplus in the affected mark et can be estimated using the following linear approximation method:


## ( ) ( ) 1 0.5 cs q p q p ∆ = − × + × ∆ × ∆ (4.5)

where 1 

### q equals with-regulation quantities produced. As sh own, higher market prices and reduced consumption lead to welfare losses for cons umers.
For affected supply, the change in producer surplus can be estimated with the following equation:


## ( ) ( ) ( ) 

## ( ) 1 1 0.5 ps q p q c q p c ∆ = × ∆ − × − × ∆ × ∆ − . (4.6)

Increased regulatory costs and output declines have a negative effect on producer surplus, because the net price change 

## ( ) p c ∆ − is negative. However, these losses are mitigated, t o some degree, as a result of higher market prices.

4.2.2 Model Baseline

Standard EIA practice compares and contrasts the st ate of a market with and without the regulatory policy. EPA selected 2010 as the baseli ne year for the analysis and collected pulp and paper production and price data for this year from the American Forest Products Association and RISI, Inc., respectively. The figures cited were o btained from RISI Inc.’s PPI Pulp and Paper
Week. Baseline data are reported in Table 4-1.4-5

Table 4-1 Baseline Paper Market Data, 2010 (in 2010 dollars)

Products Price 1 ($/ton) Quantity 2

(tons/year) % of Total

Production Paper Newsprint $ 580 3,429,000 4% Uncoated mechanical $ 740 2,002,000 2% Coated paper $ 960 7,903,000 10% Uncoated freesheet $ 930 9,500,000 12% Tissue 3 $ 1,765 7,302,000 9% Other printing/writing $ 1,305 4,917,000 6% Total Paper 4 $1,118 35,053,000 43% Paperboard Unbleached Kraft paperboard $ 640 21,579,000 26% Semichemical paperboard $ 610 5,443,000 7% Bleached paperboard $ 1,290 5,499,000 7% Recycled paperboard $ 855 14,896,000 18% Total Paperboard 4 $779 47,417,000 57% Total Paper and Paperboard 4 $923 82,470,000 100%

1 Source: RISI Inc. (2011a) 2 Source: American Forest Products Association; cite d in RISI Inc. (2011b) 3 EPA was unable to obtain national price averages f or tissue paper. For this analysis, EPA relied upo n the average of the prices reported by two major tissue producer s in corporate earnings statements. We will seek t o obtain a better tissue price estimate for the EIA for promul gation of this rule. The price used in this table is derived from prices reported by Cellu Tissue in 2009 and Clearwa ter Paper (2010). 4 Weighted average of individual product prices.
Because the paper and paperboard products listed i n Table 4-2 are aggregates of many relatively distinct types of products, EPA had to c hoose one product per aggregated product for price information. Ideally, the analyst would use weighted averaged of all products within the aggregate product category, but this information is not available to EPA as of the signature date for this proposal. With the exception of tissue pa pers (note footnote in Table 4-2), all product prices were drawn from a RISI, Inc. publication. T able 4-2 lists the aggregate product category and product selected for pricing purposes as repres entative of the aggregate product. For the promulgation version of this EIA, EPA will further investigate appropriate price information.4-6

Table 4-2 Products Used for Price Information Products Source Product Used for Price Information Paper Newsprint RISI Inc. 30-lb (East) Uncoated mechanical RISI Inc. 22.1-lb White directo ry (mid-point min./max. 1 ) Coated paper RISI Inc. Economy 8-lb sheets (mid-poi nt min./max.) Uncoated freesheet RISI Inc. 50-lb offset, rolls (m id-point min./max.) Other printing/writing RISI Inc. Bleached bristols, 10-pt C1S, rolls (mid-point min./max.) Paperboard Unbleached Kraft paperboard RISI Inc. Unbleached kraft (East, mid-point min./ma x.)
Semichemical paperboard RISI Inc. Corrugating Medium, Semichemical (East, mid-point min./max.) Bleached paperboard RISI Inc. Grocery bag, 30-lb (m id-point min./max.) Recycled paperboard RISI Inc. 20-pt clay coated new s (mid-point min./max.)

1 For many products, RISI Inc. lists price ranges, ba sed on minimum and maximum prices. We chose to use the midpoint of this range as the price used in the ana lyses.

