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### ATTACHMENT V

Proposed Amendments to Rule 67.0 Architectural Coat ings

Socioeconomic Impact Analysis

The Air Resources Board (ARB) analyzed the economic impacts that would result from implementation of the Suggested Control Measure (SC M) volatile organic compound (VOC) content limits. In addition, the South Coast Air Q uality Management District (SCAQMD) analyzed economic impacts when it amended its archi tectural coating Rule 1113 in 1996 and 1999. The interim VOC limits from those adoptions and the June 2000 SCM adopted by ARB are consistent. SCAQMD routinely runs regional economic models to determine socioeconomic impacts of its rule adoptions and did so for its Rule 1113 adoptions. ARB and

the District have evaluated the results of this mod eling analysis and believe that it provides a worst-case scenario for potential employment impact s in San Diego when interpolated by population correction factors. The applicability o f these results to the San Diego area is premised on the idea that economic relationships be tween San Diego and South Coast suppliers and users of architectural coatings do no t differ significantly.

Correspondence from ARB states that its analysis (C hapter VIII, Economic Impacts, from the SCM staff report) is appropriate for use by the San Diego County Air Pollution Control District (District) for determining costs and econo mic impacts from the proposed amendments to Rule 67.0 (Kenny, Oct. 24, 2000). In addition, this ARB letter confirms the District’s assessment that it is not necessary to use a region al economic model to perform the economic analysis for the purpose of adopting amendments to Rule 67.0 “because the cost increase

associated with the SCM is small.”

Thus, for the purpose of this socioeconomic impact analysis, the District has summarized the relevant published cost, economic, and employment i mpacts from ARB and SCAQMD reports without doing additional economic surveys or runnin g economic computer models.

Types of Affected Business and Industry Including S mall Business The proposed amendments to Rule 67.0 would potentia lly impact: (i) industries engaged in manufacturing paint, varnishes, enamels and allied products (SIC 2851); (ii) end users of architectural coatings, including do-it-yourself co nsumers, painting contractors (SIC 1721) that may be small businesses, and maintenance perso nnel; and (iii) suppliers, sellers, and solicitors of architectural coatings (SIC 5198, 523 1). New construction and maintenance of the following may be impacted by these proposed ame ndments:

• Buildings

• Transportation infrastructure

• Industrial structures such as aboveground tanks

• Any stationary structure or appurtenance

EMPLOYMENT AND ECONOMIC IMPACTS SCAQMD and ARB used different approaches in analyzi ng the employment and economic impacts of the proposed standards. The SCAQMD used a regional economic model to- 2 -

quantify the employment impacts for all businesses in the region, and that approach assumed all costs would be passed on to the end user. In c ontrast, the ARB analysis focused on the impact of the SCM on the profitability of coating m anufacturers, and its analysis assumed that all costs would be absorbed by the industry rather than passed through to the end users. ARB relied heavily on survey responses from coating man ufacturers. ARB evaluated employment, business creation, and business competitiveness for the coating manufacturers in California.

While ARB determined there would be little impact o n coating manufacturers using its assessment techniques, the SCAQMD analysis actually predicts employment gains for coating manufacturers in the chemical industry. Both analy ses support a determination that the proposed amendments to Rule 67.0 will not have an u nacceptable adverse impact on employment and the economy in San Diego County.

ARB Analysis According to ARB, the SCM is not expected to cause a noticeable change in California employment and payroll of the coating manufacturers because the analysis shows that the proposal will not significantly alter their profita bility.

ARB estimated profitability impacts by analyzing th e impact of the costs to comply on return on owner’s equity (ROE) for selected sample coating manufacturers. The approach used to determine these economic impacts was as follows: 1. Select a sample of three representative business es of different sizes from the list of

135 affected businesses. Selection is based on the sales revenues and the quantity of noncompliant coatings manufactured. 2. Estimate the cost of compliance with the SCM pro posal for each of these businesses. 3. Adjust the estimated cost for federal and state taxes. 4. Calculate the three-year average ROE where data are available for each of the selected businesses by averaging their ROEs for 1997 through 1999. ROE is calculated by dividing the net profit by the net worth. 5. Subtract the adjusted cost from the net profit d ata, then use this result to calculate an adjusted three-year average ROE. 6. Compare the adjusted ROE with the ROE before the subtraction of the adjusted cost to determine the potential impact on the profitability of all affected businesses.

