## Cost - Effectiveness of Alternative Wood Stove 

## New Source Performance Standards David Harrison, Ph.D. Andrew Foss Andrew Stuntz Prepared on behalf of the Hearth, Patio and Barbecue Association Presentation to the Office of Management and Budget September 25, 2013 Preliminary Analysis1 Preliminary Analysis · September 25, 2013 

# Contents

 Background and Objectives

 Methodology

 Results

 Conclusions2 Preliminary Analysis · September 25, 2013 

# Background and Objectives

 Current new source performance standard (NSPS) of 7.5 grams of particulate matter emissions per hour (g/h) for new non catalytic wood stoves (“Phase II”)

– “Certified” non - catalytic stoves meet the current 7.5 g/h standard

– “Non - certified” stoves have higher emission rates



###  Two potential additional wood stove NSPS “Steps”

– Step I standard of 4.5 g/h



### – Step II standard of either 2.5 g/h or 1.3 g/h



###  Study objectives

– Estimate costs and emissions reductions (tons of particulate matter) from potential NSPS

– Evaluate the incremental cost - effectiveness ($/ton) of increasingly stringent NSPS3 Preliminary Analysis · September 25, 2013 

# Overview of Methodology

 Estimate costs and emissions reductions of NSPS in an illustrative future year (2018)

– Calculate annualized costs and annual emissions

– Include effects on emissions of existing stoves

 Use detailed industry data

– Includes compliance cost components, historical sales, current prices, and emissions by stove type

– Provided by industry experts; cost data validated by expert group

 Based on sound economic principles

– Costs and emissions calculations consistent with EPA/OMB guidelines

– Compare incremental cost per ton for alternative NSPS4 Preliminary Analysis · September 25, 2013 

# Four Major Elements in Cost 

# Effectiveness Methodology
1. Estimate potential per stove compliance costs

– Cost per stove for modifying wood stoves to meet different emissions standards 2. Estimate price, sales and social costs in illustrative year

– Compare price and sales in baseline and under potential NSPS

– Include demand (price) effect and resulting consumer surplus deadweight loss 3. Estimate emissions reductions in illustrative year

– Relative to baseline emissions

– Net effect of compliance, demand effect, and scrappage effect 4. Calculate and compare cost - effectiveness of alternative NSPS

– Compliance costs per ton of emissions reduction ($/ton)

– Step I (4.5 g/h standard) and Step II (2.5 or 1.3 g/h standard)5 Preliminary Analysis · September 25, 2013 

# Key Caveats

 Empirical estimates in this study are based upon the best available data on costs and emissions of relevant stove models.

 These data have certain inherent limitations, however, that should be kept in mind when interpreting the results. In particular, costs may be understated and emissions gains may be overstated due to potential changes in EPA certification testing methods, the way compliance with the standard is determined and differences between emissions certification values (laboratory values with artificial fuel) and actual emissions under in - home conditions.

– Costs: EPA is considering a more stringent compliance algorithm; even if compliance with the proposed standards can be achieved with this approach, it would mean greater NSPS compliance costs.

– Emission gains: Certification values do not necessarily correlate with actual emissions. Even if they did, due to the inherent variability when burning wood, the EPA test methods cannot reliably distinguish emissions performance differences in the range of the proposed standards.
 References:

 Curkeet , R. and R. Ferguson, EPA Wood Heater Test Method Variability Study , October 2010  Houck, J . A Comparison of Particulate Emission Rates from the In - Home Use of Certified Wood Stove Models with U.S. EPA Certification Emission Values, February 1, 20126 Preliminary Analysis · September 25, 2013 

# Element 1: Estimate potential per 

# stove compliance costs

 Develop estimates of compliance costs to modify stove models to meet different emissions standards

– Ferguson (2013) estimates per model compliance costs based upon detailed cost components



### – Cost estimates based on current EPA compliance testing algorithm (more stringent algorithm would raise costs)



###  Annualize capital and other model costs

– 10 years and 7% discount rate



###  Translate to per stove compliance costs using estimate of 

### average annual units sold per stove model (1,000)

– Average units per model estimated using EPA and industry data7 Preliminary Analysis · September 25, 2013 