4.2.3 Model Parameters

Demand elasticity is calculated as the percentage c hange in the quantity of a product demanded divided by the percentage change in price. An increase in price causes a decrease in the quantity demanded, hence the negative values se en in Table 4-3, which presents the demand elasticities used in this analysis. Demand is cons idered elastic if demand elasticity exceeds 1.0 in absolute value (i.e., the percentage change in q uantity exceeds the percentage change in price). The quantity demanded, then, is very sensitive to p rice increases. Demand is considered inelastic if demand elasticity is less than 1.0 in absolute value (i.e., the percentage change in quantity is less than the percentage change in pric e). Inelastic demand implies that the quantity demanded changes very little in response to price c hanges.

As shown in Table 4-3, we draw demand elasticities from the North American Pulp and Paper (NAPAP) model, a dynamic model used by the U. S. Forest Service to analyze the paper and paperboard industry (Ince and Buongiorno 2007). The table presents the elasticity estimates, as well as the NAPAP product from which the elastic ity estimate is drawn.4-7

Table 4-3 Demand Elasticity Estimates
Products Elasticity Source Source Product Paper Newsprint -0.22 NAPAP Newsprint Uncoated mechanical -0.40 NAPAP Uncoated groundwood Coated paper -0.40 NAPAP Coated freesheet Uncoated freesheet -0.47 NAPAP Uncoated freesheet Tissue -0.26 NAPAP Tissue Other printing/writing -0.23 NAPAP Specialty packag ing Paperboard Unbleached Kraft paperboard -0.54 NAPAP Kraft packa ging paper Semichemical paperboard -0.43 NAPAP Corrugating med ium Bleached paperboard -0.29 NAPAP Solid bleached boar d Recycled paperboard -0.40 NAPAP Recycled board Source: The North American Pulp and Paper (NAPAP) m odel (Ince and Buongiorno 2007)

Supply elasticity is calculated as the percentage c hange in quantity supplied divided by the percentage change in price. An upward sloping supply curve has a positive elasticity since price and quantity move in the same direction. If the supply curve has an elasticity greater than one, then supply is considered elastic, which means a small price increase will lead to a relatively large increase in quantity supplied. A supply curv e with elasticity less than one is considered inelastic, which means an increase in price will ca use little change in quantity supplied. In the long-run, when producers have sufficient time to co mpletely adjust their production to a change in price, the price elasticity of supply is usually greater than one.

As shown in Table 4-4, we draw supply elasticities from the U.S. Environmental Protection Agency’s Economic Impact and Regulatory Flexibility Analysis of Proposed Effluent Guidelines and NESHAP for the Pulp, Paper, and Pape rboard Industry (1993). The table presents the elasticity estimates, as well as the p roduct in the 1993 U.S. EPA from which the elasticity is drawn.4-8

Table 4-4 Supply Elasticity Estimates
Products Elasticity Source Source Product Paper Newsprint 0.29 U.S. EPA Newsprint Uncoated mechanical 0.33 U.S. EPA Uncoated groundwo od Coated paper 1.65 U.S. EPA Clay coated printing and converted paper Uncoated freesheet 0.31 U.S. EPA Uncoated freesheet Tissue (need to find tissue price) 0.82 U.S. EPA Ti ssue Other printing/writing 1.20 U.S. EPA Paper-other Paperboard Unbleached Kraft paperboard 0.32 U.S. EPA Unbleache d Kraft Semichemical paperboard 0.28 U.S. EPA Semichemical paperboard Bleached paperboard 0.68 U.S. EPA Bleached paperboard for miscellaneous packaging Recycled paperboard 0.49 U.S. EPA Recycled paperb oard Source: U.S. Environmental Protection Agency (1993)

4.2.4 Entering Estimated Annualized Engineering Complianc e Costs into Economic Model

In order to allocate estimate engineering costs acr oss paper and paperboard product markets used in the partial equilibrium analyses, w e first identified the primary product produced by affected mills and classified the primary produc t as one of the products used in the economic analysis. Then, using the mill-level estimates of annualized engineering compliance costs, we distributed the costs to products based upon the pr imary product produced at each mill. Table 4-5 reports the results of this distribution across the three regulatory options considered.4-9

