The wider the opportunities for trades, the more easily such transfers can take effect, and the greater the flexibility that purchasers have, the more likely it is that the low cost properties of the trading systems in Options 2 and 3 will be realized. The future structure of the system is unknown and so the impacts of alternative designs cannot be evaluated at this time. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 78  Transaction Costs and Transaction Size High transaction costs can impede permit trading   or methyl bromide purchases   and so affect the efficiency of the outcome under any of the three options. 37 Transaction costs in a trading system can be high or low because of features of system design, such as rules governing purchases or transfers, as described just above ( facilitating transfers), or because of institutions that arise or are set up, or fail to arise or be developed, to facilitate exchanges. 38 Transaction costs also will be affected by the administrative costs such as reporting or monitoring that are linked to individual transactions, including transfers under Options 2 and 3, or the purchase of methyl bromide under Option 1, or of a permit under Option 3. Bargaining and decision costs   the time and costs ( e. g., lawyers fees) to end users of entering into negotiations   are also an important component of transaction costs in a trading system ( Stavins 1995).

Finally, the flexibility of transactions under the system combined with the magnitude of transaction costs will affect how end users act and the pattern of final consumption of methyl bromide across end uses. For example, under any of the options, end users may or may not be able to alter decisions of how much methyl bromide to purchase and use over the course of the year. One possibility is that purchasing decisions ( i. e., arrangements between distributors and end users) will be made once per year under Option 1, with no repurchasing possible. This could require some end users to make consumption decisions well in advance of actual consumption needs. In contrast, ongoing markets in tradable permits,

or auctions that are held more than once per year, could provide end users with more decision making flexibility, and with the ability to more easily change consumption decisions over the course of the year.

However, if a user enters into an agreement to buy methyl bromide but does not use it, presumably the user could negotiate a refund of sorts so that the material would be available for re sale. If transactions costs are low, end users will be able to avail themselves of transactions in these markets. Those end user buying and trading decisions will also be affected by rules in the system   for example, whether unused permits would be stockpiled for future use or reported to the Parties as unused.

The relationship between the average value of a transfer and average transaction costs is also a factor determining transfers of permits ( OECD 2001a). If the size of a large number of transactions   whether purchases of methyl bromide under Option 1, permit purchases under the auction in Option 3, or transfers of permits under Options 2 and 3   is too small, then potential buyers and sellers may find that 37 With high transaction costs, the prices that sellers receive for pollution rights is depressed and the prices that buyers must pay for these rights remains high, which makes transactions less attractive for both buyers and sellers. With transaction costs acting as a barrier to trading, sources find it difficult to identify potential trading partners and to conclude trades. Transaction costs were especially high for some of the early emissions and effluent trading programs. Only a tiny fraction of the potentially beneficial trades actually took place ( EPA 2001).

38 A large body of literature on transaction costs has developed in the context of organizational structures and contractual arrangements ( Williamson and Masten 1999). *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 79  the transaction costs of these purchases outweigh the value of the transactions. In these cases, the purchases or transfers may not occur and in this way, potential efficiency gains from the narrow perspective of control costs will not be exploited under the system.

Keeping transaction costs low is one means of limiting the ratio of transaction costs to the value of the transaction, or transaction size. However, some factors will be outside the administrative realm.

For example, under Options 1 and 3, as the available quantity of methyl bromide falls over time, small users may find that they can acquire only small amounts via the market or auction, and consequently may not undertake the effort. As another example, under Option 2, average transaction size will tend to fall over time; as the aggregate quantity of methyl bromide available to critical uses falls, the initial allocation to individual users based on historical use will become small, particularly for the smallest users. If high transaction costs and small transaction sizes limit transfers, the final distribution of permits under Option 2 may be more similar to the initial allocation of permits prior to trading. The outcome under Option 2, in terms of consumption, however, may be different from the final distribution of permits; because suppliers,

distributors, and applicators will also face transaction costs, small transactions between them and end users will also be discouraged.

Thus, both high transactions costs and low transaction size can limit the volume of transfers under the trading system in Options 2 or 3, the likelihood that end users will participate in the auction under Option 3, or the ability of end users to purchase methyl bromide under Option 1, 2, and 3. Some administrative costs and transactions costs associated with the regulatory options are discussed in Chapter 6 of this economic analysis.