ROE reductions ranged from negligible to a decline of two percent. A decrease of ten percent in ROE or more was considered to be a significant a dverse economic impact. ARB has used the threshold value of ten percent consistently sin ce 1990 to determine impact severity of proposed regulations. This threshold is consistent with the thresholds used by the EPA and

others.

In reaching this conclusion, ARB assumed that coati ng manufacturers, both in and outside California, would absorb all the costs from the ado ption of this proposal. Consequently, this analysis represents the maximum impact on the manuf acturers. This assumption of absorption of all costs would mean decreased profit s for the coating manufacturers; however, since coating manufacturing profitability is unlike ly to be significantly reduced, ARB concluded that employment, business creation and ex pansion, and business competitiveness should not be significantly affected for that indus try. ARB noted that its estimates of the reductions in ROE might be high. They also acknowl edged, however, that since its analysis- 3 -

was based on assumptions that may not be true for a ll businesses, it was possible that some businesses might be adversely affected.

SCAQMD Analysis A more broad-based approach to examining employment and economic impacts within the District is to scale the results of the SCAQMD anal ysis of the interim SCAQMD Rule 1113 VOC limits, which are the same VOC limits contained in the SCM and are the basis for the proposed amendments to Rule 67.0. In its 1999 soci oeconomic report and computer modeling of employment impacts, SCAQMD estimated that 374 jo bs could be forgone in the year 2002,

which is when the interim VOC standards become effe ctive for SCAQMD. Non-farm employment in the South Coast district is about 6.5 million jobs. These SCAQMD results were projected through the use of the Regional Econ omic Models, Inc. (REMI) computer

model.

The REMI model is an economic and demographic forec asting and simulation model designed to examine the economic and demographic ef fects resulting from policy initiatives or external events in a local economy. The employm ent impacts from the REMI model runs for the SCAQMD interim VOC limits are summarized in Table 1.

Table 1 – Employment Impact of SCAQMD Rule 1113 Int erim VOC Limits

INDUSTRY(SIC) 2002 INDUSTRY(SIC) 2002 Lumber (24) -1 Local/Interurban (41) -2 Furniture (25) -4 Air Transp. (45) -1 Stone, Clay (32) -1 Other Transp. (44, 46-47) -1 Primary Metals (33) 0 Communication (48) -4 Fabricated Metal (34) -2 Public Utilities (49) -3 Non-electric Machinery (35) -3 Banking (60) -10 Electric Equipment (36) -2 Insurance (63, 64) -8 Motor Vehicle (371) -1 Credit & Finance (61-62) -8 Rest of Transp. Equip(372-379) -1 Real Estate (65) -11 Instruments (38) -2 Eating & Drinking (58) -34 Misc. Manufacturing (39) -1 Rest of Retail (52-57, 59) -76 Food (20) -3 Wholesale (50-51) -17 Tobacco Manufacturing (21) 0 Hotels (70) -2 Textiles (22) -1 Services & Repair (72, 76) -15 Apparel (23) -3 Private Household (88) -6 Paper (26) 0 Auto Repair/ Service (75) -9 Printing (27) -2 Misc. Business Serv. (73) -26 Chemicals 30 Amuse & Recreation (79) -14 Petroleum Products (29) -1 Motion Pictures (78) -1 Rubber (30) 0 Medical (80) -4 Leather (31) 0 Prof. Serv. (81, 87, 89) -21 Mining (10,12-14) -1 Education (82) -21 Construction (15-17) -44 Non-Profit Org. (83) -23 Railroad (40) 0 Agri./Forest/Fish (07-09) -3 Trucking (42) -3 Government -8

TOTAL -374

The sector with the greatest job impacts from the p roposed amendments is the construction sector (SICs 15-17). The increased costs of paints and contractor-provided painting services would reduce consumer spending on other goods and s ervices. As a result, it is expected that- 4 -

there would be jobs forgone in the industries of ea ting and drinking (SIC 58), rest of retail (SICs 52-57, 59), wholesale (SICs 50-51), miscellan eous business services (SIC 73), medical (SIC 80), and miscellaneous professional services ( SICs 81, 87, 89). The chemical industry (SIC 28) is expected to add jobs in the SCAQMD beca use increased expenditures made on reformulated coatings (and other associated activit ies) in this sector. Because coating manufacturers in San Diego County already manufactu re products that meet the future limits in the proposed rule, these added jobs are not rele vant for our assessment.

