STATEMENT OF

LEE P. HUGHES

VICE PRESIDENT

CORPORATE ENVIRONMENTAL CONTROL

BAYER CORPORATION

on behalf of the

AMERICAN CHEMISTRY COUNCIL

before the

SENATE ENVIRONMENT AND PUBLIC WORKS COMMITTEE

on

S.  556

THE CLEAN POWER ACT OF 2001COST-BENEFIT ANALYSIS OF MULTI-POLLUTANT LEGISLATION

June 12, 2002

 

My name is Lee Hughes and I am Vice President of Corporate Environmental Control for Bayer Corporation.  I am responsible for the environmental matters of Bayer’s U.S. operations.  This includes compliance with the Clean Air Act.  Thank you for the opportunity to appear before you today.

 

I am here today representing the American Chemistry Council.  Leading companies engaged in the business of chemistry make-up the membership of the Council.  TheConsistent with our goal of continuous improvement in our environmental performance, the chemical industry supported the 1990 Clean Air Act Amendments.  For over a decade we have worked with EPA to implement its many programs and in the development of programs that continuously make people’s lives better, healthier, and safer.

 

Council members have a big stake in the continued success of the environmental programs, including the Clean Air Act and have done more than their fair share to ensure that success.  Overall environmental, health and safety spending by Council members has exceeded $36 billionenvironmental programs, including the Clean Air Act, and have worked hard to ensure that success.  Overall environmental, health and safety spending by Council members for the year 2000 alone was roughly 3.4 billion dollars.  We have steadily reduced dollars since 1970 on pollution abatement and control including $3.4 billion in 2000.  Not only have we reduced our emissions while increasing production, Council members have used “combined-heat-and power” (CHP or co-generation) units, to (decrease the demand for) increase our  energy efficiency and cut emissions from power generation as well. 

As a major user of energy and contributor to the success of the Clean Air Act, Council members also have a large stake in Senate Bill 556, which puts forth innovative (sounds too positive)market market-based trading approaches to reducing emissions from power plants.  Our stake, however, might not be what you would think, i.e., benefiting from the reduced emissions achieved.  While we might benefit from that aspect of the Bill, the real impact of S. 556 will likely be on our purchasing of electricity and the Bill’s impact on the availability of our industry’s lifeblood, natural gas.  Unfortunately, given the current stringency of the bill’s suggested emission cuts and timing, we expect a significant adverse effect both for our industry as well as for the broader economy.

As the Committee knows, natural gas is becoming the “fuel of choice” for achieving air emission limits from power plants.  That popularity, however, affects its availability to — and price paid by all consumers — including the business of chemistry.  In our opinion, the limits imposed by, and the timing of, Senate Bill 556, will adversely affect both the cost of electricity generation and the availability of natural gas.  Because of these reasons, the American Chemistry Council is opposed to S.556.  The 3 primary reasons are: 

1) Fuel diversity.  It is critical to the business of chemistry that S.556 and similar proposals not result in an over over-reliance on natural gas to generate our nation’s electricity needs.  The business of chemistry relies on natural gas as an energy source and as a feedstockraw material.  When the supplies of natural gas are short and prices rise, the impact on the industry is devastating.  During the winter, 2000 runup in gas prices, the US chemical trade surplus plummeted from ___ to  ____.To the extent that multi emission proposals are premised on or result inemissions while increasing production, thereby increasing economic productivity while reducing our environmental footprint.  One-way Council members have accomplished this is by using “combined-heat-and power” (CHP or co-generation) units to increase our energy efficiency and cut emissions from power generation as well. 

 

While we have improved our energy efficiency for decades, we remain an energy intensive industry.  Not only do we use a lot of electricity, we are major consumers of natural gas, both to power our energy efficient operations and as a raw material.  In fact, we are the major user of natural gas for non-energy purpose.  This makes our businesses very sensitive to energy prices and to the availability of natural gas as one of our core materials.  While S. 556’s provisions are aimed largely at the utility sector, some of our operations would be directly affected.  Moreover, as major users of energy, Council members will be directly impacted by any increase and availability of critical raw materials such as natural gas that are driven by the provisions of S. 556.

 

General Position and Concerns

 

We support the goal of continued improvement in air quality, building on significant progress to date.  We also support the use of market-based mechanisms to achieve these goals.  However, we are very concerned about S. 556’s potential impact on our industry and the broader economy.  The one million employees of the business of chemistry are just beginning to rebound from two very tough years of economic slowdown, and are poised for an upturn.  We are concerned that this bill’s impact on energy prices and natural gas availability could send us the other way by driving many utilities to switch to natural gas as a fuel source.  We think it is important to set our goals and timetables for additional emissions reductions in a way that takes account of and minimizes these sorts of economic impacts while delivering improved air quality.  We also believe it is important to harmonize any new requirements with existing provisions of the Clean Air Act, rather than to simply layer an entire set of new provisions over an already complex matrix of existing requirements.  