Other Factors Influencing Business Decisions Factors that are only indirectly linked to control or compliance costs and profits can also influence business decisions and affect the outcome under the regulatory options. For example, end users may be willing to pay more to continue using methyl bromide or a well known substitute because it is a product that they have used in the past or are familiar with. To some extent, this revealed preference for using methyl bromide may be related to training costs and other costs of adopting a less familiar substitute, and so may actually be related to profits, although not in a way that can be easily measured. Similarly,

preexisting contractual arrangements, or historical relationships such as those between distributors and end users, may affect the distribution of sales of methyl bromide ( under Option 1). Such relationships make it difficult to project the outcome of the regulatory options and to estimate the efficiency losses that might occur. Finally, to the extent that methyl bromide costs are perceived as small relative to the cost of other production inputs, farm owners and operators may not find it necessary to spend the resources needed to develop the information required to make a profit maximizing decision regarding the use of methyl bromide relative to substitutes. These and other effects may operate to reduce the efficiency of the final *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 80  solution to allocation under any of the options, and may affect end users under one option differently than another. 39 5.2.4 Limits on Purchases or Trading: Universal vs. Sector Specific Allocation and Trading Choosing the sectoral flexibility of transferable permits is a balancing act, reflecting the tradeoff between ( 1) assuring the maximum flexibility in transfers in order to achieve the lowest cost or most efficient distribution of methyl bromide among end users and ( 2) maintaining the benefits that the CUE nominations and authorizations were designed to provide to producers ( i. e., ensuring a continuing supply,

at least initially, to sectors for which methyl bromide is a critical input in production). 40 A broad base ( i. e., universal) for trading in Options 2 and 3, and analogous conditions for the market in Option 1, is generally believed to be more economically efficient than a narrow base ( i. e.,

sectoral), for several reasons. First and foremost, a broader base allows end users with diverse costs of control to trade with each other ( in Options 2 and 3) and so makes it possible to exploit the efficiency gains from trade in a trading system. In particular, greater differences in methyl bromide substitution costs among end users allow for greater potential efficiency gains from trade; allowing trading across sectors increases the likelihood of significant cost differences. Similarly, in the market under Option 1, a universal approach, rather than sector specific limits, permits methyl bromide to go to its highest valued uses, regardless of the sector.

Second, a larger number of participants make it less likely that an individual user can influence the market or corner supplies of methyl bromide. Third, a larger number of participants ( up to a point)

allows the market for permits or methyl bromide to operate more fluidly, so that buyers and sellers can conduct transactions more easily. Thus, the universal approach will likely have lower control costs and be more economically efficient than imposing sector specific quantity limits on trading or purchases of methyl bromide. ( See Section 9.1 for a quantitative assessment of the total cost savings, including administrative costs, of the two types of caps.)

How much more efficient the universal authorization will be than the sector specific authorization depends on several factors. First, it depends on how well markets function based on the factors discussed in the section above on the broad options. For example, historical relationships between distributors and customers consuming large amounts of methyl bromide may be particularly important in influencing the outcome under a universal authorization under Option 1. As supplies of methyl bromide 39 To the extent that some farms or farms in some sectors have a higher willingness to pay for methyl bromide than other farms, they will end up with greater quantities under either the sector specific or the universal allocation. It is unlikely, however, that individual farms or consortia will be able to garner additional supplies of methyl bromide on the basis of market power, since the number of farms is too large for individual farms, or a single consortium, to affect prices or the final pattern of consumption of methyl bromide.

40 Note that this section does not discuss the functioning of the allowance system for ( and trading among) producers, which is designed to limit total production and, in the case of the sector specific allocation, to limit quantities of methyl bromide going to individual sectors. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 81  diminish over time, distributors may be particularly mindful of the needs of historically important clients.

Thus, it is possible that a portion of the methyl bromide supplies that would go to sectors consuming small amounts of methyl bromide under a sector specific authorization would instead be diverted to historically large individual customers or cooperatives or associations with which the suppliers and distributors have historically done large amounts of business. Since these users may not necessarily be those placing the highest value on methyl bromide use, this diversion could reduce the efficiency properties of the universal authorization.

Second, to some extent it depends on whether the sector specific authorizations that the United States receives from the Parties to the Montreal Protocol correspond to the most valued uses of methyl bromide in the United States. To the extent that there is a good correspondence, the sector specific allocations would mirror the final pattern of consumption under a universal system. Such a correspondence is unlikely to occur, however, in part because of the complexity of the criteria used to determine the U. S. sector specific nominations. Criteria include costs of substitutes and yield changes,

applicability of alternatives by crop and region, and health and environmental effects of substitute pesticides. In addition, the factors influencing the operations of the markets and the extent to which all cost effective trades take place, and the uncertain relationship at this time between the international authorization and the U. S. nominations will affect the efficiency of the outcome.