Conclusion In the District, there are two known coating manufa cturers. One is currently manufacturing coatings which comply with the January 1, 2003, VOC content limits. The other manufacturer makes only a few architectural coating s, and is expected to comply with the future limits in the proposed rule. Since it is un likely that there will be any cost impacts to these manufacturers, there should be no impact on R OE and no impacts on employment, business creation and expansion, and business compe titiveness for these companies.

The employment and economic impacts from South Coas t’s ten percent increase in architectural coatings prices (as noted, SCAQMD ass umed all manufacturing cost increases would be passed on) may be scaled for San Diego. T he number of jobs in the District is approximately one fourth the number for SCAQMD. Th us, if one extrapolates SCAQMD data from Table 1 to San Diego, the number of jobs lost would be (374 + 30)/5.4 or 76. Note that the 30 manufacturing jobs created in SCAQMD th at acted to reduce total job loss were added because no similar job creation is expected i n San Diego, given that the San Diego paint manufacturers already make complying products and will not need to reformulate.

RANGE OF PROBABLE COSTS The above analysis focuses principally on employmen t impacts to coating manufacturers. In this section, the more general cost impacts associa ted with the proposed new requirements are discussed. For this analysis, unlike the employmen t analysis, ARB and SCAQMD both assumed costs would be passed on to the end user.

The cost impacts on manufacturers and consumers wer e examined by looking at both the ARB and SCAQMD analyses. ARB prepared a detailed a ssessment of the expected costs in the SCM staff report. They examined both the econo mic impacts on the coating manufacturers and the consumers of coatings.

The proposed amendments to Rule 67.0 may impact con sumers and other users of architectural coatings in the form of increased coa ting costs for coatings manufactured outside the District. ARB determined the maximum potential cost to consumers by assuming that manufacturers will pass on all increases in reformu lation costs. An evaluation of cost impacts to coating manufacturers is needed to perform this worst-case cost analysis for consumer impacts.

Cost Data Sources ARB relied on the December 1999 ARB Economic Impact s Survey for coating costs specific

to manufacturers. ARB used the best estimates from 23 out of 25 coating manufacturers including nonrecurring and recurring costs. (Two o f the respondents reported coating line- 5 -

reformulation costs three to ten times higher than other respondents and were considered statistical outliers by ARB.) Nonrecurring costs i nclude research and development costs, product and consumer testing costs, new or modified capital equipment costs, and one-time marketing/label change costs. Recurring costs incl ude raw material costs, recordkeeping costs, and reporting costs. The survey responses i ncluded a variety of large, medium, and small producers and provided a good sampling of pro ducts from all coating categories affected by the proposed amendments.

In addition to the cost data supplied by manufactur ers, ARB researched the raw material costs needed for coating reformulation. Primary sources included spot raw material prices from the Chemical Market Reporter and aggregate ingredient p rices reported in the 1997 U.S. Economic Census for SIC Code 2851. For ingredients not shown in these two sources, ARB relied on prices reported confidentially by individ ual coating manufacturers or on published coating literature. A default value of $1.50 per p ound was assigned to those infrequent cases where no ingredient price information was available . This value is higher than most of the ingredient prices used in the raw material cost ana lysis, including resins, which are the most expensive main ingredient.

SCAQMD’s cost estimates were based on similar cost information supplied by resin suppliers and some coating manufacturers. For the most part, resin suppliers were the most cooperative in providing price information.

Costs to Manufacturers

ARB determined the costs to manufacturers to reform ulate noncompliant coatings to comply with the proposed VOC limits for each of the affect ed coating categories. This analysis considered manufacturers located inside California, but outside the SCAQMD. The total annualized non-SCAQMD cost was $23.8 million. For comparison, the total annualized cost to manufacturers estimated by SCAQMD to meet the sa me VOC limits (not including the relatively small categories for multicolor coatings and swimming pool repair coatings) was $19.7 million. The total annual costs reported fro m ARB and SCAQMD analyses are in agreement. About 45 percent of California’s popula tion live in the South Coast District and 45 percent of the total annual cost is spent in the South Coast District. Thus, the regional cost to the manufacturers is directly proportional to th e population of that region.

