MEMO RAND UM

To: G il Wood, U S E PA
Da vid Cole, U S E PA

From: Glenn Meganck, E C/R In c. Ji ll Mo zi er , E C/R Inc.

Da te: Marc h 7 , 2013

Subj ec t: No te s from t he Fe br ua ry 28, 2013, U S E PA Meet ing wit h I n dus tr y re ga r ding
t he Cost E ff ect iv ene ss of Re visions to t he Wood Hea ter s NSP S – RTP, NC

Purpose: The m ee ti n g wa s ar ra nged a s a platfor m for the U S E PA and industry to shar e in formation on the upco ming proposed re vision of the 1988 wood heat er s N SPS th a t mi ght prove

us ef ul in the d raf ti ng of the re vised re gulations.

Participant s & Obs er ve rs Participant s Organizat ion
Amanda A ld ridge U S E PA John Cr ouch HP BA Bob F er guson Ferguson, Andor s & Co mp any (consultant to HPBA) A nd re w Foss NE RA David Ha rr ison NE RA David Me no tt i Cro we ll & Mo ring (counse l to HPBA) La rr y So rre ls U S E PA Gil Wood U S E PA Obs er v er s Organizat ion Gle nn Me ganck E C/R Inc Jill Mozier E C/R Inc

D is c ussion Hi g hligh t s:

J ohn C rouch initiated discussion by pointing out how di ff ic ult it is, in h is be li ef , for sm a ll busine ss es to und er st and and adapt to the new rule s th a t govern the ir industry. He st ated tha t in

many ca ses, these “ mi cr o” busine ss e s m ay not do business in the norma l way s th a t oth er, larg er , mo re exp er ienced busine ss es do. Of ten, he added, th ey do not even have a cl ea r id ea of th e ir own prof it a bili ty or costs of doing busine ss.

Da vid Menotti note d th a t NE R A’ s p re sentation does not take into acc ount a “ ti er 3” mo r e
st r in gent standard be ca use HPBA was not aw are tha t wa s under consideration when they asked
NE RA to do the analy sis. (N ote : Ther ef ore, no analy sis wa s p resented re g ar ding using a limit of 1.3 g /h r ; and fur th er mo re the NE RA/HB PA analysis used a limit of 3.0 g/hr ra th er th an 2.5 g /h r.)

Page 1 of 4T he m a jor po r tion of the m ee ting r e volv e d a r ound a p re s e n t a tion b y D r

. D a vid Harr ison of
NE R A

, a n ec onomic c o n sulting f i r m, c ont r a c t e d b y H B PA to p r ovide a n a n a l y sis of the c ost eff e c tiv e n e ss of the p r o p os e d N SPS re visions to w ood stov e s. Dr

. H a rr is o n n arra t e d a Po w e r PointTM p re s e nt a tion e ntitl e d “ Cost

- Eff e c tiv e n e ss of A lt er n a tive W ood Stove Ne w Sou r c e P erf o r m a n c e St a nd ar d s ” ( s e e A tt a c h me n t A )

. T h i s p re s e nt a tion l a id out st e p

- b y

- st e p the a n a l y sis th a t NE RA c ondu c t e d c o n cer ni n g the c osts to bus i n e ss of c omp l y i n g w ith p r opos e d n e w

e missions st a nd ar ds th a t w ould lo we r the p a r ti c ul a te e mission st a nd ar ds f r om 7.5 g /hr to 4.5 g /h r , a nd th e n to 3.0 g /h r

.

T his a n a l y sis w a s p e r f o r m e d sol e l y on f ree s t a ndin g , non c a t a l y tic w ood h e a t er s; ca t a l y tic w o od h ea t er s a nd sin g le b u r n r a te w ood h e a t er s w er e n o t in c lud e d in the a n a l y sis. T he a n a l y sis ( in 2013$) a ssum e d a 10

- y ea r a mo r ti z a tion of c osts a t a 7% int ere st r a t e

. T he s t u d y r e li e d h ea vi l y on p re vious w o r k b y J a m e s H ou c k a nd on a r e ce nt a n a l y sis a nd su r v e y b y B ob F e r g uson a nd Ch ar lie P a ge (e

. g ., s e e A tt a c h m e nt B “ De s c r iption of the W oodstove Cost Mod e ling a nd E x p er t P a n e l R e vi e w P r o ce s s ” a nd Att a c h me nt C “H P BA W ood Stove P r i c ing Su r v e y M e thodol og y Summ a r y ” ).

G il W ood a sk e d w h a t f o r mula wa s us e d to d er ive t he tons / y e a r e missions e s tim a t e s. B ob
F e r g uson e x pl a in e d th a t it wa s a c ompl e x f o r mula b a s e d on the A P

- 42 st a n d ar d, w hi c h a lso look e d a t the a mount of f u e l bu r n e d.

G il W ood ra is e d the qu e stion of w h e th e r it wa s “ e f f i c i e n c y ” o r “ looks” th a t d r iv e s w ood h ea t e r

s a l e s. B ob F e r g uson re pl i e d th a t b e tt e r e missions r a tin g s do not d r ive s a l e s, a nd th a t ae sth e ti c s

a nd c ost a r e mo r e impo r t a nt fac to r s to b u y e r s. G il W ood a g r e e d, noting t h a t, o f t e ntim e s, w ood h ea t er s ar e sold a s f u r nitu re

.

T h er e w a s some dis c uss i on ov e r the c ost of m a n u fac tu r e a nd the (

~ 40 % ) m ar g ins th a t

m a nu fac tu r er s, dist r ibuto r s a nd re t a il e s t a blishm e nts re qui r e to sust a in th e ir busin e ss e s. J ohn C r ou c h not e d th a t w ood h ea t e r s a l e s a r e g e n era l l y a on e

- time e v e nt, th a t is, unlike a utomobil e s, f

or inst a n ce , th e r e ar e no s ec ond a r y , p er iph e ra l s a l e s to be m a de to c ustom e r s, su c h a s

a utomobile acce ss o r i e s o r p ar ts to b u yer s of a ut o mobil e s.