Table 4-5 Estimated Annualized Engineering Complian ce Costs by Paper Product across Regulatory Options (thousands 2010 dollars)
Products Option 1 Option 2 (proposed) Option 3 Paper Newsprint $0 $0 $0 Uncoated mechanical $61 $61 $1,277 Coated paper $192 $701 $2,792 Uncoated freesheet $429 $1,234 $5,780 Tissue $117 $117 $368 Other printing/writing $90 $341 $1,731 Total Paper $890 $2,456 $11,948 Paperboard Unbleached Kraft paperboard $82 $82 $1,574 Semichemical paperboard $633 $1,578 $9,621 Bleached paperboard $153 $349 $5,034 Recycled paperboard $17 $17 $17 Total Paperboard $885 $2,026 $16,246 Pulp All pulp products $289 $1,720 $7,549 All pulp products $289 $1,720 $7,549
All products $2,064 $6,202 $35,743

Note in Table 4-5 that annualized engineering compl iance costs accrue to producers of pulp products. However, in the partial equilibrium models used within this EIA, we are modeling the impacts of compliance costs on prices and quantities of paper products. Because of this, we allocate the annualized engineering compli ance costs accruing to pulp producers to producers of paper products that are potentially af fected by this rule. This redistribution is based on the strong assumption that impacts on the pulp s ector can be reallocated to producers of paper products in proportion to the estimated compliance costs absent costs expected to accrue to pulp producers. The results of this redistribution are shown in Table 4-6.4-10

Table 4-6 Estimated Annualized Engineering Complian ce Costs by Paper Product across Regulatory Options, after Redistributing Est imated Costs to Pulp Producers (thousands 2010 dollars)
Products Option 1 Option 2 (proposed) Option 3 Paper Newsprint $0 $0 $0 Uncoated mechanical $72 $85 $1,619 Coated paper $224 $971 $3,539 Uncoated freesheet $499 $1,708 $7,328 Tissue $136 $162 $467 Other printing/writing $105 $472 $2,194 Total Paper $1,035 $3,398 $15,147 Paperboard Unbleached Kraft paperboard $95 $113 $1,995 Semichemical paperboard $737 $2,184 $12,198 Bleached paperboard $177 $483 $6,382 Recycled paperboard $19 $23 $21 Total Paperboard $1,029 $2,804 $20,596
All products $2,064 $6,202 $35,743

Using this engineering cost information and total national production of paper and paperboard products, we estimate the annualized com pliance cost per ton of product produced. These annualized engineering compliance costs per t on across regulatory options are presented in
Table 4-7.4-11

Table 4-7 Annualized Engineering Compliance Costs p er Ton Product Produced at National Level across Regulatory Options (in 2010 d ollars)

Products Option 1 ($/ton) Option 2

(proposed) ($/ton) Option 3

($/ton) Paper Newsprint $0.000 $0.000 $0.000

Uncoated mechanical $0.036 $0.043 $0.809 Coated paper $0.028 $0.123 $0.448 Uncoated freesheet $0.052 $0.180 $0.771 Tissue $0.019 $0.022 $0.064 Other printing/writing $0.021 $0.096 $0.446 Total Paper $0.030 $0.097 $0.432 Paperboard

Unbleached Kraft paperboard $0.004 $0.005 $0.092 Semichemical paperboard $0.135 $0.401 $2.241 Bleached paperboard $0.032 $0.088 $1.161 Recycled paperboard $0.001 $0.002 $0.001 Total Paperboard $0.022 $0.059 $0.434
All products $0.025 $0.075 $0.433

Note that under the proposed option, paper products incur a higher per-ton compliance cost burden, while semichemical paperboard has the highe st estimated per ton compliance costs of the ten products examined. Under the most stringent Op tion 3, however, the per-ton weighted average compliance cost estimate for paperboard pro ducts exceeds that of paper products. Note also that mills primarily producing newsprint are u naffected by any of the regulatory options. These per-ton of product produced annualized engine ering costs estimates were then entered into the series of partial equilibrium market models to estimate impacts on the respective paper and paperboard product markets.