Conclusion Based on these two analyses, manufacturers will spe nd approximately $43 million to reformulate coatings to comply with the SCM’s VOC l imits in California. Apportioning that cost to San Diego using a population factor (San Di ego population to the population of the state excluding South Coast), the annualized costs to manufacturers to comply with Rule 67.0 would be about $3.6 million per year. As a compari son, the San Diego Gross County Product is about $93 billion (based on data published by th e California Department of Finance in California Statistical Abstract, 2000).- 6 -

COST TO CONSUMERS

ARB Analysis ARB projected the maximum potential impact on consu mers by assuming that all reformulation costs in the previous section are pas sed on in the form of higher coating prices. Using this assumption, the producer cost increases range from $1.20 to $1.70 per gallon with an average of $1.40 per gallon. The retail price i ncrease is estimated using a 4X multiplier

that assumes both the wholesaler and retailer doubl e the price. Part of this cost increase results from the training and service provided by w holesalers and retailers to their customers. Thus, the estimated maximum retail price increase w ould be $4.80 to $6.80 per reformulated gallon with an average of $5.60 per gallon. This w ould translate to an average 12 percent increase in retail prices with the largest price in creases occurring at industrial maintenance and other commercial coating applications.

ARB also estimated the expected costs to consumers. For ordinary consumers who use flat and non-flat house paints, ARB projects no price in crease for a typically reformulated flat paint and a 21 percent maximum increase for a typic ally reformulated non-flat paint. They note that consumers may purchase currently availabl e compliant flat and non-flat coatings with no increase in price due to reformulation. Th e competition among suppliers of these coatings will likely constrain any price increases from reformulated coatings. Furthermore, ARB surveyed the availability and costs of coatings that currently comply with the proposed VOC limits. The survey indicated that complying co atings are available with prices similar to comparable noncomplying coatings (see Table 2). Th us, costs to consumers from the proposed amendments to Rule 67.0 should be small.

Table 2 – Shelf Survey of Complying and Noncomplyin g Coatings Costs

Coating Category Cost of Compliant Coatings Cost of

Noncompliant Coatings Flats $13.40 - $32.99 $12.29 - $34.49 Floor Coatings $15.00 - $58.00 N/A
Industrial Maintenance $24.28 $24.78 – $78.39 Lacquer $29.95 $20.95 Multi-color Coatings $35.75 - $75.70 $75.66 – $91.0 0
Nonflats $21.99 - $34.69 $24.99 – $39.49

Primers, Sealers, and

Undercoaters $25.49 - $28.49 $25.49 - $30.99

Quick-Dry Enamels $24.70 - $34.90 $23.60 - $34.41 Quick-Dry Primers, Sealers, and

Undercoaters $7.37 - $25.00 N/A

Stains $4.00 - $36.00 $7.00 - $35.00 Swimming Pool Repair Coatings $32.99 - $59.99 $43.9 5 - $84.99 Waterproofing Sealers $13.00 - $28.00 $10.00 - $30. 00

SCAQMD Analysis Results of the SCAQMD analysis are similar to the r esults of the ARB analysis. Based on available information, SCAQMD estimated that the in terim Rule 1113 VOC standards, which were the basis for the SCM, would result in maximum price increases for future complying coatings of up to ten percent. The 1999 SCAQMD Soc ioeconomic Report for Rule 1113- 7 -

projects a worst-case ten percent increase across-t he-board for all major categories. The SCAQMD price determinations for complying coatings were supported by information received from resin suppliers and coating manufactu rers. The following sources were cited by SCAQMD to provide coating price estimates:

 A case study by Devoe & Reynolds Co. published in S tirring Up Innovation (1994) noted a ten percent increase in costs for <250 g/l industrial maintenance, non-flat and wood stain coatings.