B ob F e r g uson a d d e d th a t he fe lt th a t it w ould a lso be impo r t a nt a t a l a t e r d a te to dis c uss w ith the
U S E PA the imp ac t to the indust r y o f online s a l e s , w hi c h g rea t l y a ff e c ts p r o f it a bili t y m a r g ins.

Larry So r r e ls st a t e d th a t it is di ff i c ult to f ind g o od p r i c e “ e l a sti c i t y ” d a ta f or the ca t e g o r y d u e to the n a tu r e of t h e indust r y a nd the numb e r of sm a ll m a nu fac tu r er s a nd re t a il e r s. Dr

. Da vid
Harr ison a nd B ob F e r g u s on a g ree d. B ob F er g uson st a t e d th a t a s p r i ce s o f w ood h ea t er s in c rea s e, s a l e s d ec r ea s e

. H e s a id h e h a d a n a n ec do t a l indi c a tion th a t a 10% in cr e a se i n p r i c e l ea ds to a 16% d ec r ea se in s a l e s, b ut no h ar d d a t a

. Dr. Harrison stated that th e

- 1.6 price elasticity value they used in their study was taken from the RIA done by the EPA for the 1988 wood heaters NSPS (value developed in 1986). S e v e ra l p re s e nt believe th a t th e r e i s not e no u g h d a ta to qu e stion the

- 1. 6 p r i c e e l a sti c i t y a ssumption.

Da vid Ha rr ison st a t e d th a t, acc o r ding to the NE RA stu d y , the 4.5 g /hr st a n d ar d w ould not re sult in a d e m a nd e f f

e c t, sin c e most mod e ls a l rea d y m e e t this st a nd ar d. H o we v e r , acc o r di n g to the
P a g e 2 o f 4stu d y , NE RA c l a ims th a t f u r th e r r e vising the s t a n d ar d fr om 4.5 g /hr to 3.0 g /hr w ould h a ve a d e m a nd e f fec t a pp r o x im a ting a 15% re du c tion in w ood h ea t e r s a l e s.

Dr

. Ha r r ison a lso d e s c r ib e d the “ s c ra pp a ge e f f

e c t” w h ere in some pot e nti a l w ood h ea t e r pu rc h a s e r s w ill c hoose to k ee p th e ir e x istin g , l e ss eff i c i e nt w ood h ea t e r , ra t h e r th a n p a y a g r e a t er

a mount f or a n e w stove e v e n thou g h it m a y be m o r e e f f i c i e nt in the lo n g

- t e r m. H e a r g u e d th at this w ould, th eref o re , i n c rea se o v era ll a nn u a l e mi s sions (c omp are d to e mis s ion re du c tion

e stim a tions w hi c h do n o t in c lude the s c r a pp a ge e f f

e c t) a s old e r w ood h ea t e r s re m a in in

op e r a tion.

B a s e d on a 3.0 g /hr st a n d ar d, NE RA e stim a t e d a 2 2% d ec line in p a r ti c ul a te e missions ( tons) fr om b a s e line w h e n t a ki n g into a c c ount c ombin e d d e m a nd a nd s c ra pp a ge e f fec ts. Dr

. Ha r r ison f u r th e r ar g u e d th a t in c r e m e nt a l ra t c h e ti n g do w n o f the st a nd ar d re sults in hi g h e r c osts w ith non

c omm e nsu ra te b e n ef its. NE R A’ s stu d y c on c lud e d th a t “re l a tive to 4.5 g /h r , the 3.0 g /hr st a n d ar d

w ould impose a lmost 7x mo r e c osts but on l y a bo u t 3x mo r e e mission re du c tions ( b eca use o f

mo r e e missions fr om e x isting stov e s due to s c r a p p a ge e f f

e c t )”

.

I n dis c ussi n g the m e tho d olo g y th a t B ob F er g uson us e d in his a n a l y s e s, w h i c h we r e th e n p r ovid e d

to NE RA f or th e ir stu d y , M r

. F er g uson e x pl a in e d th a t he on l y loo k e d a t no n ca t a l y tic w ood h ea t er s, a s this wa s the c a t e g o r y w ith t h e c l e are st a nd most rea di l y a v a il a b l e d a t a ; tho u g h he did look a t the c osts of non c a t a l y tic w ood h ea t er s g oi n g to c a t a l y tic c onv e r t e r w ood h ea t er s. I t wa s his p r o fe ssion a l opinion, he a dd e d, th a t the imp a c ts of c osts f or c a t a l y t i c c o nv er t e r w ood h ea t e r s

w ould be simil a r to those f or non ca t a l y tic w ood h e a t er s.

B ob F e r g uson on c e a g a in st a t e d th a t sm a ll f i r ms o f t e n do not h a ve a g ood u nd er st a ndi n g of th e ir o w n l e v e l of p r o f it a bili t y a nd d e s cr i b e d the di ff i c u lti e s face d in t r y i n g to s u r v e y the indust r y f or p rec ise in f o r m a tion.

G il W ood ra is e d the qu e stion of the l a r g e numb e r of w ood h ea t e r mod e ls a v a il a ble a nd

a s k e d w h a t a ns w e r he c ould g i v e to st a t e s a nd e nvi r onm e nt a l o r g a ni z a tions w ho b e li e ve th a t

m a nu fac tu r er s h a v e too m a n y mod e ls. M r

. F er g u son a ss er t e d th a t the nu m b e r of n e w mod e ls

c oming to m ar k e t h a s b e e n d ec r ea si n g , a nd h e h i ms e lf h a s b ee n a st r o n g a dvo ca te f o r f u r th e r

re du c i n g the numb e r of mod e ls to h e lp a c omp a n y ’ s p r o f it a bili t y

.

