## APPENDIX C

Cost Effectiveness Analysis For

Amendments to Rule 4601

December 17, 2009SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

Appendix C: Cost Effectiveness Analysis December 1 7, 2009

C-2 Final Staff Report with Appendices For

Amendments to Rule 4601 This page intentionally blank.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

Appendix C: Cost Effectiveness Analysis December 1 7, 2009

C-3 Final Staff Report with Appendices For

Amendments to Rule 4601 I. INTRODUCTION

The California Health and Safety Code 40920.6(a) re quires the San Joaquin Valley

Unified Air Pollution Control District to conduct b oth an "absolute" cost effectiveness analysis and an “incremental” cost effectiveness an alysis of available emission control options prior to adopting each Best Available Retro fit Control Technology (BARCT) rule. The purpose of conducting a cost effectiveness anal ysis is to evaluate the economic reasonableness of the pollution control measure or rule as it applies to operators in the San Joaquin Valley Air Basin (SJVAB). The analysis also serves as a guideline in developing the control requirements of a rule.

Incremental cost effectiveness is intended to measu re the change in costs (in $/year) and emissions reductions (in tons reduced/year) bet ween two progressively more effective control options or technologies. For thi s rule project, the limits are considered the lowest achieved in practice, therefore, no incr emental cost effectiveness analysis

was conducted.

The California Air Resources Board (ARB) conducted a comprehensive cost effectiveness analysis as a part of the process of developing the suggested control measure (SCM). ARB presents this data in Chapter 7 of the SCM Technical Guidance

Document. Data used for the ARB SCM cost effective ness analysis was developed using data from ARB’s 2005 Architectural Coatings S urvey, meetings with industry and air districts in California, and EPA representative s.

II. SUMMARY AND CONCLUSION

ARB, in developing the SCM, found no serious econom ic impacts and no significant impacts on employment. There were no significant a dverse impacts on the profitability of businesses affected by the rule. The SCM cost e ffectiveness of individual limits ranges from a net savings to a net cost of $13.90 p er pound of VOC reduced, with an overall average cost effectiveness of $1.12 per pou nd of VOC reduced.

The total cost of the SCM VOC limits is estimated t o be 12.3 million dollars per year in 2007 dollars statewide. As shown in Table 1, the c ost-effectiveness of individual categories ranges from a net savings to a net cost of $13.90 per pound of VOC reduced. The $13.90 per pound value for Floor Coat ings is due to the fact that a large number of non-complying products are sold in small volumes, because the complying marketshare for Floor Coatings is 85 percent, many manufacturers have already reformulated their coatings to meet the proposed VO C limit. Therefore, ARB staff believes that it is appropriate for the remaining m anufacturers to reformulate their products to meet the proposed limit. The overall a verage cost-effectiveness of the proposed limits is estimated to be $1.12 per pound of VOC reduced or $2240 per ton. This compares favorably with the cost-effectiveness of similar regulations.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

Appendix C: Cost Effectiveness Analysis December 1 7, 2009

C-4 Final Staff Report with Appendices For

Amendments to Rule 4601 SJVAPCD staff are proposing amendments to Rule 4601 that mirror the SCM. As such, the cost effectiveness analysis presented in the SC M Technical Guidance Document will be presented in this Appendix as the cost effe ctiveness analysis for this ruleamending project.

III. COST EFFECTIVENESS ANALYSIS

Suggested Control Measure

The economic impacts analysis presented by ARB in t he staff report and technical support document for the SCM provides a general pic ture of the economic impacts that typical businesses might encounter. ARB estimates t he total cost of the SCM to affected architectural coatings manufacturers, excluding tho se in the SCAQMD, to be approximately 4 million dollars per year in nonrecu rring costs and 8.3 million dollars in annual recurring costs. This corresponds to a tota l annualized cost of 12.3 million dollars per year in 2007 dollars.

For the cost effectiveness analysis each SCM limit was analyzed as a separate, standalone regulation. As shown in Table 1, the co st effectiveness of individual limits ranges from a net savings to a net cost of $13.90 p er pound of VOC reduced, with an overall average cost effectiveness of the SCM limit s estimated to be $1.12 per pound of VOC reduced. ARB’s analysis shows that the cost-ef fectiveness of the SCM limits is
similar to the cost-effectiveness of the SCAQMD Rul e 1113.