 

Because of these reasons, the American Chemistry Council is opposed to S. 556 in its current form.  We believe that S. 556 needs to be reconsidered and amended.  Our three primary concerns are: 

 

1.         Ensuring fuel diversity. 

2.         Recognizing the benefits of CHP Units.

3.         Harmonizing the various sections of Clean Air Act with new requirements.

 

The Need for Continued Fuel Diversity

 

It is critical to the business of chemistry that S. 556 and similar proposals not result in an over-reliance on natural gas to generate our nation’s electricity needs unless there is simultaneous government action to ensure access to an adequate supply of natural gas.  The business of chemistry relies on natural gas as an energy source and as a basic raw material.  For many utilities, the most cost-effective, or perhaps only, way to meet the stringent targets in S. 556 would be to switch to natural gas, accelerating the trend towards gas as a preferred fuel.  Without any increased initiatives, the Energy Information Agency (EIA) is predicting that the use of natural gas to power our utilities will increase three-fold by 2020 in their “business as usual” case.  This increasing demand for gas is occurring at the same time we are restricting access to supplies of natural gas.  S. 556 would exacerbate this shift.

 

When the supplies of natural gas are short and demand is high, prices rise with a significant impact on our industry.  In fact, each dollar rise in the price of natural gas means about $1 billion in additional annual cost for our members costs that we cannot recover in the price of our products in the global marketplace in which we compete.  When U.S. companies cannot compete in the global market, we lose jobs and investment in the U.S. (and production increases in parts of the world where local companies may be allowed to have much higher emissions).  Last year’s spike in gas prices was disastrous for our U.S.-based industry. 

 

When the price of natural gasrises above around  approaches $4.00 per MBTU,million Btu, and it increased to over $10.00 a unitper million Btu during the winter of 2000-2001, the U.S. chemical industry’s costs of production rise to the point where we are no longer competitive with foreign producers.  Gas prices increased to over $10.00 per MBTU during our most recent spell of demand-supply imbalance, the winter of 2000-2001, and the industry had one of its worst years in 50 years.  Last year we saw several plant closings because of that price spike. 

 

To the extent that multi emission proposals result in significant fuel switching by utilities from coal to natural gas and public policies do not provide for adequate gas supplies, demand for gas massive fuel switching by utilities from coal to natural gas, demand for gas will outpace supply and prices will rise.can reasonably be projected to outpace supply.  Growth in demand for electricity is already affecting the supply/demand balance for natural gas before any additional fuel switching is encouraged.  EIA reports that 90% of our new electric power facilities will rely on natural gas as their basic fuel.  Actions tothat further alter our basic fuel mix for electricity and drive up demand for natural gas are not prudent, especially given Congress’ demonstrated reluctance to seriously address domestic natural gas supply.create significant problems for our industry and we urge this Committee to evaluate them carefully.

 

Given the levels of reduction mandated bycurrently required by S. 556, and the time lines for meeting these levels, wecan conclude that enactment of this legislation will result in significant additional fuel switching by the utilities.  In particular, the CO2 component of the bill would virtually guarantee that the utilities would need to abandon coal use in favor of natural gas.  Existing technology cannot accomplish the CO2 reductions currently sought by S.556 and a fuel switchS. 556, and the bill’s timetable does not provide for adequate technology development.  to natural gas would be the only viable alternative for the utilities – at the expense of the broader US economy.  Further, theThe short deadline for meeting S. 556 deadlines in 2007 will notdoes not allow newer and developing technology-- based solutions to come on line in time to make a difference – again leading to the same result – fuel switching.difference. 

2)               Combined Heat and Power.  The U.S. chemical industry has made and continues to make significant investments in the use of combined heat and power technology to provide much of its electrical and thermal energy needs.  The advantages of CHP cannot be underestimated.  A typical CHP unit produces power twice as efficiently as a traditional utility and emits at least 50% less pollution.  In this regard, generation of energy needs by CHP technology is extraordinarily beneficial toward meeting the nation’s air quality and climate change goals.  We know members of this Committee appreciate the role of CHP, since ,(most of its members supported Senators Caper and Collins amendment to restore the incentives for CHP in the recently passed energy bill.  Chairman Jeffords, we appreciated your co-sponsorship of that important amendment.

UnfortunatelyIt is most surprising, then that, S.556 appears to ignore the beneficial aspects of CHP because it includes these units within its coverage and seemingly ignores that theseare already tightly controlled units with very little low emissions.  These units would be put in a competitively disadvantaged position of needing to buy credits – essentially penalized for being well-controlled and low emitters.  CHP units should be exempt from any multipollutant legislation. 

