2. SUMMARY OF WORKING GROUP DISCUSSION The working group meeting began with a brief summary from Michael Nisbet of his main results as reported above. Next, the facilitator asked each panelist to comment on whether the overall results were acceptable, and on the areas requiring the most discussion. The panel indicated a high level of acceptance of Nisbet's conclusions and was complimentary about his paper. The key point was the imposition of the fuel price adders on the OECD countries and not on the developing countries. The reduction in domestic employment and output results directly from the assumption that some countries but not their potential competitors would be affected by the constraints. Several panel members asserted that global emissions would not decline; they would simply be redistributed to the developing countries that expand their cement industries. Domestic Effects There was agreement by the panel that the employment and output losses projected by Nisbet were reasonable, but there was not a consensus that his estimates were highly precise. The numbers were obtained using the best methodology available, but reliability could not be assured. A panel member stated " ... exact numbers may not be that important. We all seem to be agreeing that this scenario is going to be exceptionally damaging to the U.S. industry. Maybe we should leave it at that". There was much discussion of the elasticity of import substitution. The sentiment of the group was that it could be a good empirical proxy, but it has some limitations. The elasticity defines a market outcome before and after a price change, but it does not describe the behavior of the market as it adjusts. As a result of the assumed fuel price adders, domestic producers would increase their prices by almost the full amount of the cost increase. Foreign competitors would slightly undersell domestic producers in regions with easy access. The result would be that cement prices would rise, but by less than the contribution of the fuel price adders. However, foreign suppliers would compete among themselves, with the result that domestic prices may rise initially, but subsequently foreign competition would cause prices to decline to their initial levels. Domestic output and employment would decline as foreign suppliers captured a significant share of the market. These market adjustments would occur over time, with domestic prices rising at first and then declining as foreign competitors entered U.S. markets. The panelists pointed out that a limitation of the elasticity of import substitution is its comparative static nature; it merely compares one market outcome with another. The elasticity does not describe the adjustment of the market over time or across various regions. Nisbet's final draft indicates his acceptance of the panel discussion of this point. The impact of low-priced foreign competitors on domestic producers would not differ significantly among regions in the U.S. because almost all the large markets are accessible by water. One panelist slightly demurred by stating that plants located near the coastal markets would be impacted first. Only later would plants in the interior of the U.S. be affected. U.S. cement plants are often located in rural areas and are often the major employer in the region. The panel felt that should these cement plants close, alternative employment opportunities could be limited for some employees. One panel member felt that Nisbet's conclusions might not be sufficiently pessimistic. If foreign competitors could undersell domestic producers by the 20 percent cost differential, these competitors could capture almost the entire market. Furthermore, Nisbet's employment estimates are direct industry employment effects and do not account for the indirect multiplier effects, which could double these estimates. The cement industry is in the unique and enviable position of making an effective use of waste fuels. Almost anything that burns can be used to fuel a cement kiln, and typically without additional air quality problems. However, the panel was doubtful whether the market has the potential for significant expansion of low grade fuels. One panel member indicated that the supply of waste tires is limited. Municipal waste could be used, but existing overcapacity in waste disposal discourages its use in cement. Another panel member confirmed this opinion by stating that waste fuel will not increase above seven percent of the energy used by the industry because: (1) permits are hard to obtain, (2) it is difficult to find waste that is suitable and accessible and (3) the industry is unwilling to burn municipal waste. Overall, the increased substitution of low grade fuels for fuels affected by the price adders does not appear feasible for the industry. A brief discussion of fuel switching indicated first that the assumed fuel price adders would not encourage cogeneration. The cement industry has become less energy intensive over the years and consequently there is less waste heat than a decade or two ago. With less waste heat, the feasibility of cogeneration declines. Similarly, it would not be feasible to switch to natural gas. The industry switched to coal during the 1970s and is now better equipped to burn coal than gas. International