APPENDIX C 

Cost Effectiveness Analysis For 

Amendments to Rule 4601 

December 17, 2009 
SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix C: Cost Effectiveness Analysis December 17, 2009 

C-2 Final Staff Report with Appendices For 

Amendments to Rule 4601

This page intentionally blank. 
SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix C: Cost Effectiveness Analysis December 17, 2009 

C-3 Final Staff Report with Appendices For 

Amendments to Rule 4601

I. INTRODUCTION 

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

Unified Air Pollution Control District to conduct both an "absolute" cost effectiveness 

analysis and an “incremental” cost effectiveness analysis of available emission control 

options prior to adopting each Best Available Retrofit Control Technology (BARCT) rule. 

The purpose of conducting a cost effectiveness analysis 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 measure the change in costs (in $/year) 

and emissions reductions (in tons reduced/year) between two progressively more 

effective control options or technologies. For this rule project, the limits are considered 

the lowest achieved in practice, therefore, no incremental 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 effectiveness analysis was developed 

using data from ARB’s 2005 Architectural Coatings Survey, meetings with industry and 

air districts in California, and EPA representatives. 

II. SUMMARY AND CONCLUSION 

ARB, in developing the SCM, found no serious economic impacts and no significant 

impacts on employment. There were no significant adverse impacts on the profitability 

of businesses affected by the rule. The SCM cost effectiveness of individual limits 

ranges from a net savings to a net cost of $13.90 per pound of VOC reduced, with an 

overall average cost effectiveness of $1.12 per pound of VOC reduced. 

The total cost of the SCM VOC limits is estimated to be 12.3 million dollars per year in 

2007 dollars statewide. As shown in Table 1, the cost-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 Coatings 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 VOC limit. Therefore, ARB staff 

believes that it is appropriate for the remaining manufacturers to reformulate their 

products to meet the proposed limit. The overall average 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 DISTRICT

Appendix C: Cost Effectiveness Analysis December 17, 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 SCM Technical Guidance Document 

will be presented in this Appendix as the cost effectiveness analysis for this ruleamending project. 

III. COST EFFECTIVENESS ANALYSIS 

Suggested Control Measure 

The economic impacts analysis presented by ARB in the staff report and technical 

support document for the SCM provides a general picture of the economic impacts that 

typical businesses might encounter. ARB estimates the total cost of the SCM to affected 

architectural coatings manufacturers, excluding those in the SCAQMD, to be 

approximately 4 million dollars per year in nonrecurring costs and 8.3 million dollars in 

annual recurring costs. This corresponds to a total 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 cost effectiveness of individual limits 

ranges from a net savings to a net cost of $13.90 per pound of VOC reduced, with an 

overall average cost effectiveness of the SCM limits estimated to be $1.12 per pound of 

VOC reduced. ARB’s analysis shows that the cost-effectiveness of the SCM limits is 

similar to the cost-effectiveness of the SCAQMD Rule 1113. 

In doing the cost effectiveness analysis, ARB relied on various sources of information, 

including coating manufacturers, and industry responses to the 2007 ARB Economic 

Impacts Survey. ARB sent this survey, eliciting manufacturers’ best estimates of the 

costs of meeting the proposal, including their estimates 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 because they have either already 

reformulated their products to meet the SCAQMD limits, 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 materials, 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 ingredients used in the raw materials costs 

analysis. 
SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix C: Cost Effectiveness Analysis December 17, 2009 

C-5 Final Staff Report with Appendices For 

Amendments to Rule 4601

ARB applied the Capital Recovery Method, a well established 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 cost 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 pollutants to be achieved by complying with 

that limit (in annual pounds). 

The cost-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). Annual 

costs include annualized nonrecurring costs (e.g., total research and development 

(R&D), product and consumer testing, equipment purchases/ modifications, one-time 

distributional/marketing changes, literature changes, etc.) and annual recurring costs 

(e.g., increases or decreases in raw material costs, labeling, packaging, recordkeeping 

& reporting, etc.). Thus, the cost-effectiveness is 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 recommends 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, the corresponding discount rate is 5 

percent. 
SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix C: Cost Effectiveness Analysis December 17, 2009 

C-6 Final Staff Report with Appendices For 

Amendments to Rule 4601

Table 1. SCM Cost Effectiveness and Maximum Per-Gallon 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