4.2.5 Model Results
Across regulatory options, market-level changes in the paper and paperboard markets are estimated to be insignificant. For the proposed op tion, national-level weighted average paper and paperboard prices are predicted to increase les s than 0.01%, while total quantities are predicted to also decrease less than 0.01% (Table 4 -8).4-12

Table 4-8 Summary of Market Impacts (%) Across Prod ucts and Regulatory Option
Option 1 Option 2

(proposed) Option 3

Products Price Change (%) Quantity

Change (%) Price

Change (%) Quantity

Change (%) Price

Change (%) Quantity

Change (%) Paper Newsprint 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% Uncoated mechanical 0.002% -0.001% 0.003% -0.001% 0.049% -0.020% Coated paper 0.002% -0.001% 0.010% -0.004% 0.038% -0.015% Uncoated freesheet 0.002% -0.001% 0.008% -0.004% 0.033% -0.015% Tissue 0.001% 0.000% 0.001% 0.000% 0.003% -0.001% Other printing/writing 0.001% 0.000% 0.006% -0.001% 0.029% -0.007% Total Paper 0.002% -0.001% 0.005% -0.002% 0.023% -0.010% Paperboard Unbleached Kraft paperboard 0.000% 0.000% 0.000% 0.000% 0.005% -0.003% Semichemical paperboard 0.009% -0.004% 0.026% -0.011% 0.144% -0.062% Bleached paperboard 0.002% -0.001% 0.005% -0.001% 0.063% -0.018% Recycled paperboard 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% Total Paperboard 0.001% -0.001% 0.004% -0.002% 0.027% -0.011% Total Paper and Paperboard 0.001% -0.001% 0.004% -0.002% 0.025% -0.010%

As indicated by having the highest estimated per to n compliance costs, semichemical paperboard has the largest predicted percentage change in pric e and quantity. Overall, the economic models predict an overall pr ice increase of about 4.1 cents per ton of paper and paperboard product, from a baseline pr ice of about $920 per ton (Table 4-9). Overall production quantities are predicted to decr ease about 1500 tons, from a baseline production level of about 82 million tons. Note th at the weighted average price increase is lower than the weighted per ton compliance cost increase of about 7.5 cents per ton as shown in Table 4-7. As the welfare impacts analysis that follows shows, producers absorb a portion of the regulatory program costs and do not pass on the ful l burden to consumers.4-13

Table 4-9 Change in Price and Quantity (#) across P roducts and Regulatory Options (costs in 2010 dollars)

Option 1 Option 2 (proposed) Option 3

Products Price Change ($/ton) Quantity

Change (tons/year) Price

Change ($/ton) Quantity

Change (tons/year) Price

Change ($/ton) Quantity

Change (tons/year) Paper Newsprint $0.000 0.0 $0.000 0.0 $0.000 0.0 Uncoated mechanical $0.016 -17.5 $0.019 -20.8 $0.366 -395.9 Coated paper $0.023 -75.1 $0.099 -325.6 $0.361 -1,187.4 Uncoated freesheet $0.021 -99.9 $0.071 -342.2 $0.306 -1,468.2 Tissue $0.014 -15.2 $0.017 -18.1 $0.048 -52.1 Other printing/writing $0.018 -15.5 $0.081 -69.8 $0.375 -324.7 Total Paper $0.018 -223.2 $0.060 -776.6 $0.263 -3,428.3 Paperboard Unbleached Kraft paperboard $0.002 -29.6 $0.002 -35.3 $0.034 -621.2 Semichemical paperboard $0.053 -202.8 $0.157 -601.5 $0.875 -3,359.2 Bleached paperboard $0.023 -28.0 $0.062 -76.2 $0.814 -1,006.1 Recycled paperboard $0.001 -5.0 $0.001 -6.0 $0.001 -5.5 Total Paperboard $0.010 -265.5 $0.028 -718.9 $0.214 -4,992.0 Total Paper and Paperboard $0.013 -488.7 $0.041 -1,495.5 $0.235 -8,420.2

The national compliance cost estimates are often us ed to approximate the social cost of the rule. However, in cases where the engineering cost s of compliance are used to estimate social cost, the burden of the regulation is typically mea sured as falling solely on the affected producers, who experience a profit loss exactly equ al to these cost estimates. Thus, the entire loss is a change in producer surplus with no change (by assumption) in consumer surplus, because no changes in price and consumption are est imated. This is typically referred to as a “full-cost absorption” scenario in which all factor s of production are assumed to be fixed and firms are unable to adjust their output levels when faced with additional costs.