Exhibit <IP_ADDRESS> illustrates the magnitude of compliance cost savings that might occur under a universal allocation relative to a sector specific allocation. In this table, estimated compliance cost savings for Approach 1 and the " high" scenario are presented. 41 Recall that the model reports cost savings, because the incremental compliance cost of the rule is the difference between the estimated changes in surplus ( 1) for the baseline phaseout in 2005, and ( 2) for the critical use exemption phaseout.

This difference gives the incremental cost of the Allocation Rule, relative to the baseline phaseout. Note that, because the allocation rule increases the quantity of methyl bromide that can be used for some years, this incremental cost is negative, i. e., the Allocation Rule generates cost savings relative to the original phaseout.

In the exhibit, sector specific cost estimates are those presented in Section 5.1. Cost for an illustrative universal scenario is presented. Under this scenario, it is assumed that the two largest users of methyl bromide   strawberries and tomatoes   are able to consume a higher proportion of total methyl bromide under the universal allocation than the sector specific allocation. Specifically, it is assumed that the combined consumption of methyl bromide by these two sectors equals 80 percent under the universal allocation. This value is assumed because, based on CUE applications prepared by the strawberry and tomato sectors, original requests from these sectors amounted to 82 percent of the total amount of methyl 41 As explained earlier in the chapter, this approach provides a conservative estimate of costs and cost savings. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 82  bromide nominated for CUE by the United States in 2002. Consumption of the remaining methyl bromide is assumed to be divided among the remaining sectors based on proportions in the nomination.

Exhibit <IP_ADDRESS>. Net Present Value Compliance Cost Savings under Approach 1, High Scenario: Sector Specific vs. Illustrative Universal Allocation (  1997$)

Sector Specific Allocation Illustrative Universal Allocation Discount Rate 3% High scenario 617 million 696 million Discount Rate 7% High scenario 383 million 447 million Note: Under the sector specific allocation, which follows the nomination, strawberries and tomatoes receive a little over half to the total methyl bromide in 2005. For the universal allocations, it is assumed that approximately 80 percent of total methyl bromide goes to these two sectors, combined. Note that this scenario is intended to be illustrative only, rather than a projection of what is likely to occur under the universal allocation.

The cost estimates presented for the universal allocation scenario are intended only to illustrate the magnitude of compliance cost savings that might result from following a universal allocation method rather than a sector specific approach. The estimates are not intended to be a projection or estimate of the actual compliance cost savings that would occur, since the data are currently unavailable to estimate how the consumption of methyl bromide would change. The estimates suggest that, depending on how methyl bromide consumption changes, compliance cost savings aggregated across all sectors could well be higher under the universal than the sector specific allocation ( i. e., the universal allocation could have lower aggregate costs than the sector specific allocation). In the analysis, additional compliance cost savings of moving to the universal allocation are roughly 10 percent of the sector specific compliance cost savings. Actual compliance cost savings would, of course, depend on the rate of adoption of substitutes,

and on which sectors were able to obtain methyl bromide under the three broad options.

5.2.5 Comparison of EIA and Other Compliance Cost Savings Estimates An analysis comparing potential compliance cost savings under sector specific versus universal allocation schemes was also conducted by Kim et al. and can be compared to the cost estimates presented above in Section 5.2.4. This analysis supports the phaseout model's projection that sectorspecific allocations are more costly to the overall regulated community than the universal allocation. The full analysis is provided in Appendix C. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 83  Kim et al.' s analysis found that, as predicted by economic theory, universal trading under Option 2 would offer more compliance cost savings than sector specific trading. As described in detail in Chapter 4, two types of permit trading could occur:

  Sector specific availability/ trading, which means that end users could only redeem permits for use on the identical crop or commodity for which the permits were initially held; and   Universal availability/ trading, which means that permits could be redeemed for use in any CUEapproved sector, regardless of the sector to which the permit was initially allocated.

Kim et al.' s analysis found that, as predicted by economic theory, universal trading would offer more compliance cost savings than sector specific trading. This can be explained by the fact that trading across all sectors would increase the number of sectors involved in trading, and thus result in more methyl bromide substitution cost differences among end users. With higher marginal cost differences for substitutes, more opportunity for cost savings would be realized because end users with relatively low marginal costs of substitution could sell methyl bromide use permits to end users with relatively high costs of substitution. Permit sellers would benefit from the revenue gained from sales, and buyers would benefit from continued use of methyl bromide allowed by the additional permits.