M r

. W ood st a t e d th a t the c ost eff e c tiv e n e ss b e c o m e s rea so n a ble if y ou c on s id e r the mod e l d e s i g n li f e of the w ood h e a t e r a s e x t e nding out 20 y e ar s. H e f u r th e r m or e point e d o ut th a t indust r y

m e mb er s h a d st a t e d th a t t h er e a r e m a n y ol d e r sto v e s in hom e s now th a t h a v e b ee n in pl a c e f o r 20

- plus y e ar s. D a vid Ha r r ison not e d th a t NE RA did a simil a r a nnu a li z e d a n a l y sis f or OTAQ

w hi c h took into c onsid e r a tion the li fe sp a n of c on s um e r a ppli a n c e s su c h a s l aw nmo wer s. M r. F e r g uson a g r e e d w ith M r

. W ood ’ s point th a t some mod e l d e si g ns ( i. e ., t h e “ g uts” of t h e stov e ) h a ve not c h a n g e d sin c e t he 1988 N SPS, a nd a dd e d th a t m a nu fac tu r er s w o u ld like to m a ke

c h a n g e s but h a v e not fe lt ab le to t a ke the f i n a n c i a l r isk of e x t e nsive R & D

.

Da vid M e notti f u r

th e r a g ree d t h a t c onsum er s do not h a ve the s a me moti v a tion to re pl ac e w ood h e a t er s a s th e y do car s, f or e x a mpl e , w hi c h must be re pl a ce d w h e n th e y no lon g e r s er ve t h e f un c tion of t ra nspo r t a tion. W ood h ea t er s g e n e ra l l y s er ve the p u rpose of p r o d u c ing h ea t f or lo n g

P a g e 3 o f 4p er i o ds of tim e , r e g ar d l e ss of th e ir e missions a nd ef f i c i e n c y , a nd th e ref o r e a r e not re pl ace d a s

o f

t e n a s th e y p r ob a b l y should b e.

J ohn C r ou c h e x p re ss e d a c on cer n r e g ar di n g the f o r ce d

- a i r f u r n ac e indust r y a nd a sk e d w h e th er the p r opos a l w ould in c l u de a 1

- y e a r e x e mption f or su c h a ppli a n c e s. M r

. W ood st a t e d th a t th er e is

c u rre nt l y no su c h e x e mption f or th e se a ppli a n ce s i n the p r opos e d r e vision to the N SPS. I ndust r y

m e mb er s a nd U S E PA d i s c uss e d the use of CSA S t a nd ar d 415.1 f o r e f f i c i e n c y t e stin g . M r. F e r g uson st a t e d th a t th e r e h a s b ee n a poor l e ar ni n g c u r v e , thus f ar , re g ar d i ng this st a nd ar d. T h e point wa s m a de th a t m a n y C a n a d i a n f i r ms m a ke f o rce d a i r f u r n ace s th a t a r e d ua l

- f u e l using ( e

. g .,
w ood a nd oil )

, w hi c h po s e s a noth e r issue in t er ms of und er st a ndi n g a nd e mpl o y m e nt of the

st a nd ar d. F u r th er , M r

. F e r g uson point e d out th a t m a n y “ mi cr o” m a n u f a c tu rer s a r e p r od u c ing f

o rce d a ir f u r n a c e s th a t a r e e ss e nti a l l y “ built to o r d er ” a nd, t h er e f o re , l a b t e sting is imp rac ti ca bl e

.

I n a ns w e r to indust r y ’ s q u e stion r e g ar di n g w h e n the p r opos e d r u l e w ould b e re l e a s e d, M r

. W ood

summ ar i z e d the c u rre nt l y p r oj ec t e d s c h e dule f o r r e vi e w of the d r af t r ule b y v ar ious a g e n c i e s, in c luding publi ca tion of t he p r opos e d r u l e in l a te s umm e r 2013. T he U S E PA a nd indust r y

re p re s e nt a tiv e s e x p re ss e d th e ir mutu a l int ere st in w o r king t o g e th e r a nd m a int a ining a n op e n di a lo g ue a s the p r opos e d re visions to the w ood h e a t er s N SPS mov e s f o rwa r d th r ou g h the

r e g ul a to r y p r o ce ss.

P a g e 4 o f 4A TTACHMENT A

# Cost-Effectiveness of Alternative Wood Stove New Source Performance Standards

David Harrison, Jr., Ph.D. Andrew Foss

Prepared on behalf of the Hearth, Patio and Barbecue Association

Presentation to the U.S. Environmental Protection Agency February 28, 2013 

# Preliminary Analysis • Do Not Distribute1 Preliminary Results · Do Not Distribute 

# Contents

 Overview of Objective and Methodology

 Compliance Cost Estimates

 Baseline Sales Estimates

 Baseline Emissions Estimates



#  Price and Elasticity Estimates

 Emissions Reductions and Costs of 4.5 g/h Standard

 Emissions Reductions and Costs of 3.0 g/h Standard



#  Cost

- Effectiveness of 4.5 and 3.0 g/h Standards

 Appendix

– Range of Compliance Cost Estimates



## – Sensitivity Analyses of Compliance Cost Estimates and Scrappage Parameter2 Preliminary Results · Do Not Distribute 

# Overview of Objective and 

# Methodology

Objective : Develop preliminary analysis of the cost

- effectiveness ($/ton) of potential wood stove new source performance standard (NSPS) of 4.5 or 3.0 grams of particulate matter (PM) per hour (g/h) based on estimated total compliance costs and total emission reductions



## Methodology

 Analyzed illustrative future year (2018)

 Estimated compliance costs

– Ferguson (2013) provides ranges of compliance costs per model for modifying stove models



### – Estimated compliance costs per unit based on sales assumption per model

 

## Estimated price and demand effects

– Ferguson and Page (2013) provide survey results on baseline prices

– Used estimates of retail price markup and price elasticity of demand for new wood stoves



###  

## Estimated emissions and scrappage effects

– Used Houck (2011) to estimate baseline emissions from new stoves sold in 2018

– Also estimated emission changes for existing stoves in 2018 due to demand (price) impact on scrappage rates

 

## Developed estimates of cost

- effectiveness of alternative NSPS

 Developed sensitivity analyses (in appendix) for ranges of compliance costs from Ferguson (2013) and alternative scrappage parameters3 Preliminary Results · Do Not Distribute 

# Compliance Cost Estimates: 

# Averages by Cost Category

Average compliance costs for modifying 7.5 or 4.5 g/h stove models to comply with 4.5 and 3.0 g/h standard (2013$)