In contrast, EPA’s economic analysis builds on the engineering cost analysis and incorporates economic theory related to producer an d consumer behavior to estimate changes in market conditions. Paper and paperboard producers c an make supply adjustments that will generally affect the market environment in which th ey operate. As producers change levels of4-14

product supply in response to a regulation, consume rs are typically faced with changes in prices that cause them to alter the quantity they are will ing to purchase. These changes in price and output from the market model are used to estimate t he total economic surplus changes for two types of stakeholders: paper and paperboard consume rs and producers.

As shown in Table 4-10, under the proposed Option 2 , paper and paperboard consumers are predicted to experience a $3.3 million reductio n in surplus as the result of higher prices and reduced consumption. Producer surplus is predicted to decrease about $2.9 million. Total welfare losses are then estimated at $6.2 million.

Table 4-10 Summary of Consumer and Producer Surplus Changes: 2010 (in millions of 2010 dollars) Surplus Change (in 2010 dollars) Option Product Type Consumer Producer Total Option 1 Paper -$0.6 -$0.4 -$1.0

Paperboard -$0.5 -$0.6 -$1.0 Total -$1.1 -$1.0 -$2.1 Option 2 (proposed) Paper -$2.0 -$1.4 -$3.4

Paperboard -$1.2 -$1.6 -$2.8 Total -$3.3 -$2.9 -$6.2 Option 3 Paper -$8.7 -$6.5 -$15.1

Paperboard -$10.0 -$10.6 -$20.6 Total -$18.7 -$17.1 -$35.7
Again, as indicated by the relatively higher per to n compliance costs accruing to paper product producers, paper products are predicted to experien ce a greater proportion of the welfare losses, compared to paperboard products. For paperboard pr oducts, however, producers are predicted to have greater welfare losses than consumers of paper board products, as opposed to the predictions for paper products.

4.2.6 Limitations Ultimately, the regulatory program may cause neglig ible increases in the costs of supplying paper and paperboard products to consumer s. The partial equilibrium model used in this EIA is designed to evaluate behavioral respons es to this change in costs within an equilibrium setting within nationally competitive m arkets. The national competitive market4-15

assumption is clearly very strong because the marke ts in paper products may be regional for some products, as well as some product markets with in the paper industry may be interdependent. Regional price and quantity impact s could be different from the average impacts reported if local market structures, production cos ts, or demand conditions are substantially different from those used in this analysis.

4.3 Small Business Impacts Analysis

The Regulatory Flexibility Act as amended by the Sm all Business Regulatory Enforcement Fairness Act (SBREFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemakin g requirements under the Administrative Procedure Act or any other statute, unless the agen cy certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small governmental jurisdictions, and small not-for-profit enterprises.

After considering the economic impact of the propos ed rules on small entities, the screening analysis indicates that these proposed ru les will not have a significant economic impact on a substantial number of small entities (o r “SISNOSE”). The supporting analyses for these determinations are presented in this section of the EIA.

4.3.1 Small Business National Overview
The industry sectors covered by the final rule were identified during the development of the engineering cost analysis. The U.S. Census Bur eau’s Statistics of U.S. Businesses (SUSB) provides national information on the distribution o f economic variables by industry and enterprise size. The Census Bureau and the Office o f Advocacy of the Small Business Administration (SBA) supported and developed these files for use in a broad range of economic analyses. 1 Statistics include the total number of establishmen ts, and receipts for all entities in an industry; however, many of these entities may not n ecessarily be covered by the final rule. SUSB also provides statistics by enterprise employment a nd receipt size (Table 2-10).

The Census Bureau’s definitions used in the SUSB ar e as follows:

1 See http://www.census.gov/csd/susb/ and http://www. sba.gov/advocacy/ for additional details.4-16  Establishmen t: A single physical location where business is con ducted or where services or industrial operations are performed.