Incremental costs in Kim et al.' s analysis include profit loss from reduced methyl bromide consumption under the Allocation Rule ( e. g., reduced yields, forced switches to other crops or commodities, or business closure) and increased production costs. These estimates tend to be different from the cost model estimates for the Allocation Rule because the cost model, as described in Chapter 3 and Appendix B, used a variety of literature and other sources for yield, cost, and other data, whereas Kim et al. exclusively used applicable portions of the data provided by CUE applicants.

Kim et al. estimated that incremental costs of the Allocation Rule to industry under a sectorspecific trading system would be $ 55 million, whereas incremental costs to industry under a universal trading system would be much lower at approximately $ 35 million. 42 The phaseout cost model estimates a difference in cost between universal and sector specific allocation of $ 79 million or $ 64 million, at a 3 and 7 percent discount rate, respectively, compared to Kim et al.' s estimate of $ 20.2 million. The values of the cost model and Kim et al. differ because the analyses compare different baseline situations and have similar but different data sets. The phaseout cost model compares industry costs for sector specific and universal allocation under the Allocation Rule, which allows continued use of methyl bromide beyond 42 Kim et al. estimated that compliance cost savings of the Allocation Rule under a sector specific trading system would be $ 121.5 million compared to a high cost non trading command and control scenario ( all permits initially allocated to applicants with lower costs of methyl bromide substitution). Incremental costs under a high cost nontrading scenario were estimated to be $ 177.2 million, and incremental costs under a sector specific trading system were estimated to be $ 55.7 million). Compliance cost savings for the universal trading system compared to a highcost non trading scenario were estimated to be $ 143.6 million ($ 177.2 million in incremental costs for the high cost scenario and $ 35.5 million in incremental costs for universal trading). Incremental costs in Kim et al.' s analysis include profit loss from reduced methyl bromide consumption under the Allocation Rule ( e. g., reduced yields, forced switches to other crops or commodities, or business closure) and increased production costs *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 84  2005 for CUE, to a complete phaseout of methyl bromide in 2005 under the Phaseout Rule. Kim et al.' s analysis compares industry costs for universal and sector specific allocation under a market trading system to a system that does not allow trading ( command and control). A scenario of complete phaseout of methyl bromide use is not considered.

For further discussion of the compliance cost savings associated with universal versus sectorspecific allocation, readers are referred to Appendix C, " Marketable Permit Designs for the Methyl Bromide Critical Use Exemption Request in the United States" ( Kim et al. 2003), and Section 6.4 of this EIA.

5.2.6 Summary: Efficiency, Costs, and Limitations of the Analysis Exhibit <IP_ADDRESS> summarizes the foregoing discussion and the likely differences in the economic efficiency of the regulatory options. The most readily identifiable difference across the options in terms of efficiency impacts is whether trading is universal or sector specific. Between the universal and sectorspecific trading and allocations, the universal option is clearly lower cost from the perspective of economic efficiency, because the universal option allows more entities to trade, and thus is more likely to capture the potential gains from trade within agriculture. Across the three broad regulatory options,

however, the implications are less clear cut. Because participation in the regulatory system is essentially voluntary ( end users can opt to use substitutes and not obtain methyl bromide), the efficiency of the regulatory options will depend on which end users choose to participate and how consumption of methyl bromide is distributed among these end users. The foregoing discussion suggests that a number of the factors affecting the efficiency of market outcomes under the regulatory options will depend on the design of the option   whether it facilitates trades, how great information requirements are, and other features affecting participation.

Some factors, however, are independent of how the system is designed. In particular, information requirements will be lowest under Option 1, thus facilitating participation and efficiency, relative to the options involving permit trading or auction. Under Option 1, however, prior existing contractual arrangements and historical relationships may influence which end users purchase of methyl bromide;

such impediments will not operate in Options 2 and 3. The final column in Exhibit <IP_ADDRESS> summarizes some of the features of the three broad options that are not easily classified or compared. This column combines information on the magnitude of transaction costs ( the information that is needed to make a purchase or find buyers and sellers for a trade), and on timing issues that increase transaction costs ( the number of chances end users have to optimize the quantity being requested). The assessment in this last column should be considered particularly tentative; considerably more information is needed on how markets would operate under each of the options, as well as on how system design decisions would influence the types of transactions that could occur and the associated transaction costs. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 85

Exhibit <IP_ADDRESS>. Summary of Some Key Factors Affecting the Efficiency of the Regulatory Options Authorization and/ or Trading Regulatory Option Information Requirements and fixed costs of participation Historical impediments to the fluid market Casting a broad net and differences in control costs Transactions and Transaction costs Option 1. Producer/

Importer Allowance Cap with Market Distribution Low Certification, methyl bromide market information, and information on substitutes High Contractual and historical relationships between distributors and large customers and/ or large sectors Low No restrictions on trading across sectors Low because prices of methyl bromide should be relatively easy to discover.