3) Clean Air Act Regulatory Reform.  One of the issues we see with ways that S.556 is fundamentally flawed ( I would not use this phrase with this group) is that it merely imposes yet another set of emission reduction requirements on industry over and above what currently is called for in the Clean Air Act.  ACC is generally  (I would prefer) can be supportive of a market based trading approach for managing certain emissions in an existing appropriate regulatory framework.  We believe the market will do a significantly better job of allocating scarce resources to accomplish the goals of the Clean Air Act than a confusing, overlapping, and constantly changing command and control regulatory regime.  However, to achieve the true benefits of a market-based system, it must be properly structured and it must be allowed to work.  And it must not penalize the good performers.  S.556 meets neither none of these tests.  The compliance timelines are too short to allow the market to develop and function; the emissions reduction requirements are so stringent that they will preclude the opportunity for overcontrol- one of the main reasons the Acid Rain emissions trading program was successful.  And, it does not replace any of the command and control requirements of the Clean Air Act.  Trading mechanisms have been successfully used and our country already has a number of areas where trading programs will be expanded this decade, but our experience with trading programs across industries with different margins and a constrained allocation is almost non-existent.  This means that a source subject to S.556 will still face the uncertainty of meeting all other Clean Air Act requirements for the same pollutants in addition to meeting S.556 requirements.  Not only does this remove any incentive for an industry to support S.556, but also it eliminates any perceived benefit of certainty and cost-effectiveness that a properly crafted multipollutant approach could provide.

As support for our views, the Committee should consider the following:

 

The Clean Air Act is working and Air Quality has Improved

The Clean Air Act, now nearing thirty years old and with amendments through the years, is a complex, command &and control- driven series of requirements and deadlines. For all the complexities and cost, the Act has worked.  Emissions have dramatically reduced since the early 1970’s and the Nation’s air quality keeps improving as demonstrated by declines in annual emissions declining in all measured categories over the past 14 years!  The 1990 amendments added significant control requirements and deadlines extending the scope and reach of the Act.  Combined with EPA’s 1997 decision to tighten standards for ozone and add a standard for fine particulates – we see a continued stream of requirements through 2020. 

Unlike thirty years ago, most of the low cost reductions have occurred and Because of this improvement, decisions about what to control, and the stringency of the control can have a critical impact on entire business sectors.  The chemical industry is a prime example of a highly regulated and controlled industry that now faces significantcosts for any additional incremental environmental gains in from programs such as the multipollutant approach.

With that context, ACC members have made considerable progress in cleaning up the air and the Chemical industry has been a leader of environmental progress.  Council members support protecting human health and the environment, including the air resources of the Nation.  Over the past twenty-five years, Council members have made their operations more energy efficient and reduced their air emissions.  (Too much boilerplate?)

During that period, Council members constructed many cogeneration or “combined heat and power” systems —a significantly more efficient way of producing power than conventional electric generating units — and co-generation units produced 80 billion kilowatt-hours of electricity in 1998 - and our members contributed nearly 45 billion kilowatt-hours of that total.  These and other projects helped make the chemistry business 41% more energy efficient per unit of output than it was in 1974.  Council members have also dramatically reduced air emissions while increasing production.  For example, core Toxic Reduction Inventory (TRI) emissions are down 63% since 1988 even though production was up 27%.  According to EPA data, ACC members also led all of industry in cutting emissions of 30 key hazardous air pollutants —including mercury, since 1990.  Likewise, ACC members have aggressively reduced our SO2 and NOx emissions.

Even as Council members are highly regulated under the Clean Air Act, we are constantly upgrading our facilities to comply with its various provisions.  [JCD comment- does this statement beg an implication that we routinely do not comply with NSR?  If that is possible, we probably should either delete it or further refine it to specifically state that those are additional requirements to reduce emissions.]Our members (and others) are reducing mercury emissions pursuant to section 112 of the Clean Air Act[JCD comment- if this reference to Hg emissions refers to chlor-alkali Hg reductions, it may be okay but I am not familiar with those rules; if it refers to upcoming boiler/process heater MACT rules, this should be deleted since the proposal is not out yet and reductions would not be required until maybe 2007, and we should not imply that we expect actual reductions to be required yet.], NOx emissions through Section 126 and EPA’s “NOx “SIP cCall” and some have opted into the Act’s Title IV acid rain program. 

As you move forward with the development of multipollutant legislation, we ask the committee to carefully consider the progress that has already been made in reducing emissions, the increasingly complex and costly requirements still under development, and the need for equity in determining the scope of the program.  Manyfacilities, like those in the chemical industry are highly regulated and tightly controlled and sweeping one-size fits all approaches will put us at an  further economic disadvantage.  In fact, structuring a program that doesn’t provide credit for previous emission reductions penalizes sources and industries that have dramatically reduced their emissions in favor of those who currently use energy less efficiently. have less regulation or control.