 Firm: A firm is a business organization consisting of on e or more domestic establishments in the same state and industry that were specified under common ownership or control. The firm and the establishmen t are the same for singleestablishment firms. For each multi-establishment f irm, establishments in the same industry within a state will be counted as one firm - the firm employment and annual payroll are summed from the associated establishmen ts.

 Receipts : Receipts (net of taxes) are defined as the revenu e for goods produced, distributed, or services provided, including revenu e earned from premiums, commissions and fees, rents, interest, dividends, a nd royalties. Receipts exclude all revenue collected for local, state, and federal tax es.

 Enterprise : An enterprise is a business organization consisti ng of one or more domestic establishments that were specified under c ommon ownership or control. The enterprise and the establishment are the same for s ingle-establishment firms. Each multi-establishment company forms one enterprise—th e enterprise employment and annual payroll are summed from the associated estab lishments. Enterprise size designations are determined by the sum of employmen t of all associated establishments.

Because the SBA’s business size definitions apply t o an establishment’s “ultimate parent company,” we assumed in this analysis that the “fir m” definition above is consistent with the concept of ultimate parent company that is typicall y used for SBREFA screening analyses, and the terms are used interchangeably.4-17

Table 4-11 Number of Firms, Total Employment, and E stimated Salaries by Firm Size and NAICS for Primarily Affected Segm ents, 2006
NAICS NAICS Description SBA Size Standard Small

Businesses Large

Businesses Total

Firms Number of Firms by Firm Size 322110 Pulp Mills 750 21 10 31 322121 Paper (except Newsprint) Mills 750 137 42 17 9 322122 Newsprint Mills 750 11 7 18 322130 Paperboard Mills 750 57 30 87 Percentage of Firms by Firm Size 322110 Pulp Mills 750 68% 32% 100% 322121 Paper (except Newsprint) Mills 750 77% 23% 1 00% 322122 Newsprint Mills 750 61% 39% 100% 322130 Paperboard Mills 750 66% 34% 100%

Source: U.S. Census Bureau. 2011. “Statistics of U. S. Businesses, Business Dynamics Statistics, Busine ss Employment

Dynamics, and Nonemployer Statistics.” < http://www.sba.gov/advocacy/849/12162#susb>

4.3.2 Small Entity Economic Impact Measures

The proposed NESHAP amendments will affect the owne rs of the facilities that will incur compliance costs to control their regulated emissio ns. The owners, either firms or individuals, are the entities that will bear the financial impac ts associated with these additional operating costs. The proposed rule has the potential to impa ct all firms owning affected facilities, both large and small.

The analysis provides EPA with an estimate of the m agnitude of impacts the proposed NESHAP amendments may have on the ultimate domestic parent companies that own facilities EPA expects might be impacted by the rules. The ana lysis focuses on small firms because they may have more difficulty complying with a new regul ation or affording the costs associated with meeting the new standard. This section presents th e data sources used in the screening analysis, the methodology we applied to develop estimates of impacts, the results of the analysis, and
conclusions drawn from the results.4-18

The small business impacts analysis relies upon a s eries of firm-level sales tests (represented as cost-to-sales ratios) for firms tha t are likely to be associated with NAICS codes listed in Table 2-10. EPA obtained firm-level empl oyment, revenues, and production levels using various sources, including the Dun & Bradstre et, the American Business Directory, corporate websites, and publically-available financ ial reports. Using these data, we estimated firm-level compliance cost impacts and calculated c ost-to-sales ratios to identify small firms that might be significantly impacts by the rules.

For the sales test, we divided the estimates of ann ualized establishment compliance costs at the company-level by estimates of company sales. This is known as the cost-to-revenue ratio, or the “sales test.” The “sales test” is the impac t methodology EPA employs in analyzing small entity impacts as opposed to a “profits test,” in w hich annualized compliance costs are calculated as a share of profits. The sales test is often use d because revenues or sales data are commonly available for entities impacted by EPA regulations, and profits data normally made available are often not the true profit earned by firms because o f accounting and tax considerations. Revenues and sales as typically published are correct figure s and are more reliably reported when compared to profit data. The use of a “sales test” for estimating small business impacts for a rulemaking such as this one is consistent with guid ance offered by EPA on compliance with
SBREFA 2 and is consistent with guidance published by the U .S. SBA’s Office of Advocacy that suggests that cost as a percentage of total revenue s is a metric for evaluating cost increases on small entities in relation to increases on large en tities (U.S. SBA, 2010). 38

4.3.3 Small Entity Economic Impact Analysis and Conclusio ns As discussed in Section 3, 114 facilities are poten tially affected by each of the regulatory options, but as the options increase in stringency the relative impacts increase. Of these 114 facilities, three are owned by small entities. Tab le 4-12 presents facility names, ultimate owners, number of employees, and estimates sales in 2010 fo r the three small firms.