Source: Ferguson (2013)
See appendix for range of compliance costs4 Preliminary Results · Do Not Distribute 

# Compliance Cost Estimates: 

# Total Per Unit

 Table shows total compliance costs per unit

– Assumed capital and other “model” costs annualized over 10 years using 7% real annual discount rate

– Assumed 1,000 units sold per model per year on average

 Source: Based on sales data in Houck (2011) and estimated total number of models from EPA model certification data (see next slide)



## – Assumed 35% indirect costs for costs anywhere in supply chain that were not 

## directly estimated by Ferguson (2013)

 Indirect cost estimates used in EPA analyses (e.g., motor vehicle emission standards)5 Preliminary Results · Do Not Distribute 

# Baseline Sales Estimates: 

# Houck Data and Cat/Non

- Cat

Source: Houck (2011, p. 28) and NERA extrapolation 

##  Figure shows Houck’s (2011) historical 1987

- 2010 data for total wood stove sales (catalytic and non

- catalytic) and trendline extending to 2018 (1% annual growth)

 Of the projected 110,000 wood stove sales in 2018, assumed 2/3 are non

- cat (included in this analysis) and 1/3 are cat (not included in this analysis)

– Thus, 75,000 new non

- cat stoves in 2018

– Based on EPA model certification data by model count ( http://www.epa.gov/compliance/resources/publications/monitoring/caa/woodstoves/certifiedwood.pdf )



## – Broadly consistent with 2010 stock data in Houck (2011, pp. 30 and 33): 406,000 cat stoves in use [24%] and 1,286,000 non

- cat stoves in use [76%]6 Preliminary Results · Do Not Distribute 

# Baseline Sales Estimates: 

# Non

- Catalytic by Emission Rate

 Table shows projections of non

- cat wood stove sales in 2018 under baseline conditions (without new EPA NSPS)

 Used survey results from Ferguson and Page (2013) to estimate sales percentages for 7.5, 4.5, and 3.0 stoves

Source: Ferguson and Page (2013) for sales percentages and NERA calculations7 Preliminary Results · Do Not Distribute 

# Baseline Emissions Estimates: 

# Annual Emission Rates

 Houck (2011, p. 33) provides the following information on the stock of in-use certified non-catalytic and in-use non-certified wood stoves in 2010

Note: EPA certification requirements were phased in between 1987 and 1990.



##  Based on annual emissions per unit for certified stoves (0.012 tons/unit), table below shows estimated annual emissions per unit for 7.5, 4.5, and 3.0 stoves

− Weighted average emission rate (using assumed percentages of sales): 4.2 g/h

− Example: 7.5 g/h is 1.79 times the weighted average emission rate, so its annual emissions estimate is 1.79 times the certified stove average (0.012 tons/unit), hence 0.021 tons/units

− Note: If actual

emission rates all differed from tested emission rates by the same proportion for all three groups, the annual emission estimates in the table below would still apply8 Preliminary Results · Do Not Distribute 

# Baseline Emissions Estimates: 

# Total Emissions

 Table shows baseline emission estimates for new non

- cat wood stoves in 2018 based on the sales and emission rate estimates above9 Preliminary Results · Do Not Distribute 

# Baseline Average Price Estimate

 Ferguson and Page (2013) performed survey of stove manufacturers on model prices and emission rates

– Survey indicated that high-emission-rate stoves tend to have relatively low prices and low-emission-rate stoves tend to have relatively high prices



##  Table shows baseline price estimates for new non-cat stoves based on Ferguson and Page (2013) survey results

– Stove categorization

 All stoves with emission rates up to 3.0 g/h are categorized as 3.0 g/h

 All stoves with emission rates greater than 3.0 g/h up to 4.5 g/h are categorized as 4.5 g/h

 All stoves with emission rates greater than 4.5 g/h are categorized as 7.5 g/h

 “Rounded up” because actual emission rates tend to be higher than lab -tested rates



### – Prices are average of all stove models within each category (not weighted by sales)10 Preliminary Results · Do Not Distribute 

# Compliance Retail Price and 

# Elasticity Estimates

 Assumed that retail price impact would include 67% retail markup on wholesale compliance cost

– Source: Industry estimate that retailers generally price units for a 40% gross margin (equivalent to 67% retail markup)

– Example: If total wholesale cost for a unit is $1200, retailer sells it at $2000 (a 40% gross margin [$800/$2000] and 67% retail markup [$800/$1200])



##  Assumed

- 1.6 price elasticity of demand for new wood stoves (i.e., 10% increase in price leads to 16% decrease in sales quantity)

– Source: EPA (1986) regulatory impact analysis (demand for wood heat)11 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Price Increase 

# for 4.5 g/h Compliant Stoves

 If EPA set a new standard of 4.5 g/h, stoves with baseline rates of 7.5 g/h would have to be modified to 4.5 g/h, and the modification costs would lead to higher prices

 Table shows new average price of 4.5 g/h stoves with modification of 7.5 

# g/h models12 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Average Price 

# Increase for All Stoves

 If EPA set a new standard of 4.5 g/h:

– Sales of 7.5 g/h stoves would be eliminated;

– Average price of 4.5 g/h stoves would be different (because of averaging in modified 7.5 g/h stoves); and

– Sales of 3.0 g/h stoves would be unchanged



##  Table shows changes in sales and average price across new stoves

 Average price of new stoves estimated to rise by $23 due to eliminating the low-price 7.5 g/h stoves and modifying them to 4.5 g/h13 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Demand Effect Explained

 Higher prices lead to lower sales

 Figures show market for new wood stoves (all emission rates combined)

– Figures are not drawn to scale

Baseline

Sales Price

Demand

$2,008

75k 

## New 4.5 Standard

Sales Price

Demand

$2,008

75k +$23 (+1.1%)

- 1,359 (

- 1.8%)14 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Scrappage Effect 

# Explained

 Some of the 2018 sales loss due to higher prices is from consumers who would have bought a new stove and scrapped the old stove but now keep the old stove



