present study, the authors were asked to focus only on their special industry and not consider competitive industries.

●The countries that do not incur energy price increases will enhance the competitiveness of their industries relative to the countries that have such increases. As shown in Table 5a of Slinn's paper, the U.S. is currently more than competitive with OECD countries, such as Canada, Sweden and others in terms of delivering bleached hardwood kraft pulp to the U.S. market.

from TABLE 5a

VARIABLE PRODUCTION AND TRANSPORTATION COSTS FOR BLEACHED
HARDWOOD KRAFT PULP DELIVERED TO THE U.S. MARKET

As seen in Slinn's Table 5b, this product can currently be delivered to the U.S. market from Brazil, Chile and Indonesia at lower variable costs than it can be produced in the U.S. These countries would experience an increased competitive advantage with the U.S. if the U.S. were subject to the increased costs. The largely integrated paper mills in the OECD countries of Canada, Sweden and Finland may be able to maintain their competitive position by increasing their reliance on biomass fuels and self-generation.

If the fuel cost impact is greater in OECD Pacific countries than in the USA and OECD Europe, the Japanese industry is likely to be most affected. Japan has the second largest paper and paperboard industry in the world. The paper industry in Japan "imports" much of its energy in the form of wood chips and residues from logs. However, the Japanese are heavily dependent on imported fossil fuels, which would be subject to significant cost increases under the assumed scenarios. The Japanese could lose market share to those countries that are assumed not to face energy price increases, such as Brazil, Chile and Indonesia.

●A meaningful price elasticity of demand for energy cannot be obtained from a statistical analysis of the industry's historic costs and quantity mix of fuels. From 1972 through the early 1980s, the industry experienced a six-fold increase in the price of purchased energy in current dollars. In the following years, the industry undertook extensive conservation measures, and also increased self-generation. During the 1980s, energy prices fell significantly. These profound dynamic events, along with the wide disparities among firms, preclude using historical data to estimate a simple price elasticity. The previous response to energy price increases in the form of fuel switching and conservation is much less feasible today. Whereas the industry survived the energy crisis of the 1970s, the responses that made this survival feasible may be less available today and the assumed fuel price adders could have a more costly impact on the industry, particularly given the assumed unevenness in their application.

2. SUMMARY OF WORKING GROUP DISCUSSION

The working group meetings began with a brief discussion by Slinn of his main points followed by brief comments from the individual panel members indicating overall agreement or disagreement with main conclusions. Although Slinn presented many conclusions in his paper, he focused on two conclusions in his brief introductory comments. First, the pulp and paper industries in countries which do not commit to a coordinated GHG mitigation initiative will increase their competitive advantage vis-a-vis the US industry. Second, the paper industry is characterized by its wide differences among mills, in terms of amount of fuel purchased, choice of fuels, efficiency of plant, and other variables.

The panel indicated agreement with these two points and was highly supportive of Slinn's overall analysis. There was no disagreement about fundamental conclusions, but a few qualifications were suggested. Slinn's conclusions are qualitative and several panel members would have liked to see quantitative econometric estimates. An econometric analysis would, however, be difficult because of the significant diversity among firms. Panel members contributed their own expertise to extend and clarify Slinn's analysis.

Domestic Effects

The panel felt that the effect of significantly higher fuel prices would be to shift the production cost advantage to low cost non-participating producers. The consequence would be an increase in imports at the expense of domestic output and employment. Although quantitative estimates were not presented, the description of "serious employment and output effects" reflected the consensus of the group. Under the assumed price increases, many mills would not be economically viable.

The panel agreed with Stinn's finding that the employment and output effects would, however, be unevenly distributed among mills and are dependent on the amount and type of fuel purchases. In the absence of the assumed fuel price adders, mills that purchase fuel are likely to gain relative to those that self-generate given projected declining trends in purchased fuel prices. With actions that affect the price of purchased fossil fuels and electricity but not self-generated power fueled by biomass, these impacts become reversed as the large integrated mills are less adversely affected, while numerous small mills could be closed.' Furthermore, in the absence of new environmental constraints, coal dependent facilities in the North Central and Atlantic regions would benefit from a decline in coal prices. These regions would be the most adversely affected by new environmental constraints. The oil dependent mills in the Northeast would also be adversely affected by the assumed fuel price adders. These unequal impacts upon mills were the main interest of this panel.

'An (arbitrary) assumption of the analysis is that self-generated energy would not be subject to the fuel price increases.