Multipollutant legislation needs to be carefully crafted to address the following critical issues:

The Need for Continued Diversity and Balance in our Nation’s Energy Mix

The crippling run up of energy prices in 2000-2001 is still fresh in our minds and we still face a continuing threat of a repeat of that crisis. Current natural gas production and the recent decline in exploration almost guarantee it.  A cCarefully crafted multipollutant legislation could help minimize this threat.  In turn, bBy statutorily driving up or down the delicate balance of supply and demand for energy resources, multipollutant legislation could plunge the nation back into an energy crisis.

The basic chemicals part of the business of chemistry converts certain petroleum products, natural gas, and other naturally occurring raw materials into a wide variety of basic chemicals.  These basic chemicals are then converted by other sectors of the chemical industry into chemical intermediates and final chemical products such as plastics, synthetic fibers, and rubber.  In turn, these chemical products are fabricated by many different industries into thousands of essential products for consumers.  Consumers use these products to make their lives better, healthier, and safer, meeting their needs more efficiently.  This creates the demand for our products.  Our level of production is driven by this consumer demand, need not the reverse.

1)               Fuel switching to natural gas would be the only viable alternative for the utilities, at the expense of the broader U.S. economy.

 

Congress Must Not Penalize Co-generation or Combined Heat and Power (CHP) Units

 

S. 556 covers more than power generating units in the electric utility industry.  It also covers combined heat and power units (CHP) that produce thermal energy and electricity for on-site consumption, but who may also sell small amounts to the electric grid.  This puts these already efficiently operating units in a competitively disadvantaged position of now needing to buy credits – essentially penalized for being “ahead of the curve.” 

 

The U.S. chemical industry continues to make significant investments in the use of combined heat and power (CHP) technology to provide much of its electrical and thermal energy needs.  CHP, also referred to as “co-generation,” produces both thermal power and electricity, from the same fuel input.  Where utilities generally discard the thermal energy produced from combustion, CHP units capture it for use in a manufacturing plant. 

 

The advantages of CHP cannot be overestimated.  A typical CHP unit produces power twice as efficiently as a traditional utility and emits at least 50% less pollution.  In this regard, generation of energy needs by CHP technology is extraordinarily beneficial toward meeting the nation’s air quality goals. 

 

We know members of the Environment and Public Works Committee appreciate the role of CHP, since most of them, including the Committee’s Chairman, supported Senators Carper and Collins on their amendment to restore the incentives for CHP in the recently passed energy bill.  It is most surprising then that S. 556 appears to ignore the beneficial aspects of CHP units because it includes them within its coverage.  CHP units should not be included in S. 556, but should be provided with an opportunity to opt-in to the program. 

 

Harmonize New Requirements With The Clean Air Act

 

We support using a market driven approach to achieve the goals of the Clean Air Act.  We believe the market will do a significantly better job of allocating scarce resources to accomplish the goals of the Clean Air Act than a confusing, overlapping, and constantly changing command and control regulatory regime.  However, to achieve the true benefits of a market-based system, it must be properly structured and it must be allowed to work.  And, it must not penalize good performers. 

 

Currently, S. 556 meets neither of these tests.  Its compliance timelines are too short to allow the market to develop and function.  Further, by not providing relief from any of the command and control requirements of the Clean Air Act, the uncertainty of meeting the various regulatory program requirements in the coming years will discourage facilities from participating in market-based trading.  Companies will likely decide that they need any “credits” within their company – or worse, they simply may not be able to generate credits because of other overlapping regulatory requirements. 

 

The trading mechanisms of the Clean Air Act acid rain program were successful because that program was the mechanism for reducing acid rain and the program focused only on a single, similar sector, i.e., utilities.  By design, S. 556 isn’t the only program that will apply to a facility, and S. 556 will also cover non-utilities such as combined heat and power units from the chemical sector and others. 

 

These two factors will contribute to a higher cost program and severe inequities between industrial sectors with different margins and a constrained allocation.  This means that a source subject to S. 556 will still face the uncertainty of meeting all other Clean Air Act requirements for the same pollutants in addition to meeting S. 556 requirements.  Not only does this remove any incentive for an industry to support S. 556, but also it eliminates any perceived benefit of certainty and cost-effectiveness that a properly crafted market-based system could provide.

 

Finally, because S. 556 adds another mechanism for meeting Clean Air Act emission goals without ensuring that these programs will work in concert, sources will not be able to benefit from the market-based approach of S. 556.  Instead, they will still be required to adopt each additional command and control approach implemented by the CAA over the next two decades. 