High if no repurchasing possible.

Option 2. Producer/ Importer Cap and Trade Allowance with End User Permit Trading High Option 1 plus trading market,

plus data for allocation Low No existing contracts among end users Low No restrictions on trading across sectors High, because of costs of finding buyers and sellers.

Low, because of flexibility of permit market Universal Option 3. Producer/ Importer Cap and Trade Allowance with End User Permit Trading and Auction High Option 1 plus trading market,

plus operation of auction Low No existing contracts among end users or between government and end users Low No restrictions on trading across sectors High because of cost of participating in auction, and finding buyers and sellers.

Low because of frequency of auction and flexibility of permit market Option 1. Producer/

Importer Allowance Cap with Market Distribution Low Certification, methyl bromide market information, and information on substitutes Low Contractual and historical relationships constrained by sectorspecific limits High Restricted trading across sectors Low because prices of methyl bromide should be relatively easy to discover.

High if no repurchasing possible.

Option 2. Producer/ Importer Cap and Trade Allowance with End User Permit Trading High Option 1 plus trading market,

plus data for allocation Low No existing contracts among end users High Restricted trading across sectors High, because of costs of finding buyers and sellers.

Low, because of flexibility of permit market Sector Specific Option 3. Producer/ Importer Cap and Trade Allowance with End User Permit Trading and Auction High Option 1 plus trading market,

plus operation of auction Low No existing contracts among end users or between government and end users High Restricted trading across sectors High because of cost of participating in auction, and finding buyers and sellers.

Low because of frequency of auction and flexibility of permit market A " low" indicates that impediments to efficient markets are low, and so the outcome will be closer to the least cost, or efficient solution. In the third or fourth columns, low signifies low costs. In the second to last column, low signifies that the net is broad, and so there are fewer impediments to trading. Low in the last column reflects low transactions costs, or low impediments to trading. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 86  5.3 Economic Impacts and Equity Issues Across the Regulatory Options This section examines distributional issues associated with the regulatory options, including economic impacts and equity effects. An analysis of economic impacts examines how costs are distributed   who gains and who loses ( and by how much) from the policy, and how are the gainers and losers different under the alternative regulatory approaches. Equity assessment is generally concerned with identifying whether sub populations, such as minorities or small businesses, may experience negative impacts as a result of a regulation ( EPA 2000). The first subsection below looks at the economic impacts of the three broad regulatory options on two particular groups: methyl bromide producers and end users. The subsequent subsection looks at impacts of the universal vs. the sectorspecific approaches. The final subsection discusses distributional effects on small farms.

5.3.1 Economic Impacts: Non Social Cost Transfers As methyl bromide use in the U. S. is limited according to the allocation from the Parties to the Montreal Protocol, the declining supply will be rationed among the different end users, using a mechanism and limits defined by the U. S. rule. As described in Section 5.1, both consumer and producer surplus losses may result from the phaseout. 43 Impacts on consumers depend on price rises in the commodity markets, which in turn depend primarily on the commodities supplied by other domestic and foreign producers, and so will be largely unaffected by the method by which methyl bromide is distributed to end users ( i. e., which regulatory option is chosen). As discussed in Section 5.1, end users of methyl bromide will also experience producer surplus changes. 44 This section examines transfers between methyl bromide producers, end users, and the government, which will be different under the three broad regulatory options. 45 Under the first regulatory option ( i. e., the cap on production/ imports with tradable allowances), allowances are issued to methyl bromide producers, based on historical production, allowing each to produce a fraction of their previous production, so that the sum of their production ( together with imports) equals the phaseout target for each year. Impacts on methyl bromide producers and end users under this option are examined in two steps:

first, the impacts of a phaseout relative to no regulation are considered, and second, the impacts of the 43 These losses, however, will be smaller under the Allocation Rule phaseout, and so the net impact of the Allocation Rule phaseout is a negative cost, compared to the phaseout.