# – The increase in emissions from existing stoves is termed a “scrappage effect” and is included in EPA/CARB analyses (e.g., new motor vehicle emission standards)

 Assumed scrappage parameter of 50% (i.e., sales reduction of X stoves would lead to 0.5X more existing stoves that otherwise would have been scrapped/replaced)

– Also performed sensitivity analysis with 0% and 100% parameters



#  Increase

in emissions from the existing stoves that would have been scrapped partly offsets the emission decrease from new
stoves15 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Emissions Impacts With Demand and Scrappage Effects

 Table shows impacts with demand and scrappage effects (50%)

– Calculations use annual emission rate (tons/unit) from above (including existing stove average annual emission rate of 0.027 tons/unit)



##  The new standard would decrease total emissions, but the reduced 

# scrappage of existing stoves would lead to more emissions from existing stoves (which have higher emission rates than new stoves)16 Preliminary Results · Do Not Distribute 

# 4.5 g/h Standard: Compliance Costs 

# with Demand Effect

 Table shows estimated total compliance costs for new 4.5 g/h standard based on modifying 7.5 g/h stoves and accounting for the reduced number of stoves sold due to the price increase17 Preliminary Results · Do Not Distribute 

# 3.0 g/h Standard: Price for 3.0 g/h 

# Compliant (All) Stoves

 If EPA set a new standard of 3.0 g/h, stoves with baseline rates of 7.5 or 4.5 g/h would have to be modified to 3.0 g/h, and the modification costs would lead to higher prices

 Table shows new average price of 3.0 g/h compliant stoves with 

# modification of 7.5 and 4.5 g/h models18 Preliminary Results · Do Not Distribute 

# 3.0 g/h Standard: Average Price 

# Increase for All Stoves

 If EPA set a new standard of 3.0 g/h:

– Sales of 7.5 g/h and 4/5 stoves would be eliminated; and

– Average price of 3.0 g/h stoves would be different (because of averaging in modified 7.5 and 4.5 g/h stoves)



##  Table shows changes in sales and average price across new stoves

 Average price of new stoves would rise by $187 due to eliminating the 7.5 and 4.5 g/h stoves and modifying them to 3.0 g/h19 Preliminary Results · Do Not Distribute 

# 3.0 g/h Standard: Demand Effect 

# Explained

 Higher prices lead to lower sales

 Figures show market for new wood stoves (all emission rates combined)

– Figures are not drawn to scale

Baseline

Sales Price

Demand

$2,008

75k 

## New 3.0 Standard

Sales Price

Demand

$2,008

75k +$187 (+9.3%)

-11,146 (-14.9%)20 Preliminary Results · Do Not Distribute 

# 3.0 g/h Standard: Emissions Impacts with Demand and Scrappage Effects

 Assumed that reduced sales of new stoves (3.0 g/h) would lead to reduced scrappage of existing stoves

 Table shows impacts with demand and scrappage effects

– Calculations use annual emission rate (tons/unit) from above



#  The new standard would decrease total emissions, but the reduced scrappage of existing stoves would lead to more emissions from existing stoves (which have higher emission rates than new stoves)21 Preliminary Results · Do Not Distribute 

# 3.0 g/h Standard: Compliance Costs

 Table shows estimated total compliance costs for new 3.0 g/h standard based on modifying 7.5 and 4.5 g/h stoves and accounting for reduced need to modify due to reduced sales22 Preliminary Results · Do Not Distribute 

# Cost-Effectiveness of 4.5 and 3.0 

# g/h Standards

 Relative to 4.5 g/h, the 3.0 g/h standard would impose almost 7x more costs but only about 3x more emission reductions (because of more emissions from existing stoves due to scrappage effect)

# Appendix24 Preliminary Results · Do Not Distribute 

# Compliance Cost Estimates: 

# Ranges

Source: Ferguson (2013) and NERA calculation of averages (midpoints) 

#  Table shows minimum and maximum compliance cost estimates from Ferguson (2013)

 NERA calculated averages as the midpoints between these minimum and maximum values25 Preliminary Results · Do Not Distribute 

# Sensitivity Analysis: 

# Alternative Compliance Costs

 Table shows the effects of alternative compliance costs (minimum, average, or maximum from Ferguson (2013)) on total 

# emission reductions and cost per ton using 50% scrappage parameter26 Preliminary Results · Do Not Distribute 

# Sensitivity Analysis: 

# Alternative Scrappage Parameters

 Table shows the effects of alternative scrappage parameters (0%, 50% and 100%) on total emission reductions and cost per ton 

# using average (midpoint) compliance costs from Ferguson (2013)

– 0%: None of the lost sales would have been replacement stoves

– 100%: All of the lost sales would have been replacement stoves

Note: (a) Incremental cost per ton is not calculated for 100% scrappage parameter because the incremental gains are negative (i.e., emissions would be higher with 

### 3.0 g/h than with 4.5 g/h).

### David Harrison, Jr., Ph.D. Senior Vice President NERA Economic Consulting Boston 617 927 4512 

### david.harrison@nera.com

© Copyright 2013 National Economic Research Associates, Inc.

All rights reserved. 

### Andrew Foss Consultant NERA Economic Consulting Boston 617 927 4582 

### andrew.foss@nera.comA TTACHMENT B2/26/2013

1 

# Description of the Woodstove Cost Modeling and Expert Panel Review

Process.

Presented by Bob Ferguson

For the Hearth, Patio & Barbecue Association

1



### • A comprehensive economic impact analysis is an important component for the determination of any new passing grades for wood heaters.

• In order to provide technically sound inputs to these economic analyses, HPBA developed information on the potential costs of meeting alternative particulate matter (PM) standards using an engineering modeling approach.

– It is important to note that the modeling did not consider the impacts of adding other allowables to the regulatory landscape (notably overall efficiency or carbon monoxide standards).

22/26/2013

2 

### • The HPBA economic modeling addresses woodstov e

m odels that meet current PM requirements but will requir e

m odification if more stringent PM standards ar e pr omulgat ed.

• M odification of current model designs to comply wit h
t ighter standards implicates a variety of capital and fix ed

c ost investments

.