 

As additional support for our views, the Committee should consider that,

 

·       the Clean Air Act is working and air quality has improved;

·       the Nation needs to maintain diversity of fuel sources;

·       the business of chemistry is vitally important to the U.S. economy;

·       the business of chemistry is competitively disadvantaged by high natural gas prices; and

·       including combined heat & power units in S. 556 will add significant burden to these highly efficient and well-controlled units.

 

The Clean Air Act Is Working and Air Quality Has Improved

 

The Clean Air Act, now nearing thirty years old and with amendments through the years, is a complex, command and control driven series of requirements and deadlines.  While fraught with cumbersome programs, such as new source review, and full of complex and costly requirements, emissions have been dramatically reduced since the early 1970’s.  Furthermore, the Nation’s air quality keeps improving as demonstrated by declines in annual emissions for all measured categories over the past 14 years.  The 1990 amendments added significant control requirements and deadlines extending the scope and reach of the Act.  Combined with EPA’s 1997 decision to tighten standards for ozone and add a standard for fine particulates – we see a continued stream of requirements through 2020. 

 

Because of this improvement, decisions about what to control, and the stringency of the control can have a critical impact on entire business sectors.  The chemical industry is a prime example of a highly regulated and controlled industry that may now have to face significant raw material cost increases if a bill like S. 556 attempts to move too far too fast.  In addition, S. 556, in its current form, would regulate combined heat and power units from the chemical and other industries.  The cost of achieving any incremental environmental gains in emission reductions from these units will be prohibitive.

 

As you move forward with the development of multi-pollutant legislation, we ask the committee to carefully consider the progress that has already been made in reducing emissions, the increasingly complex and costly requirements still under development, and the need for equity in determining the scope of the program.  Many combined heat and power facilities, like those in the chemical industry, are highly regulated and tightly controlled.  Sweeping one-size fits all approaches will put us at a further economic disadvantage.  In fact, structuring a program that doesn’t provide credit for previous emission reductions penalizes sources and industries that have dramatically reduced their emissions in favor of those who currently use energy less efficiently.

 

The Need for Continued Diversity and Balance in our Nation’s Energy Mix

 

The crippling run-up of energy prices in 2001 is still fresh in our minds and we still face a continuing threat of a repeat of that crisis.  Current natural gas production and the recent decline in exploration almost guarantee it.  Carefully crafted multi-pollutant legislation could help minimize this threat.  In turn, by statutorily influencing the delicate balance of supply and demand for energy resources, multi-pollutant legislation could have a detrimental impact on our efforts to address our Nation’s basic energy needs.

 

Our industry is an example of one that uses energy efficiently to make products that consumers use to make their lives better and in many cases, help our Nation improve the efficiencies of energy generation and utilization.  The business of chemistry converts certain petroleum products, natural gas, and other naturally occurring raw materials into a wide variety of basic chemicals.  These basic chemicals are then converted by other sectors of the chemical industry into chemical intermediates and final chemical products such as plastics, synthetic fibers, and rubber.  In turn, these chemical products are fabricated by many different industries into thousands of essentialFor example, the business of chemistry converts natural gas liquids into ethylene, which is used to make hundreds of other chemical products that, in turn, are used to make thousands of consumer products such as detergents, antifreeze, medical and sanitary products including sterile medical applications,PVC windows, detergents, anti-freeze, energy-saving insulation, packaging to keep food fresh, textiles, agricultural films and computer housings. (courtesy of Huntsman)  food packaging, swimming pool liners, carpet, antifreeze, paper coatings, crayons, and window frames.

The business of chemistry is vitally important to the U.S. economy.It is the nation’s largest exporting sector, larger than agriculture, computers, or aircraft/aerospace.  Exports grew 13.4% to a record $79.9 billion in 2000.  The $6.3 billion trade surpluscontinued a seventy-year-old tradition. In the United States, more than ten cents of every export dollar are due to chemicals and related products.  This surplus was nearly wiped out by the last spike in natural gas prices.

More than one million people are employed by the business of chemistry, and companies that purchase the products of the business of chemistry employ more than 36 million workers.

To maintain this position, the business of chemistry depends onraw materials, also known as feedstocks.  Among feedstocks, natural gas is one of the most important.  The chemical industry is the nation’s biggest industrial user of natural gas, accounting for 11% of total U.S. consumption, and 30% of industrial consumption.  The business of chemistry uses natural gas directly to produce ammonia, and methanol and their derivatives and indirectly (when ethane and other constituents are removed from the gas) to produce ethylene and other basic building-block chemicals.

Impact of High Natural Gas Prices

High natural gas prices have an adverse effect on the business of chemistry in the United States.  Although the market for chemicals is global, the price of natural gas is not.  Because U.S. firms are paying higherprices for natural gas, chemical products made in the United States are at a competitive disadvantage in the global marketplace. 