2 The SBREFA compliance guidance to EPA rulewriters regarding the types of small business analysis that should be considered can be found at <http://www.epa.gov/s brefa/documents/rfaguidance11-00-06.pdf> 3 U.S. SBA, Office of Advocacy. A Guide for Governmen t Agencies, How to Comply with the Regulatory Flexibility Act, Implementing the President’s Small Business Agenda and Executive Order 13272, June 20 10.4-19

Table 4-12 Potentially Affected Small Entities: Emp loyees and Sales, 2010

Faculty Ultimate Owner Employees in 2010 Sales in 2010

(million of 2010 dollars) Lincoln Paper and Tissue, LLC Lincoln Paper and Tissue, LLC 350 141.2 Old Town Fuel & Fiber Patriarch Partners, LLC 170 1 2.9 Port Townsend Paper Corp. Port Townsend Paper Corp 585 181.3

Table 4-13 shows that cost-to-sales ratios for the three affected small firms do not exceed 1% for the proposed option. In fact, the ratios ar e well below 1%, ranging from 0.01% to about 0.16%. An impact level greater than 1% is estimate d for one firm under the more stringent Option 3, however.

Table 4-13 Estimated Annualized Engineering Costs f or Potentially Affected Small Entities across Regulatory Options (costs in 2010 d ollars) Option 1 Option 2 (proposed) Option 3

Ultimate Owner Estimated Annualized Costs Estimated

Costs to Sales Ratio Estimated

Annualized Costs Estimated

Costs to Sales Ratio Estimated

Annualized Costs Estimated

Costs to Sales Ratio Lincoln Paper and Tissue, LLC 18,223 0.01% 18,223 0.01% 18,223 0.01% Patriarch Partners, LLC 18,223 0.14% 18,223 0.14% 2 59,918 2.01% Port Townsend Paper Corp 13,345 0.01% 299,058 0.16% 687,022 0.38%

EPA concludes from this analysis that a substantial number of small firms are not significantly impacted. Based upon the analysis in this section, we conclude there is no SISNOSE arising from the proposed NESHAP amendments

.4-20

4.4 Employment Impacts Analysis

While a standalone analysis of employment impacts i s not included in a standard costbenefit analysis, such an analysis is of particular concern in the current economic climate of sustained high unemployment. Executive Order 13563, states, “Our regulatory system must protect public health, welfare, safety, and our env ironment while promoting economic growth, innovation, competitiveness, and job creation”. Th erefore, we seek to inform the discussion of labor demand and job impacts by providing an estima te of the employment impacts of the proposed regulations using labor requirements for t he operation and maintenance of control requirements.

Regulations set in motion new orders for pollution control equipment and services. New categories of employment have been created in the p rocess of implementing regulations to make our air safer to breathe. When a new regulation is promulgated, a response of industry is to order pollution control equipment and services in order t o comply with the regulation when it becomes effective. Revenue and employment in the environme ntal technology industry have grown steadily between 2000 and 2008, reaching an industr y total of approximately $300 billion in revenues and 1.7 million employees in 2008. 4 While these revenues and employment figures represent gains for the environmental technologies industry, they are costs to the regulated industries required to install the equipment. More over, it is not clear the 1.7 million employees in 2008 represent new employment as opposed to work ers being shifted from the production of goods and services to environmental compliance acti vities.

Once the equipment is installed, regulated firms hi re workers to operate and maintain the pollution control equipment – much like they hire w orkers to produce more output. Morgenstern et al. (2002) examined how regulated industries res pond to regulation. The authors found that, on average for the industries they studied, employm ent increases in regulated firms. Of course, these firms may also reassign existing employees to perform these activities.