• A dding or modifying technology also implicates cost increases to the product itself including:

– materials

,

– d irect labor and

– warranty exposur e.



### • T he costs presented in the models should be considered as incremental cost increases that are attributable directly t o i ncreases in regulatory stringency.

3



## • The woodstove economic modeling was limited to non-catalytic stoves only.

– Non-catalytic models represent by far the largest category of certified stove models produced and
sold.

– Catalytic stove models can also be expected to incur similar incremental costs depending on the stringency of the promulgated standards.

42/26/2013

3 

### • The first step was the development of initial modeli ng

w ithin an Excel® workbook

.

• F or purposes of the modeling, a mid-size base stove model was used as the basis

.

– T he base model was considered to be a model that includes all components that comprise a fully-functional stove model bu t

w ithout any enhancements, options or upgrades

.



### • T he various cost sections were built from the bottom up

c onsidering the various components that comprise t he di fferent categories of cost:

– Capital Costs (development, engineering, manufacturing

, p urchasing, equipment and integration, and facilities impacts)

,

– Fi xed Costs (testing, certification and product roll-out) and

– Variable Costs (materials, machining, assembly labor, etc.) associated with modifying model lines to meet two targe t

em ission levels.

5



### • The modeling further delineated between steel and cast iron construction because of the significant differences in capital cost requirements between the two materials.

– Other materials – specifically soapstone or other stone materials- were not modeled

.

• It should be noted, however, that models that employ thos e

n atural materials in their aesthetic/functional designs ar e g enerally at the high end of the retail price range even without consideration for technology improvements beyond today’s norm

.



### • T he modeling was approached at a fairly granular level to allow reviewers to understand what was specifically included.

62/26/2013

4 

### • Each cost section was treated like a part of a p roduct development budget. The only difference is that the question being evaluated was “what are the incremental costs specifically attributable to new regulations?" In other words,if a model needs to be redesigned and recertified for no other reason than to meet new regulatory requirements, what are the costs?

• Each cell in the spreadsheet was then populated with a range of values, based on the expert judgment of the engineering consultant including advice from other industry experts.

7



### • In the variable cost section, the costs again reflect
incremental costs.

– These are direct costs attributable to the added complexity and additional labor needed to build a

s tove with improved or additional technology added

.

– L abor costs include employee benefits

.

– N o indirect costs are included in the variable cost modeling sections. Those indirect costs (G & A

,
o verhead, etc.) are absorbed in the manufacturer’s margin which is reflected in the cost to the next entity in the distribution chain and ultimately in the MSRP.

82/26/2013

5 

### • A total of three cost scenarios were modeled.

– These address situations where existing stove models ar e t echnologically modified to improve the emission performance while leaving the other features and design elements generally unchanged.



### • Scenario 1

– an “EPA-only” model, ≤ 7.5 g/h but > 4.5g/hr) is modified to meet the current Washington State limit.



### • Scenario 2

– modifying a stove model that currently meets the current Washington State limit (≤ 4.5 g/hr), to meet a new lower limit (≤3.0 g/hr).



### • Scenario 3

– modifying an EPA-only stove model to meet the ≤ 3.0 g/hr emission limit (≤ 7.5 g/h to ≤3.0 g/hr).

9



### • The second step in the process was the review of the initial modeling spreadsheet by a broader group of industry experts

− the “Experts Panel”.

• Each Expert Panelist was individually briefed about the review process including:

– what was expected of the panelists in det ail

– an swering any questions

– how to provide and

– the form used to document the panelists ’ b ackgrounds as industry experts

.

102/26/2013

6 

### • Panelists were asked to evaluate the cost ranges in th e

m odels from the perspective of whether they pass th e

“ reasonableness” test for a typical free-standing wood stove, based on their experience in the industry.

– The panelists were asked to first consider the “macro” ranges presented for each of the main cost categories, and then consider each item in the more detailed breakdown within each cost category

.

– F eedback from individual panelists was compiled.



### • Revisions were made to the modeling where th e

en gineering consultant felt they were appropriat e b ased on the aggregated feedback.

• Please note that this generic modeling approach is intended to develop estimates of typical costs for typical manufacturers for a typical mid-sized non-cat base stove model as verified by the cumulative weight of the expertise of the Expert Panel. Some outlier cost suggestions were disregarded as the final modeling was prepared.

11A TTACHMENT CHPBA Wood Stove Pricing SurveyMethodology SummaryPresented by Bob FergusonFor the Hearth, Patio & Barbecue Association1•The survey was done by Charlie Page,HomeWarmth, Inc. in conjunction withFerguson, Andors & Company. Charlie Pagehas 35 years of industry experience in productdevelopment, sales and marketing for varioushearth industry manufacturers.•The purpose of the survey was to identify2012 retail pricing of woodstoves sold by thedominant manufacturers in the hearthindustry.2•The pricing spread sheet was developed frommanufacturers’ price lists.–These were obtained by on-line searches or by contactingand interviewing retailers and distributors or themanufacturers themselves.–Other information relating to typical discounts, freightcosts and industry practices came from interviews withindustry experts in key stove selling areas.•All information obtained was logged in spreadsheets bymanufacturer and model. A summary of the datacollected was tabulated with manufacturers andmodels masked.•For the purposes of the survey, the Base List Price wasconsidered the same as the Manufacturer’s SuggestedRetail Price (MSRP) for their base models.3•The retail pricing used is that for specialtyretailers with nationally distributed majorbrands and where retail pricing was able to beobtained during the surveying.•Pricing information was obtained for:–142 individual stove models representing:•14 Major Manufacturers•22 Woodstove “Brands”•This information was used to determinebaseline pricing in the broader economicanalyses prepared by NERA.4Firebox EPA PM With