Not only does the relative price of natural gas affect chemical producers, so does the degree to which chemical producers rely on natural gas as a feedstock.  For example, 70% of U.S. ethylene production relies on natural gas liquids as a feedstock, whereas 70% of global ethylene production relies on heavy liquids such as naphtha and gas oil.  Therefore, as the price of natural gas rises, the competitive position of U.S. ethylene producers isweakened.

Last year’s price shocks greatly affected U.S. production.  The price of natural gas liquids (ethane, propane, butane) rose such that heavier feedstock chemicals (naphtha, gas oil, condensate) became more attractive economically.  Unfortunately, few chemical production facilities that use natural gas as a feedstock could use these heavier liquids.  [Should we mention the environmental ramifications of switching to heavier feedstocks?][JCD response to question- No] [Molinaro response:  No]

 

In the short run, these high natural gas prices in the United States had a dramatic effect on companies in the business of chemistry:

·Shut down almost one-half the nation’s methanol capacity and one-third of its ammonia capacity.  (Side note: about 5 years ago the US was self sufficient in methanol now we import as much as we do oil)

·Ethylene capacity dropped between 10% and 15%, with at least 5% of this drop due to permanent (?) plant shutdowns.  Net trade in ethylene was at one-fifth the 1997 level in 2001.

·The inherent Hhigh electrical power requirements of and cost adversely affected chor-alkali, atmospheric gas, and ethylene oxide production facilities caused them to be particularly hard hit by increased electrical costs.

·The Gulf Coast region, where most of the U.S. petrochemical industry is located, was hit particularly hard. [This may be a positive to the Senators on this committee – we may want to drop]

·The combined effect of higher natural gas prices led to fewer U.S. exports, greater U.S. imports, and a rising U.S. trade deficit.  Net trade for the United States last year fell at least $13.5 billion (4.5 billion attributable to the business of chemistry) as a result of higher input costs.

·The Unlike the regulated utility sector, International competition sluggish U.S. economy prevents chemical companies from passing through the full cost of increased natural gas prices.

In the long-term, the outlook already remains uncertain prior to any multi-emission requirements:

·Domestic natural gas prices that remain year-on-year above $4 per mmillion BTU will severely damage U.S. basice chemical producers’ ability to participate in world trade., creating slower production growth. Over time this competitive disadvantage will move this industry from the United States.  This impact is predicated on oil prices remaining below $25 per barrel.  Plant closures, employment loss, reduced international investment in U.S. capacity, and an increased in semi- and finished goods imports will occur.

·Capital investment will be negatively affected.  For example, a new ethylene plant costs about $400 million to build, but the rising price of natural gas in the USis country, coupled with the historically flat global price of ethylene (the 1999 price was the same as the 1980 price) makes new investment here unlikely.  Not sure about this.  Could still be more investment, but with greater capacity to swing to naptha. gas oil, etc.  Can generally be said that investments in asia, and other places where there is “stranded gas” are more likely to attract the next dollar of investment.

·Rising natural gas prices are inherently inflationary and have ripple effects on other products and services.  An acceleration in inflation proceeded every post-World War II recession.  If chemical companies are able, in the long run, to pass through the full cost of higher raw material costs, the prices of many consumer products will increase by one or two percent.  This does not help us – it will be viewed as no cost change to this group – I also question this level of contribution to consumer cost by the time this cost works through four or so mark ups to reach the consumer.  [JCD comment- I agree- also said above that cost could not be passed through] [Molinaro comment – I agree too]

·If chemical companies cannot pass on the cost increase to their customers, more plant shutdowns will occur, exports will continue to diminish, and more jobs will be lost.  .

Manufacturing and the chemical industry create the demand at our colleges and universities for scientists and engineers. (Martha Moore had put together some information on the size of our R&D and the education level of our workforce that might be appropriate to insert here – I could not find it readily)  As we continue to diminish these sectors in our economy we hurt the technological base we often look to for solving the issues we face.

These facts convey the critical nature of developing a multipollutant program that doesn’t upset our balanced energy supply.

Combine Heat &and Power Units

Combined heat and power (CHP) generating systems, also known as cogeneration, are cost effective and environmentally beneficial projects that provide both electricity and steam power.  They are over 50% more efficient thant typical power production units.  A form of distributed generation, CHP plants are located at or near manufacturing facilities that require large amounts of electricity and steam.  They offer several advantages over purchasing utility-generated power to run manufacturing processes:

CHP systems are more reliable and require fewer down times than utility power plants.  Also, since they are located at or near the site of the consumer there is no reliance on the transmission system to move these large blocks of power.  The result is fewer bottlenecks and greater available transmission capacity for utilities to serve other customers.

CHP systems are, on average, twice as fuel efficient as conventional utility power plants because the heat that is wasted in a utility plant is captured for use in the associated manufacturing facility in the form of steam.  So far we cover CHP in at least 3 places, and repetitiously so.  Need to boil it down to the essence. 