 A Superior Coating paper at the April 28, 1998, SCA QMD Architectural Coatings Technology Conference ( Superior Performance Coatings ) noted a zero to ten percent increase in the cost per gallon of zero-VOC non-fla t, primer sealer and undercoater, rust preventative, industrial maintenance, and stai n coatings.

 Another paper at the 1998 Architectural Coating Tec hnology Conference indicated examples of zero-VOC flats, non-flats, primer seale r and undercoaters, rust preventatives, quick-dry enamels, floor coatings, i ndustrial maintenance coatings, wood sealers, and wood stain coatings that have sup erior or matching coating performance while simultaneously reducing productio n and application costs (VOC

Free Paints and Inks at No Extra Cost by G. Sugerman of PPA Technologies, a resin supplier).

 Norman Mowrer of Ameron International also presente d a paper at the 1998 Architectural Coating Technology Conference that re ported reduced costs for industrial maintenance coatings based on cost per p erformance characteristics.

Conclusion The projected worst-case price increases are summar ized in the following table from both SCAQMD and ARB reports.

Table 3 – Estimates of Projected Maximum Coating Pr ice Increases

Coating Category Typical Retail Price per Gallon ARB Cost per

Gallon Increase SCAQMD Cost per

Gallon Increase Industrial Maintenance $34 to $100+ $6.80 $4.00

Rust Preventative Coatings $30 $4.80 Info Not Available

Floor Coatings $21 to $24 $4.80 to $6.80 $3.00
Non-Flats $3 to $35 $3.70 $2.00

Primers, Sealers & Undercoaters (PSU) $9 to $31 $4.80 to $6.80 $2.00

Quick-Dry PSU $3 to $25 $4.80 to $6.80 $2.00 Quick-Dry Enamels $25 to $35 $4.80 to $6.80 $2.00
Stains $4 to $36 $4.80 to $6.80 $2.50 Waterproof Wood

Sealers $10 to $30 $4.80 to $6.80 $2.00- 8 -

COST TO SMALL BUSINESS The costs of the proposal to small businesses inclu ding small coating manufacturers, retailers, wholesalers, and painting contractors were evaluate d based on studies performed by ARB and SCAQMD. ARB again focused on the cost incurred by coating manufacturers while the SCAQMD evaluated the cost impacts on painting contr actors. The District believes that these studies are applicable to the San Diego region beca use the economic factors affecting architectural coating manufacturers, wholesalers, r etailers, and painting contractors is similar throughout California.

ARB Analysis ARB analyzed the impact of the SCM on the competiti veness of small business coating manufacturers that compete with large coating manuf acturers. According to ARB, smaller coating manufacturers tend to cater to niche market s that are based on competitive factors other than price. These companies depend on specia lty coatings, brand loyalty, customer service, and other non-price related factors.

According to ARB, small business retailers and whol esalers generally sell products from all types of manufacturers and should be unaffected by the proposed amendments to Rule 67.0. High-performance coatings that currently comply wit h the proposed VOC limits are available now from many different manufacturers. Thus, retai lers should have an ample supply and a variety of products to sell.

SCAQMD Analysis The SCAQMD also analyzed the cost impacts to painti ng contractors in its analysis of

amendments to Rule 1113. Based on data from indust ry sources, the estimated annual cost of SCAQMD’s interim VOC limits was $10.9 million 1998 dollars to consumers and $8.9 million 1998 dollars to painting contractors (SIC 1 721). According to SCAQMD, painting

contractors and consumers could incur additional co sts beyond these amounts. For the painting contractor, it could be the cost of traini ng, learning, and testing the new reformulated coatings, frequent painting, possible construction defects, and litigation costs. These additional costs are based on claims made by some c oating manufacturers and some paint contractors and not on any empirical studies. Thes e costs assume coating manufacturers pass through all reformulation costs to end users.

Conclusion An estimate of cost impacts to painting contractors in San Diego was made by assuming that the cost breakdown (consumer vs. painting contracto r) is similar to that found in the South Coast AQMD. This is a reasonable assumption becaus e the type and quantity of work performed by painting contractors is expected to be similar in both regions on a per capita basis. SCAQMD estimates that 45 percent of the cos t impact is experienced by painting contractors. Thus, the cost impact to San Diego ar ea painting contractors would be 45 percent of $3.6 million, which is $1.6 million.