A discussion about quantifying the employment and output impacts of the fuel price adders emphasized several complications. For instance, 7 percent of the variable cost of the paper industry is accounted for by chemicals, the cost of which would also be affected by the fuel price adders. The total effect on the industry is therefore larger than merely the direct impact of higher fuel prices. Also, this industry has a large "downstream" converting segment that uses primary paper to make paper containers. While this segment is not energy intensive and would therefore not be directly affected by the assumed policy actions, cost increases in their feedstock would be likely to increase their costs as well.

A question was raised about the effects on environmental emissions resulting from selfgeneration relative to purchasing power. There was a concern that switching from purchased fossil fuels and electricity to self-generation would not always be an environmental improvement.

The assumed fuel price increases could adversely affect the paper recycling industry, which is environmentally friendly. Higher purchased fuel prices would tend to increase the value of paper as an unaffected fuel source relative to its value as a fiber for recycling.

The panel discussion indicated that recycling issues are even more complicated in terms of environmental policy issues. Recycling is often claimed to save energy, but this depends on how energy is counted. For instance, if paper and board is made from virgin pulp it may require 30 million Btu per ton. If the mill is 50 percent energy self-sufficient, then only 15 million Btu of purchased energy is required. However, if the same product were made from recovered fiber, about 18 million Btu would be required and all of it would be from purchased energy. Consequently both energy and environmental impacts of the assumed price increases in energy require close study when applied to the paper industry.

International Effects

Slinn concluded that countries facing higher energy prices will disadvantage their industries relative to those that do not. Even in a base case of no policy changes, the global market is growing more rapidly outside of the U.S. and particularly in less developed countries located in temperate climates where trees tend naturally to grow rapidly. The paper industry experienced a major increase in energy prices during the 1970s and was able to withstand this increase by substituting self-generation for purchased fuels, by fuel switching, by energy conservation and by new investments that were facilitated by brisk domestic and global economic growth. Panel members pointed out that the situation today is different. Many of the energy conservation opportunities available earlier have been exploited; but of increasing importance is the growing competition from Brazil, Indonesia and Chile. The domestic industry is more vulnerable to imports today than during the early 1980s. According to Slinn, in 1995 the cost for producing and delivering pulp to the U.S. market was about $330 per ton, which was lower than the costs of the OECD competitors. However, the same costs for delivered pulp from Brazil, Chile and Indonesia were $309, $328 and $255, respectively. These countries already have a cost advantage over the U.S. even in the absence of any new actions to mitigate greenhouse gas

emissions.

The panel members indicated agreement with the conclusion that potential environmental commitments by the United States could significantly affect the domestic industry, while encouraging more rapid development in non-affected less developed countries. In a base case, large segments of the domestic market are not highly profitable and the industry is already moving offshore. The assumed fuel price effects would accelerate this movement. New mills that are being located in the Southern Hemisphere typically have large scale (and hence efficient) facilities; they have access to low cost labor and wood as well as access to rapidly growing markets. Increased imports from these non-participating countries could displace domestic production and employment. The relocation of the paper industry to developing countries could have adverse environmental consequences if rain forests are destroyed or if environmental standards in those countries are less stringent than or less vigorously enforced than in the U.S..

New Technologies/Investments

A question posed to the panel was whether investments in newly developed technologies could offset some of the effects of higher fuel prices. New technical developments have been occurring in this industry and further potential remains. Technical change in this industry generally occurs with the normal turnover of the capital stock, by modernizing existing mills rather than building new "greenfield" mills. Technical improvement is gradual and continuous. The view of the working group was that technical improvements will continue to occur at a normal rate, but would not respond positively to the assumed fuel price adders. In some cases, the reverse would occur. Higher energy costs would discourage new investments, including investments in environmentally clean technologies.

Industrial boilers offer significant potential for technical improvement. The age of these boilers follows an approximate normal distribution with about a 30 year lifetime. A large share (67 percent by one estimate) of the boilers will require replacement within the next 5 years. If more efficient boilers were available when these boilers needed replacement, efficiency improvements could be made without disrupting the industry's normal capital cycle. The feasibility of these improvements will likely depend on the availability of new technologies and not on the imposition of higher fuel prices.

A summary impression of the panel comments is that the industry has potential for improved productivity and environmental quality through the adoption of now technologies. This industry may also have a "window of opportunity" in the near future when new efficient technologies could replace retired capital. However, higher fuel prices would not necessarily encourage the industry to take advantage of this opportunity.

The paper industry supplies much of its required input through the growing and harvesting of trees, which are, of course, a carbon sink. Some panel members stated that the industry is on balance carbon neutral and not a contributor to climate change. Further, declines in the domestic industry would reduce the industry's forestry activities which would similarly reduce carbon sequestration.