By getting twice the amount of power from the same fuel input, CHP systems generally produce less than half the emissions of conventional utility power plants. 

Combined heat and power systems offer benefits beyond those realized by the manufacturing community.  Because it is distributed generation, CHP offers communities an additional option for power in times of emergencies.  Furthermore, since the cost of building an industrial CHP plant is borne by the manufacturing plant, consumers are not held responsible for recovery of that capital investment, as with monopoly (regulated ?) utility plant investments.

The future of CHP is generally bright.  The Department of Energy and the Environmental Protection Agency set a goal of doubling U.S. CHP capacity by 2010 to over 100,000 MW.  This would represent 14 percent of total U.S. generating capacity.  The Environmental Protection Agency has established its Combined Heat and Power Partnership with both small and large industrial participants seeking to expedite permitting and removing other regulatory barriers to building new, highly efficient CHP systems.

Because of their numerous benefits in energy generation and minimal environmental footprint, CHP units cannot be considered in the same vein as electric power generating units.  Multipollutant legislation that encompasses CHP units would put them at a significant economic disadvantage as they are already highly controlled.  Cost per ton of emissions removed would range well over $5,000 per ton removed as compared to electric generating units where cost per ton removed would average under $1500 per ton removed.

Some have suggested that these units would be “credit generators” under a multipollutant approach.  In fact, these highly controlled units would be purchasers because uncontrolled electric utility units would generate more credits, and much more cheaply.  By not accounting for the relative efficiency of various units the unintentional result is to reward the less efficient production.

CHP units should not be included in multipollutant legislation. A provision should be added however, that would allow these units and other industrial boilers to “opt-in” to the rule if a facility determines that they could benefit from participating in the program.

Summary

ACC members believe that a carefully crafted multipollutant program could work and provide air quality benefits to the nation as well as an economic incentive to participating industries.  The program would need to 1) ensure a continued and diverse fuel supply that doesn’t undermine the natural gas supply or raise energy prices, 2) exempt CHP units from the requirement, but allow an opt-in provision, 3) address three pollutants, SOx, NOx and mercury, but not CO2, and 4) address the conflicts and overlaps between multipollutant initiatives and existing Clean Air Act requirements.  We oppose S.556, as this bill does not meet any of these criteria.  We would be willing to work with the committee to develop an alternative to S.556.  Thank You.

 

food-packaging, and energy efficient uses such as insulation.  All segments of our society use these products to make their lives better, safer and more energy efficient.

 

The Business of Chemistry is Vitally Important to the U.S. Economy

 

We are the nation’s largest exporting sector, larger than agriculture, computers, or aircraft/aerospace.  Exports grew 13.4% to a record $79.9 billion in 2000.  The $6.3 billion trade surplus in 2000 continued a seventy-year-old tradition.  In the United States, more than ten cents of every export dollar are due to chemicals and related products.  That said, all of these numbers are down dramatically in the past year due largely to the run up of natural gas prices during the energy crisis of 2000 – 2001.

 

More than one million people are employed by the business of chemistry, and companies that purchase the products of the business of chemistry employ more than 36 million workers.

 

To maintain our position, the business of chemistry depends on reasonable prices and a secure supply of raw materials.  Among these raw materials, natural gas is one of the most important.  The chemical industry is the nation’s biggest industrial user of natural gas, accounting for 11% of total U.S. consumption, and 30% of industrial consumption. 

The Business of Chemistry is Competitively Disadvantaged by High Natural Gas Prices

 

High natural gas prices have an adverse effect on the business of chemistry in the United States.  Although the market for chemicals is global, the price of natural gas is not.  When U.S. firms are paying higher disproportionate prices for natural gas, chemical products made in the United States are at a competitive disadvantage in the global marketplace.  

 

Not only does the relative price of natural gas affect chemical producers, so does the degree to which chemical producers rely on natural gas as a feedstock.  For example, 70% of U.S. ethylene production relies on natural gas liquids as a feedstock, whereas 70% of global ethylene production relies on heavy liquids such as naphtha and gas oil.  Therefore, as the price of natural gas rises disproportionately to that of heavy liquid feedstocks, the competitive position of U.S. ethylene producers is further weakened.

 

Last year’s price shocks greatly affected U.S. production.  The price of natural gas liquids (ethane, propane, butane) rose such that heavier feedstock chemicals (naphtha, gas oil, condensate) became more attractive economically.  Unfortunately, few chemical production facilities that use natural gas as a feedstock could use these heavier liquids.  In the short run, these high natural gas prices in the United States had a dramatic effect on companies in the business of chemistry.  Here are some examples:

 

·       Shut down almost one-half the nation’s methanol capacity and one-third of its ammonia capacity.  Five years ago, the U.S. was self sufficient in methanol.  Now we import about the same amount of methanol as we do oil.