COST-EFFECTIVENESS OF THE PROPOSAL Both ARB and SCAQMD reported cost-effectiveness cal culations for the SCM VOC limits and interim Rule 1113 standards, respectively. Bot h the SCM and interim SCAQMD Rule 1113 are the basis for the proposed amendments to R ule 67.0. In addition, ARB performed a- 9 -

sensitivity analysis with the increase in resin cos ts as the dependent parameter. This ARB analysis was performed using resin costs increasing at ten percent, 20 percent, and 50 percent per year. Both reports include cost-effectiveness values for each of the major coating categories that are proposed for amendment.

The overall cost-effectiveness of the proposal is $ 3.19 per pound of VOC reduced according to ARB or $2.45 per pound of VOC reduced according to SCAQMD. The ARB costeffectiveness value assumes that resin costs for re formulation will increase by 20 percent. This assumption of 20 percent increase in resin cos ts is based on socioeconomic analyses performed by SCAQMD and confidential comments provi ded by some manufacturers to ARB. The South Coast AQMD cost-effectiveness overa ll value does not include the impact from flats or lacquer coatings which were amended b y SCAQMD in 1996 instead of 1999 for the rest of the categories, which would have made t he result even less than the estimated $2.45. These cost-effectiveness results are summar ized in the following table. The table reports the comparison between the ARB and SCAQMD a nalyses and shows the results of the sensitivity analysis performed by ARB that uses pro jected resin price increases as the dependent variable.

Table 4 – Reported Cost-Effectiveness in $ per Poun d of VOC Reduced

Coating Category ARB:

Baseline ARB: 10%

Increase ARB: 20%

Increase ARB: 50%

Increase SCAQMD

Interim VOC

Limit SCAQMD

Final VOC

Limit Flats ($1.64) ($0.97) ($0.30) $1.71 0 $2.85
Industrial Maintenance $5.37 $5.48 $5.59 $5.91 $3.0 3 $8.76 Lacquer $1.59 $1.59 $1.59 $1.59 $1.06 $0.60
Multicolor $2.55 $2.69 $2.83 $3.26 N/A N/A

Non- flat (low & medium gloss) $3.13 $3.75 $4.37 $6.23 $5.64 $10.73

Primers, Sealers, Undercoaters (PSU) $7.36 $7.50 $7.65 $8.08 $1.11 $1 2.46 Quick-Dry Enamel $3.77 $3.87 $3.97 $4.28 $1.01 $4.6 3 Quick-Dry PSU ($0.47) ($0.36) ($0.25) $0.08 $0.48 $ 9.79 Stains $2.04 $2.09 $2.14 $2.30 $0.89 $0.89 Swimming Pool Repair $0.48 $0.65 $0.83 $1.36 N/A N/ A Waterproofing Sealers ($0.72) ($0.61) ($0.50) ($0.1 6) $0.90 $0.90

Overall CostEffectiveness $2.72 $2.96 $3.19 $3.88 $2.45 $8.18

Conclusion From the Costs to Manufacturers section, the total annualized cost to comply with the proposed Rule 67.0 limits would be about $3.6 milli on. The VOC emission reductions, based on 1996 data, are anticipated to be 1.5 tons/day (s ee Emission Reduction Potential of the Rule section). The estimated cost-effectiveness is $3.2 8 per pound of VOC emission reduced. This cost-effectiveness is comparable to the cost-e ffectiveness of other District-adopted VOC regulations. Generally, the cost-effectiveness of past VOC rule adoptions in this District has been in the one-dollar to three-dollar range.- 10 -

AVAILABILITY AND COST-EFFECTIVENESS OF AN

ALTERNATIVE TO THE PROPOSAL

ARB looked at seven alternatives that were found in feasible. Staff also looked at these seven alternatives and found them infeasible. Following is a brief description of these alternatives, and a discussion of why they were found infeasible:

1. Performance-Based Standards Rather than establish lower VOC content requirement s for specified categories of coatings, this alternative would establish emission standards based on performance standards such as “emissions per area covered” or “ coating durability.” This alternative has been rejected as infeasible because it would be too difficult to reach a consensus among involved parties as to how to creat e the standards to cover the multitude of coatings reformulations with varying p erformance characteristics.