In doing the cost effectiveness analysis, ARB relie d on various sources of information, including coating manufacturers, and industry respo nses to the 2007 ARB Economic Impacts Survey. ARB sent this survey, eliciting ma nufacturers’ best estimates of the costs of meeting the proposal, including their esti mates of the nonrecurring and recurring costs involved, to 147 manufacturers. Of the 147 surveys sent out, 36 responses were received. Of the 36 respondents to the ARB survey, 12 reported that they would not incur any costs to meet the SCM beca use they have either already reformulated their products to meet the SCAQMD limi ts, or do not market products that will be impacted by the SCM.

To determine the cost from changes in raw materials , ARB relied on information from chemical manufacturers, distributors of raw materia ls, and Chemical Market Reporter Magazine. In cases where a price range or multiple prices were found for a particular ingredient, ARB used the highest price available in the analysis. In cases where no price information was available for an ingredient, ARB applied a default value of $1.50 per pound, which is higher than most of the ingredi ents used in the raw materials costs analysis.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

Appendix C: Cost Effectiveness Analysis December 1 7, 2009

C-5 Final Staff Report with Appendices For

Amendments to Rule 4601 ARB applied the Capital Recovery Method, a well est ablished methodology for converting compliance costs, both nonrecurring and recurring, to an annual basis. ARB then compared the ratio of the annual costs to the annual emission reductions in terms of “dollars spent per pound of VOC reduced. The co st effectiveness of a limit is generally defined as the ratio of total dollars to be spent to comply with the limit (as an annual cost) to the mass reduction of the pollutant s to be achieved by complying with that limit (in annual pounds).

The cost-effectiveness of a limit is generally defi ned as the ratio of total dollars to be spent to comply with the limit (as an annual cost) to the mass reduction of the pollutant(s) to be achieved by complying with that limit (in annual pounds). Annual costs include annualized nonrecurring costs (e.g., total research and development (R&D), product and consumer testing, equipment purc hases/ modifications, one-time distributional/marketing changes, literature change s, etc.) and annual recurring costs (e.g., increases or decreases in raw material costs , labeling, packaging, recordkeeping & reporting, etc.). Thus, the cost-effectiveness i s calculated according to the following general equations:

Cost-Effectiveness = Annualized Nonrecurring Costs + Annual Recurring Costs

Annual Emission Reductions

where,

Annualized Nonrecurring Cost = CRF x 

## Σ ( Nonrecurring Costs )

where,

Cost Recovery Factor (CRF) = i(i+1) n
(i+1) n - 1

i = discount rate, assumed 5%

n = project horizon, assumed 5 years

Annual Recurring Costs = Non-Raw Material Costs + Raw Material Costs

With regard to the discount rate, Cal/EPA recommend s 2 percent plus the current yield for a U.S. Treasury Note of similar maturity to the project horizon. Cal/EPA recommends a 5-year project horizon when conducting cost-effectiveness analysis. In 2007, treasury yields have been about 5 percent for a 5 year bond (CNN, 2007), and when adjusted for an inflation rate of 2 percent, t he corresponding discount rate is 5
percent.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

Appendix C: Cost Effectiveness Analysis December 1 7, 2009

C-6 Final Staff Report with Appendices For

Amendments to Rule 4601 Table 1. SCM Cost Effectiveness and Maximum Per-Ga llon Cost Increases

Coating Category Individual CostEffectiveness for Each Limit (Dollars per Pound of VOC Reduced) Calculated Cost per

Gallon to Consumers (Dollars per Gallon) Cost Increase Per

Gallon to Consumers (Dollars per Gallon)

Aluminum Roof $0.41 $14.63 $1.16

Bituminous Roof $1.02 $11.81 $6.43

Concrete Masonry Sealer ($0.36) $14.09 ($0.88)

Dry Fog ($0.52) $34.86 ($3.96)

Flat ($0.69) $17.81 ($0.33)

Floor $13.90 $16.96 $27.30

Mastic Texture $2.38 $17.72 $8.61

Non Flat $7.03 $19.44 $4.40

Non Flat High Gloss ($1.38) $23.96 ($3.39)

PSU $2.73 $16.90 $2.51

Roof $1.38 $29.94 $1.95

Rust Preventative ($0.46) $30.30 ($2.51)

Specialty PSU ($0.71) $25.19 ($6.32)

Traffic Marking $4.73 $14.18 $4.00

Waterproofing Membrane $6.55 $33.38 $17.00

Wood Coatings ($1.13) $38.70 ($6.34)

Cost - Effectiveness ($/lb VOC Reduced) Cost per Gallon ($/Gallon) Cost Increase ($/Gallon)

OVERALL RESULTS $1.12 $19.20 $1.21