 

·       Ethylene capacity dropped between 10% and 15%, with at least 5% of this drop due to plant shutdowns.  Net trade in ethylene was at one-fifth the 1997 level in 2001.

 

·       High electrical power requirements and cost adversely affected choralkali, atmospheric gas, and ethylene oxide production facilities.

 

·       The Gulf Coast region’s economy, where most of the U.S. petrochemical industry is located, was hit particularly hard with widespread job losses due to plant shutdowns.

 

·       The combined effect of higher natural gas prices led to fewer U.S. exports, greater U.S. imports, and a rising U.S. trade deficit.  As a result, net trade for the United States last year fell at least $13.5 billion (4.5 billion attributable to the business of chemistry).

 

In the long-term, the outlook remains uncertain:

 

·       Domestic natural gas prices that remain year-on-year above $4 per mm BTU will severely damage U.S. based chemical producers ability to participate in world trade.  This impact is predicated on oil prices remaining below $25 per barrel.  Plant closures, employment loss, reduced international investment in U.S. capacity, and an increase in semi- and finished goods imports will occur.

 

·       Capital investment will be negatively affected.  For example, a new ethylene plant costs about $400 million to build, but the rising price of natural gas in this country, coupled with the historically flat global price of ethylene (the 1999 price was the same as the 1980 price) makes new investment in the United States unlikely. 

 

·       Rising natural gas prices are inherently inflationary and have ripple effects on other products and services.  An acceleration in inflation preceded every post-World War II recession.

 

·       If chemical companies cannot pass on the cost increase to their customers, more plant shutdowns will occur, exports will continue to diminish, and more jobs will be lost.

 

Manufacturing and the chemical industry create the demand at our colleges and universities for scientists and engineers.  As we continue to diminish these sectors in our economy, we hurt the technological base we often look to for solving the issues we face.

 

These facts convey the critical nature of developing a multi-pollutant program that doesn’t upset our balanced energy supply.  Legislation should not discourage further development of CHP facilities.

 

Including Combined Heat & Power Units in S. 556 Will Add a Significant Burden To These Highly Efficient and Well-controlled Units

 

Combined heat and power (CHP) generating systems, also known as cogeneration, are cost effective and environmentally beneficial projects that provide both electricity and steam power.  They are over 50% more efficient than typical power production units.  A form of distributed generation, CHP plants are located at or near manufacturing facilities that require large amounts of electricity and steam.  They offer several advantages over purchasing utility-generated power to run manufacturing processes:

 

CHP systems are more reliable and require fewer down times than utility power plants.  In addition, since they are located at or near the site of the consumer there is no reliance on the transmission system to move these large blocks of power.  The result is fewer bottlenecks and greater available transmission capacity for utilities to serve other customers.

 

CHP systems are, on average, twice as fuel efficient as conventional utility power plants because the heat that is wasted in a utility plant is captured for use in the associated manufacturing facility in the form of steam.  By getting twice the amount of power from the same fuel input, CHP systems generally produce less than half the emissions of conventional utility power plants. 

 

Combined heat and power systems offer benefits beyond those realized by the manufacturing community.  Because it is distributed generation, CHP offers communities an additional option for power in times of emergencies.  Furthermore, since the cost of building an industrial CHP plant is borne by the manufacturing plant, consumers are not held responsible for recovery of that capital investment, as with regulated utility plant investments.

 

Because of their numerous benefits in energy generation and minimal environmental footprint, CHP units cannot be considered in the same vein as electric power generating units.  Multi-pollutant legislation that encompasses CHP units would put them at a significant economic disadvantage as they are already highly controlled.  Cost per ton of emissions removed range well over $5,000 per ton removed as compared to electric generating units where cost per ton removed would average under $1500 per ton removed.

 

Some have suggested that these units would be “credit generators” under a multi-pollutant approach.  In fact, these highly controlled units would be purchasers because uncontrolled units would generate more credits, and much more cheaply.  By not accounting for the relative efficiency of various units, the unintentional result is to reward the less efficient production.

 

Summary

 

In summary, the Council’s members believe that a carefully crafted multi-pollutant program could work and could provide air quality benefits to the nation without serious economic disruption.  To succeed, however, the program must:

 

1) avoid creating supply/demand imbalances for critical fuels such as natural gas,

2) avoid significant increases in electricity costs,

3) not include CHP units,

4) allow CHP and other sources not covered to voluntarily opt-in,

5) address three pollutants, SOx, NOx and mercury, and

6) harmonize these provisions with existing CAA requirements to ensure that market mechanisms function properly.

 

We oppose S. 556 in its current form, as this bill does not meet these criteria.  We would be happy to work with the committee to amend or develop an alternative to S. 556.