2. Seasonal Regulation Under this alternative, the VOC content limits prop osed for various coatings in Rule 67.0 would be in effect during the “high-ozone seas on” (typically the summer months). During the “low-ozone season” (typically the winter months), coatings formulators could sell and distribute, and contract ors and do-it-yourself consumers could use coatings with higher VOC contents. This alternative was found infeasible because it is too difficult to implement and enforc e. It would be difficult for coatings formulators, distributors, and retail stores to man age their inventories to ensure that only complying coatings are sold during the high-oz one season. Knowledge of and enforcement of these requirements at the end-user l evel would be difficult and would require significant additional enforcement resource s. In addition, there have been State violations (“high ozone”) in all months of th e year except February and

December based on data from 1980 - 1995.

3. Regional Regulation Under this alternative, areas within a District tha t do not have an ozone problem or contribute to a District’s ozone problem would be e xempted from the VOC requirements of Rule 67.0. This alternative was re jected as infeasible for two main reasons. First, in order to determine the viabilit y of such an approach, the District would have to conduct an extensive analysis involvi ng ambient air quality modeling to determine which geographical areas would be subject to the lower VOC requirements and which would be exempted. This type of analysis would be difficult to complete due to the inherent variability of meteorological c onditions within San Diego County. Different meteorological scenarios would drasticall y alter the determination of those geographical area. In addition, there have been st ate ozone violations throughout the

area.

Second, even if a reliable technical determination could be made regarding the geographical areas, the problem of enforcing this r egulatory approach remains. Enforcement at the retail level, as well as the end -user level would be difficult and would require significant additional enforcement re sources, as identified in the “Seasonal Regulation” alternative.- 11 -

4. Exceedance Fees This alternative would allow purchases of noncompli ant coatings on payment of a fee, similar to the system that exists in the national A rchitectural and Industrial Maintenance (AIM) coatings rule. The system used i n the national AIM rule allows coatings manufacturers and importers to sell coatin gs that exceed the applicable VOC limit if they pay a fee of $0.0028 per gram of exce ss VOC. Essentially, this is a “payto-pollute” approach. The District does not suppor t such an approach because it does nothing to bring the air into compliance with the s tate ozone standards, and may actually hinder efforts to attain the state and fed eral ozone standards. This type of approach could eliminate or substantially reduce th e emission reductions expected from the proposed revisions to Rule 67.0. Addition al problems include concern regarding whether the fee is high enough to discour age the manufacture and sale of high-VOC coatings, enforcement at the district-wide level, and extensive recordkeeping requirements. For all of these reaso ns, an exceedance fee approach is

not considered a feasible alternative.

5. Tonnage Exemption As with the “Exceedance Fees” alternative, this typ e of alternative is part of the national AIM coatings rule. A tonnage exemption wo uld allow coatings manufacturers and importers to sell limited quantit ies of coatings that exceed the applicable VOC limit in Rule 67.0, without paying a n “exceedance fee.” The

calculation would be based on the total mass of VOC contained in all exempt coatings. The limit of the exemption, on a “per manufacturer” or “per importer” basis, would be on a sliding scale that would decrease in future ye ars.

Like the “Exceedance Fee” approach, a tonnage exemp tion would do nothing to bring the air into compliance with ozone standards, may a ctually hinder efforts to attain both the state and federal ozone standards, and could su bstantially reduce the emission reductions expected from the proposed revisions to Rule 67.0. Additional problems include enforcement, recordkeeping, and reporting r equirements. For these reasons, a tonnage exemption is not considered a feasible alte rnative.

6. Low Vapor Pressure (Low Volatility) Exemption Under this alternative, VOCs with low vapor pressur es (i.e., “low vapor-pressure VOCs” or “LVP-VOCs”) would be exempted as VOCs in d etermining the overall VOC content of a coating. This type of exemption i s based on an assumption that low vapor-pressure VOCs volatilize more slowly, and as a result emit less VOCs to the atmosphere and contribute very little to ozone form ation in the atmosphere. The ARB Final Program EIR identified a number of reasons wh y this alternative should be rejected as infeasible. Due to the extensive and t echnical nature of the reasoning behind this determination, the reasons have not bee n fully summarized in this report. For an extensive explanation of the ARB’s determina tion of infeasibility, the reader should reference the ARB Final Program EIR, Pages V -142 to V-151.