Effects About 65 to 70 percent of the cement plants in the U.S. are foreign owned. Plants located in the U.S. typically supply the local region and do not export to the world market. In the base case of no new environmental commitments, these companies will continue to open new plants in the developing countries and not construct new plants in the U.S. In contrast, new plants are welcome in China and such plants are typically modern and efficient. Also in the base case, domestic plants will lose market share over time to foreign competitors. This trend would simply be accelerated by any new commitments that affect the OECD countries but not developing countries. The assumed fuel price adders would exacerbate the relatively stringent environmental constraints placed on cement plants in the developed countries. According to one panelist, environmental costs in the U.S. are about $1 per tonne and they are about the same in Europe. However, in developing countries such as Thailand, these costs may be only $0.25. Although cement is typically produced and consumed within a small radius, it can be transported by water world wide at relatively low cost. As stated by one panel member "cement can be transferred more cheaply from Korea to Los Angeles than it can be transferred from 80 miles away". As a result of access to U.S. markets by foreign competition, imports in a baseline (no fuel price adders) case are projected to double by the year 2015, while domestic production will increase by about 10 percent. With the assumed fuel price adders, cement prices would increase 20 percent (Scenario 1) or 13.5 percent (Scenario 2) by the year 2015 relative to a base case. These percent increases are the approximate cost disadvantage that domestic producers would experience relative to non-participating countries. New Technologies/Investments The manufacture of cement uses an old process that is standard worldwide. Major technological breakthroughs have not occurred in this process. Improvements in efficiency and productivity have been gradual but important, and old kilns are replaced with newer more efficient kilns. The improvements have been in the form of refurbishments of existing plants and not targeted energy-efficiency investment in new plants. No new greenfield plants have been built in the U.S. in 10 years because of environmental regulations and site requirements. One possible way to reduce the impact of the assumed fuel price adders is to allow the use of blended cement. Panel members suggested that cement blended with fly ash, blast furnace slag, or other pozzolans could reduce overall costs while not compromising quality. Existing building codes, state highway departments and other standards (STM standards) effectively preclude this cost saving measure. The panel agreed with Nisbet that higher fuel prices would not encourage new capital investments in more energy efficient technologies. Panelists offered various explanations. First, U.S. plants are typically foreign owned and investment capital cannot readily be obtained from the parent company. Second, current technologies are already efficient and no major breakthroughs are on the horizon. Third, the industry is relatively slow growing and new capacity is not added unless it is needed to meet demand. Higher fuel prices, resulting from any sources, would not encourage efficiency improvements. Fuel substitutions also offer limited opportunities to reduce these assumed price increase. If the industry were to experience a cost increase, there would be fewer available funds to invest domestically. The rate of return on investing domestically relative to foreign investing would further discourage domestic investing. The panel suggested that some potential exists for burning more hazardous waste in cement kilns. The disposal of hazardous waste in this manner can be safer than alternative methods; for instance, there are less carbon emissions from burning hazardous waste in a kiln then burning it in an incinerator. However, the Environmental Protection Agency (EPA) has placed significant constraints on the industry. Several panel members indicated that a review of EPA policy in the area of burning hazardous waste would be useful. Panel's Advice to DOE The panel suggested that the Administration should seek to develop a policy that does not discriminate against the OECD and the U.S. The opportunities for reducing CO2 from cement are limited, but policies could perhaps focus on concrete, which has some potential for reduced CO2. Environmental policies that affect this industry should be designed with great care and detailed knowledge of the industry. The use of hazardous waste is one example, but the use of old tires in kilns is another example. If waste tires were substituted for a fossil fuel, emissions would actually fall because CO, from the kiln would remain about the same, but the tires would no longer be in a landfill where they emit methane and carbon over a long time period. THE EFFECTS OF NEW CLIMATE CHANGE COMMITMENTS THE CEMENT INDUSTRY PREPARED BY MICHAEL NISBET JAN CONSULTANTS July 1996 Acknowledgement The author would like to thank the Portland Cement Association and the American Portland Cement Alliance for providing extensive statistical and technical information. |