4 Environmental Business International (EBI), Inc., San Diego, CA. Environmental Business Journal, mon thly (copyright). http://www.ebiusa.com/ EBI data tak en from the Department of Commerce International Tr ade Administration Environmental Industries Fact Sheet from April 2010: http://web.ita.doc.gov/ete/eteinfo.nsf/068f3801d047 f26e85256883006ffa54/4878b7e2fc08ac6d85256883006c45 2c?OpenDocument4-21

Environmental regulations support employment in man y basic industries. In addition to the increase in employment in the environmental pro tection industry (via increased orders for pollution control equipment), environmental regulat ions also support employment in industries that provide intermediate goods to the environmenta l protection industry. The equipment manufacturers, in turn, order steel, tanks, vessels , blowers, pumps, and chemicals to manufacture and install the equipment. Bezdek et al. (2008) fo und that investments in environmental protection industries create jobs and displace jobs , but the net effect on employment is positive.

Unlike several recent RIAs, however, we do not prov ide employment impacts estimates based on the study by Morgenstern et al. (2002). U sing plant-level data from 1979-1991, Morgenstern et al. (2002) estimate a model for four highly-polluting, regulated industries (pulp and paper, plastics, steel, and petroleum refining) to examine the effect of higher abatement costs from regulation on net employment. The results ind icate that, on average across the four industries, each additional $1 million in spending on pollution abatement results in a net increase of 1.55 jobs (95% confidence interval: -2.9 to + 6. 0). We do not, however, provide employment impacts estimates for this rulemaking based on the study by Morgenstern et al. (2002) because the study’s results for the pulp and paper industry , specifically, were not statistically significant

The focus of this part of the analysis is on labor requirements related to the compliance
actions of the affected entities within the affecte d sector. We do not estimate any potential changes in labor outside of the pulp and paper indu stry. This analysis estimates the potential employment impacts due to the operation and mainten ance of control equipment, as well as additional reporting and recordkeeping requirements . No estimates of the labor used to manufacture or assemble pollution control equipment or to supply the materials for manufacture or assembly are included because U.S. EPA does not currently have this information.

The employment analysis uses a bottom-up engineerin g-based methodology to estimate employment impacts. The engineering cost analysis summarized in this EIA includes estimates of the labor requirements associated with implement ing the proposed regulations. These labor changes may be required as an upfront, intensive ex penditure of effort required to initially comply with the new requirements, or as continuous, annual efforts to sustain compliance.4-22

We convert estimates of the number hours of labor r equired to full-time equivalents (FTEs) by dividing by 2,080 (40 hours per week mult iplied by 52 weeks). We note that this type of FTE estimate cannot be used to make assumptions about the specific number of people involved or whether new jobs are created for new em ployees. In this EIA, we make no distinction in the quantitative estimates between l abor changes within and outside of the regulated sector.

The results of this employment estimate are presen ted in Table 4-14 for the proposed
NESHAP amendment alternatives. The table includes estimates of labor requirements by NESHAP option evaluated in the EIA and presents bot h the estimated hours required and the conversion of this estimate to FTE. The upfront and ongoing requirements are estimated at about 2.5 and 9.1 FTEs, respectively for Option 2, the proposed NESHAP option.

Table 4-14 Labor-based Employment Estimates for Ope rating and Maintaining Control Equipment Requirements, Proposed NESHAP Options

Option 1 Option 2 (proposed) Option 3

Compliance-related Activities Initial Reqs. Cont. Annual Reqs. Initial

Reqs. Cont. Annual Reqs. Initial

Reqs. Cont. Annual Reqs. Kraft Condensate-related Activities Nationwide Labor (hrs) 0 0 N/A 11,100 N/A 87,640 Full-time Equivalents (FTE) 0 0 N/A 5.3 N/A 42.1 Reporting and Recordkeeping Nationwide Labor (hrs) 5,244 7,866 5,244 7,866 5,244 7,866 Full-time Equivalents (FTE) 2.5 3.8 2.5 3.8 2.5 3.8 Total Nationwide Labor (hrs) 5,244 7,866 5,244 18,966 5,244 95,506 Full-time Equivalents (FTE) 2.5 3.8 2.5 9.1 2.5 45. 95-1 5 REFERENCES

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