The same reasons identified in the ARB Final Progra m EIR are applicable to the proposed project. The District has concluded that this alternative is not feasible because exempting LVP-VOCs would not achieve regula tory consistency, LVP-VOCs in architectural coatings will eventually evaporate and enter the atmosphere, and- 12 -

EPA’s Test Method 24 automatically excludes VOCs th at do not evaporate into the atmosphere.

7. Reactivity-Based VOC Limits This alternative would involve establishing coating VOC limits based on the reactivity characteristics (i.e., the tendency to react in the atmosphere to form ozone) of the compounds contained in the coating, instead of the mass-based VOC limits that are used in the proposed revisions to Rule 67.0. Histo rically in the State of California and in San Diego County in particular, control of VOC e missions has been through massbased reductions. ARB has committed to evaluating the feasibility of reactivity-based regulations for certain VOC source categories, and a number of specific studies relating to VOC photochemical activity are listed o n Pages V-152 and V-153 of the ARB Final Program EIR. In addition, ARB has begun to incorporate reactivity characteristics of compounds into some of its exist ing and proposed regulations. However, at this time, a number of issues need to b e addressed before this type of control strategy could be developed for architectur al coatings. These issues are described in the ARB Final Program EIR (Pages V-155 to V-158). As discussed in the Program EIR, additional data are necessary befo re assessing the feasibility of a reactivity-based control strategy for architectural coatings. Because additional reductions are needed in the near-term, and histori cal data indicate mass-based controls effectively reduce ozone formation, it is necessary to proceed with massbased VOC limits at this time.

The District looked at three feasible alternatives to the proposed amendments to Rule 67.0. These alternatives were to not amend the rule, to e xtend the compliance deadline by one year,

or to further reduce the VOC limits.

1. The first alternative to not adopt the rule is n ot recommended because it would result in fewer emission reductions than the proposed amen dments to Rule 67.0 and the

District needs the emission reductions to achieve t he state ozone standards.

2. The second alternative to extend the compliance deadlines by one year is not recommended because the VOC limits in the proposed rule are feasible by January 1, 2003 (January 1, 2004, for Industrial Maintenance C oatings), and additional time to comply is not necessary. Both the federal and stat e mandates that air quality standards be attained as expeditiously as practicable, and th e District’s air quality problems require that any delay in achieving emission reduct ions must be technically or economically justified. Based on the information r eceived to date, such a delay is not

warranted.

3. The last alternative is to further reduce the VO C limits. The District looked at the cost-effectiveness of the currently adopted form of SCAQMD Rule 1113, Architectural Coatings, which include more stringen t VOC content requirements for coatings with a future effective date of 2006. Thi s alternative was analyzed by the SCAQMD for cost-effectiveness and availability.

According to SCAQMD staff report, the overall cost- effectiveness of the final VOC limits, effective 2006, is $8.18 per pound of VOC reduced. Although the adopted final VOC limits- 13 -

will reduce more VOC emissions than the interim lim its, it is a more expensive control measure when compared to the $3.19 per pound of VOC reduced for the SCM.

Although the alternative to the proposal could stil l be considered cost-effective at $8.18 per pound of VOC reduced, staff is not proposing this a lternative for several reasons:

First, ARB staff also considered this alternative i n the SCM but declined to include it

because there were insufficient time and resources to do a thorough evaluation.

Second, the SCM provides consistency statewide that provides a uniform regulation for coating manufacturers in all of California except t he South Coast district.

Third, a statewide averaging provision from the SCM is being proposed and uniform standards are needed for this provision to be worka ble.

Fourth, the alternative is in many ways technology- forcing, the South Coast AQMD will be doing technology assessments to determine the pr ogress of complying coating technologies in meeting future VOC limits, and Dist rict staff can reassess the need to adopt the more stringent standards in response to t hese future analyses.

EMISSION REDUCTION POTENTIAL OF THE RULE The estimated emissions from architectural coatings in 2000 are 10.33 tons of VOC per day. The estimated emission reduction for the proposed r ule based on a 15 percent overall control factor is 1.5 tons of VOC per day.