Model Tech. Primary Nominal Volume Emissions List Enamel Other Upgrade $

Code Type Material Size ft 3 g/hr Price Premium Upgrades Difference

L1 NC Steel L 3.1 2.6 2,656 $ NA 2,796 $ 140 $

L2 NC Steel L 3.1 2.9 1,999 $ NA 2,466 $ 467 $

L3 NC Steel L 3.25 4.3 2,629 $ NA 3,057 $ 428 $

L4 NC Steel L 3.1 5.7 1,579 $ NA

L5 NC Steel L 3.4 3.9 1,989 $ NA

L6 NC Steel L 3.2 3.5 1,869 $ NA 1,979 $ 110 $

L7 NC Steel L 3.1 3.2 2,200 $

L8.1 NC Cast Iron L 3.2 2.3 3,009 $ 3,559 $ 550 $

L14 NC Stone L 4 3.1 4,349 $ NA

L13 NC Stone L 3.2 2.8 3,329 $ 3,869 $ 540 $

M22 NC Steel M 1.9 4.1 999 $ NA

M45 NC Steel M 2.15 2.7 1,199 $ NA

M27 NC Steel M 1.6 4.4 1,209 $ NA 1,323 $ 114 $

M24 NC Steel M 1.6 4.4 1,209 $ NA 1,323 $ 114 $

M50 NC Steel M 1.6 5.9 1,289 $ NA

M97 NC Steel M 1.74 5.8 1,295 $

M7 NC Steel M 2.25 3.5 1,299 $ NA

M2 NC Steel M 1.7 4.1 1,303 $ NA 1,637 $ 334 $

M99 NC Steel M 2.1 3.5 1,375 $

M51 NC Steel M 1.9 4.4 1,379 $ NA 1,479 $ 100 $

M49 NC Steel M 2.2 6.9 1,399 $ NA

M4 NC Steel M 2.25 3.5 1,453 $ NA 1,787 $ 334 $

M44 NC Steel M 2.15 2.7 1,489 $ NA

M36 NC Steel M 1.85 3.3 1,489 $ NA 1,944 $ 455 $

M1 NC Steel M 1.7 4.1 1,518 $ 1,888 $ 370 $

M28 NC Steel M 2.2 1.9 1,561 $ NA 1,694 $ 133 $

M25 NC Steel M 2.2 1.9 1,561 $ NA 1,694 $ 133 $

M46 NC Steel M 2.5 3.5 1,599 $ NA

M37 NC Steel M 1.85 3.3 1,639 $ NA 2,094 $ 455 $

M40 NC Steel M 2 2.5 1,669 $ NA 2,232 $ 563 $

M3 NC Steel M 2.25 3.5 1,688 $ 2,068 $ 380 $

M15 NC Steel M 2 1.1 1,699 $ NA 1,760 $ 61 $

M23 NC Steel M 1.6 4.4 1,717 $ NA 2,162 $ 445 $

M38 NC Steel M 2.5 4.5 1,739 $ NA 2,206 $ 467 $

M29 NC Steel M 1.6 4.4 1,756 $ NA

M39 NC Steel M 2.5 4.5 1,779 $ NA 2,246 $ 467 $

M47 NC Steel M 2.1 7.5 1,789 $ NA

M16 NC Steel M 2.1 3.4 1,796 $ NA 2,551 $ 755 $

M20 NC Steel M 2.1 3.4 1,842 $ NA 2,371 $ 529 $

M54 NC Steel M 2.1 4.2 1,843 $ NA 2,550 $ 707 $

M48 NC Steel M 2.9 4.4 1,869 $ NA 2,069 $ 200 $

M33 NC Steel M 2.3 3.44 1,874 $ NA 2,350 $ 476 $

M52 NC Steel M 1.8 2.7 1,889 $ NA 1,989 $ 100 $

M14 NC Steel M 2.4 1.1 1,899 $ NA 1,896 $

M56 NC Steel M 2.6 4.1 1,961 $ NA 2,550 $ 589 $

M34 NC Steel M 2.3 3.44 2,016 $ NA 2,492 $ 476 $

M55 NC Steel M 2.3 3.6 2,020 $ NA 2,507 $ 487 $

M30 NC Steel M 1.8 2 2,021 $ NA 2,512 $ 491 $ HPBA Wood Stove MSRP Survey, Specialty Retailers

Dominant Manufacturers and Brands - Blinded
February 19, 2013

Woodstove Specifications PricingLarge Non-Cat: All Mat'ls.Medium Non-Cat: SteelM41 NC Steel M 2 2.5 2,029 $ NA 2,620 $ 591 $