# Element 2: Estimate effects on 

# price, sales and total social costs

 Estimate baseline sales and average price by stove emissions category

– Linear projection of Houck (2011) and HPBA historical total wood stove sales

– Sales and average price by emissions rate estimated using Ferguson & Page (2013) stove pricing survey



###  Estimate effects of NSPS compliance costs on price and sales

– NSPS retail price increase includes compliance cost and 40% stove retailer gross margin (industry estimate)

– Account for reduced sales from higher stove price (“demand effect”), assuming - 1.6 elasticity of demand from EPA (1986) wood heat analysis



###  Estimate total social costs

– Cost of compliance to meet NSPS standard for units actually sold

– Cost to consumers who are priced out of the market (“consumer surplus deadweight loss”)8 Preliminary Analysis · September 25, 2013 

# Element 3: Estimate emissions 

# reductions

 Estimate baseline total particulate matter emissions and emission rates (tons/year) by stove type

– Use Houck (2011) study on stock of in - use stoves and EPA certified stove emission rates (g/h)



###  Calculate three components of NSPS net emissions impact: 1. Demand Effect ( - ): rise in stove prices causes sales to fall, so fewer units are emitting 2. Compliance Effect ( - ): units converted to comply with NSPS emit less (by assumption) 3. Scrappage Effect (+): reduced scrappage of existing, non - certified units leads to more emissions from existing stoves  Non - certified stoves have higher emission rates than new stoves  Use estimate that 40% of new stove purchases are replacements (Ferguson & Page 2013 retailer survey)9 Preliminary Analysis · September 25, 2013 

# Element 4: Compare incremental 

# cost/ton for three potential NSPS

 Incremental cost per ton = Increased Costs / Increased Emissions Reductions 1. Step I standard of 4.5 g/h compared to current standard of 7.5 g/h 2. Step II standards of 2.5 g/h and 1.3 g/h compared to Step I standard of 4.5 g/h 3. Step II standard of 1.3 g/h compared to Step II standard of 2.5 g/h (“1.3 incremental from 2.5”)10 Preliminary Analysis · September 25, 2013 

# Results: Impacts on Stove Sales 

# and Social Costs

Note: Totals may differ from sum of rows due to independent rounding11 Preliminary Analysis · September 25, 2013 

# Results: Components of Emissions 

# Reductions

Note: Totals may differ from sum of rows due to independent rounding12 Preliminary Analysis · September 25, 2013 

# Results: Incremental Cost 

# Effectiveness of Alternative NSPS13 Preliminary Analysis · September 25, 2013 

# Conclusions

 Step II NSPS standards of 2.5 g/h and 1.3 g/h are both considerably less cost - effective than a Step I standard of 4.5 g/h
 The Step II standard of 1.3 g/h is particularly costly relative to emission gains, as shown by incremental cost - effectiveness results
 Caveat

. Estimates assume the current EPA wood stove compliance algorithm and use of EPA test methods and certified emission rates, 

### which may understate costs and overstate emission gains14 Preliminary Analysis · September 25, 2013 

# References

 EPA . NSPS for new residential wood heaters: Regulatory Impact Analysis , December 1, 1986 .  Ferguson, R. Wood Heater Economic Modeling Detail , July 15, 2013.


###  Ferguson & Page. HPBA Wood Stove Pricing Survey, February 19, 2013.
 Ferguson & Page. HPBA Stove Retailer Survey , May 21, 2013.


###  Houck, J. The Fraction of Freestanding Wood - Fueled Stoves in Current Use That are U.S. EPA Certified Cordwood Stoves and Wood Pellet Stoves, July 23, 2011 .David Harrison, Ph.D. Senior Vice President NERA Economic Consulting Boston +1 617 927 4512 David.Harrison@nera.com Andrew Foss Consultant NERA Economic Consulting Boston +1 617 927 4582 Andrew.Foss@nera.com Andrew Stuntz Research Associate NERA Economic Consulting Boston +1 617 927 4530 Andrew.Stuntz@nera.com