M5 NC Steel M 3 2.9 2,068 $ 2,438 $ 370 $

M42 NC Steel M 2 2.5 2,069 $ NA 2,660 $ 591 $

M17 NC Steel M 3 3.6 2,075 $ 2,568 $ 2,759 $

M43 NC Steel M 2 2.5 2,119 $ NA 2,282 $ 163 $

M19 NC Steel M 2.1 3.4 2,138 $ 2,138 $ 2,510 $

M35 NC Steel M 2.9 4.19 2,174 $ NA 2,637 $ 463 $

M31 NC Steel M 2.92 3.5 2,199 $ NA

M53 NC Steel M 2.2 2.7 2,219 $ NA 2,319 $ 100 $

M21 NC Steel M 2.1 3.4 2,223 $ NA 2,464 $ 241 $

M32 NC Steel M 2.3 3.4 2,251 $ 2,500 $ 249 $

M13 NC Steel M 2 1.1 2,287 $ NA 2,697 $ 410 $

M8 NC Steel M 2 2.6 2,299 $ NA

M6 NC Steel M 1.7 4.1 2,368 $ NA

M18 NC Steel M 2.1 3.4 2,436 $ 2,436 $ 2,808 $

M12 NC Steel M 2.4 1.1 2,487 $ NA 2,897 $ 410 $

M9 NC Steel M 2.6 3.7 2,499 $ NA

M10 NC Steel M 3 1.1 2,599 $ NA

M11 NC Steel M 3 2.3 2,777 $ NA 3,177 $ 400 $

M26 NC Steel M 2.2 1.9 2,260 $ NA 2,372 $ 112 $

M100 NC Cast Iron M 2.5 3.6 2,599 $ 3,069 $ 470 $

M57 NC Cast Iron M 1.5 3.1 1,659 $ 1,999 $ 340 $

M58 NC Cast Iron M 2.1 2 2,099 $ 2,599 $ 500 $

M61 NC Cast Iron M 2.3 2.32 2,499 $ NA

M62 NC Cast Iron M 1.7 2.2 2,299 $ NA

M63 NC Cast Iron M 3 2.9 2,599 $ 3,249 $ 650 $

M64 NC Cast Iron M 2.4 3.44 2,299 $ 2,849 $ 550 $

M69 NC Cast Iron M 2.67 2.84 2,449 $ NA

M70 NC Cast Iron M 1.77 3.77 2,099 $ 2,509 $ 410 $

M71 NC Cast Iron M 2.54 3 2,409 $ 2,769 $ 360 $

M72 NC Cast Iron M 2.54 3.2 2,409 $ NA

M73 NC Cast Iron M 2.97 4.1 2,769 $ 3,129 $ 360 $

M79 NC Cast Iron M 2.8 1.3 2,299 $ NA

M80 NC Cast Iron M 1.6 1.4 1,769 $ NA

M81 NC Cast Iron M 2 1.5 2,009 $ NA

M77.2 NC Cast Iron M 2.3 1.5 2,699 $ 3,249 $ 550 $

M78 NC Cast Iron M 1.7 3.4 2,259 $ 2,779 $ 520 $

M59 NC Cast Iron M 1.7 4.1 1,639 $ 2,059 $ 420 $

M60 NC Cast Iron M 2.25 3.5 2,119 $ 2,529 $ 410 $

M65 NC Cast Iron M 2.1 3.4 2,425 $ 3,039 $ 614 $

M66 NC Cast Iron M 3 3.9 2,847 $ NA

M74 NC Cast Iron M 1.7 4.2 2,289 $ 2,839 $ 550 $

M75 NC Cast Iron M 1.85 3.3 2,289 $ 2,969 $ 680 $

M76 NC Cast Iron M 2.5 4.5 2,639 $ 3,199 $ 560 $

M68 NC Cast Iron M 2.3 2.4 2,147 $ 2,550 $ 403 $

M67 NC Cast Iron M 2.3 2.4 2,216 $ 2,629 $ 413 $

M83 NC Stone M 2.3 2.7 2,999 $ 3,499 $ 500 $

M84 NC Stone M 1.9 2 2,699 $ 2,999 $ 300 $

M86 NC Stone M 2.2 2.4 2,849 $ 3,179 $ 330 $

S1 NC Steel S 1.5 2.1 1,499 $ NA 1,560 $ 61 $

S10 NC Steel S 1.3 5.3 689 $ NA

S11 NC Steel S 1.5 4.4 1,009 $ NA

S12 NC Steel S 1.5 6.2 1,259 $ NA

S13 NC Steel S 1.3 5.3 939 $ NA

S14 NC Steel S 1.4 6 1,279 $ NAMedium Non-Cat: Cast IronMed. NCStoneS15 NC Steel S 1.5 5.7 1,219 $ NA 1,319 $ 100 $

S16 NC Steel S 1.25 2.6 3,469 $ NA

S17 NC Steel S 1.6 1.6 1,419 $ NA 2,168 $ 749 $

S2 NC Steel S 1.5 2.9 1,358 $ 1,714 $ 2,022 $

S3 NC Steel S 1.3 3 1,719 $ NA 2,210 $ 491 $

S4 NC Steel S 1.4 3 1,802 $ 1,902 $ 100 $

S5 NC Steel S 1.4 3 1,412 $ NA 1,897 $ 485 $

S6 NC Steel S 1.15 2.5 3,799 $ NA

S7 NC Steel S 1.5 3.76 1,439 $ NA

S8 NC Steel S 1.3 5.3 1,119 $ NA

S9 NC Steel S 1.5 4.4 1,259 $ NA

S18 NC Cast Iron S 1.46 5.4 2,249 $ 2,699 $ 450 $

S19 NC Cast Iron S 1.5 2.7 1,999 $ 2,449 $ 450 $

S20 NC Cast Iron S 1.5 2.9 2,075 $ 2,475 $ 400 $

S21 NC Cast Iron S 1.17 3.78 1,739 $ 2,099 $ 360 $

S22 NC Cast Iron S 0.85 3 1,229 $ NA

S23 NC Cast Iron S 1.47 3.5 1,839 $ NA

S24 NC Cast Iron S 0.82 5.2 979 $ NA

S25 NC Cast Iron S 1.4 3.9 1,820 $ 2,185 $ 365 $

S26 NC Cast Iron S 1 4.3 1,039 $ 1,419 $ 380 $

S29 NC Stone S 1.25 3.57 4,779 $ NA

S28 NC Stone S 1.2 3 1,799 $ 2,199 $ 400 $

L8.1 C Cast Iron L 3.2 1.1 3,009 $ 3,559 $ 550 $

L10 C Cast Iron L 3.3 1.3 2,160 $ NA

L11 C Steel L 4.4 1.2 2,500 $

L12 C Steel L 4.32 1.76 2,850 $

M95 C Steel M 2.8 2.4 2,795 $

M98 C Steel M 2.75 1.3 2,833 $

M96 C Steel M 2.75 0.97 3,084 $

M88 C Cast Iron M 1.9 1.1 1,629 $ NA

M89 C Cast Iron M 2.2 1.4 1,889 $ NA

M77.1 C Cast Iron M 2.3 1.2 2,699 $ 3,249 $ 550 $

M101 C Cast Iron M 3 0.45 3,800 $ 4,400 $ 5,050 $ 600 $

M90 C Stone M 2.2 3.5 2,799 $

M91 C Stone M 2.2 1.3 2,819 $

M92 C Stone M 1.5 1.9 2,679 $

M93 C Stone M 1.5 1.9 2,599 $

M94 C Stone M 2.8 1.3 3,595 $ 3,745 $ 150 $

Sm C: CI S27 C Cast Iron S 1.3 2.1 1,889 $ 2,389 $ 500 $Medium Cats: All Mat'ls.Small Non-Cat: All Mat'ls.Large Cats: AllMat'ls.