44 The total impacts of a methyl bromide phaseout on methyl bromide users stem from two sources: the increasing price of methyl bromide over its price in the absence of the phaseout ( the non social cost transfers discussed in this section) and producer surplus losses borne by methyl bromide users, as described under Approaches 1 and 2 above, in section 5.1.

45 Impacts on producers of substitutes for methyl bromide are not explicitly addressed. In a competitive market, the prices at which they sell their products will equal the full cost of production including normal economic profits, or return on capital. Hence, social and private costs for these alternatives are equal, so that no additional social welfare gains or losses need to be incorporated in this analysis. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 87  Allocation Rule relative to the Phaseout Rule. After examining the effects of the regulatory options generally in this way, differences across the alternative regulatory options are considered.

Consider, first, the effects of a phaseout, relative to a situation of no regulation. In this case, the phaseout target is below the desired level of consumption of methyl bromide, and so competition among end users leads to higher methyl bromide prices. The increase in the price of methyl bromide, multiplied by the production quantity capped by the allowances in each year, is a transfer from those end users who continue to use methyl bromide to the producers of methyl bromide. This increase in price for the baseline scenario ( the Phaseout Rule) occurs through 2005. After 2005, no money is transferred to producers or importers because no production or imports are permitted. These costs through 2005 are not social costs, but are a transfer from one group to another. This effect is discussed additionally in the Phaseout RIA ( ICF 2000b). Note that transfers to producers would be smaller in the case of the permit auction in Option 3 ( as discussed below), or a tax of the type that was used in the case of CFCs. Another issue that arises under methyl bromide phaseout involves the possible development of black market for methyl bromide. Exhibit <IP_ADDRESS> discusses this issue in detail.

Windfall profits could be an issue of significant concern to some elements of the regulated community. Since 1991, when the phaseout of methyl bromide began, to 2002 the price of methyl bromide has almost doubled. Staff economists at EPA estimate that the price of methyl bromide may have risen from $ 5.90 to $ 11.70 per kilogram ( in constant 2002 dollars) during this time horizon.

Assuming that the cost of producing and importing methyl bromide has risen at the same rate as inflation,

this translates into annual windfall profits of about more than $ 66 million. No one can predict the future price of methyl bromide, although some estimates are made in analytic documents that are available in the docket and accompany today's proposed rulemaking. EPA seeks comment on future windfall profits and how different methods of allocating methyl bromide would influence methyl bromide pricing. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 88  Exhibit <IP_ADDRESS>. Is a Possible Black Market a Concern for Methyl Bromide?

The United Nations Environment Program ( UNEP) has expressed concern about illegal trade in Ozone Depleting Substances ( ODS) arising as a result of the ODS phaseout ( UNEP 2002). The incentive for a black market to develop can arise as a substance is phased out, because the consumption by some countries or for particular uses is restricted. Coupled with high demand, these restrictions   sometimes supplemented by taxes or surcharges   raise the price of the substance in highly restricted markets relative to prices elsewhere. If the price difference is high enough, and if the substance can be readily obtained at the cheaper price and easily transported and introduced illegally into a high priced market, then an incentive exists for a black market to develop. If, in addition, controlling the illegal trade is difficult, then an active market may develop. Numerous sources of the illegal good ( e. g., a relatively large number of producers) and a widely dispersed distribution chain for the good, are two conditions that create difficulty in identifying the good in transit and undermine enforcement efforts ( UNEP 2001).

The circumstances surrounding the CFC phaseout in the United States ( in particular CFC 12, primarily in mobile air conditioning applications) were ideal for the development of a black market during the phaseout. First, a high demand for CFCs in the United States combined with an excise tax that was greater ( per pound) than the price of CFCs at the time resulted in a wide price differential between prices in the United States and the rest of the world in the 1990s ( FBI undated). For example, in 1999 a 30 pound cylinder of CFC 12 could be purchased from Canada for approximately $ 180 and then sold at greater than three times this rate ( approximately $ 450) in the United States ( EPA 2003a).

Second, there was a ready supply of CFCs. CFC production facilities existed in a number of countries, including Russia, China, India, and Eastern Europe. CFC production was also still legal in developing countries at the time of CFC phaseout in the United States ( UNEP 2001). Once imported, illegal CFCs could be fairly easily distributed via the large and dispersed network of parts providers and auto repair shops located in thousands of towns and cities around the United States. In 1997, for example, the distribution chain comprised over 7,600 automobile and other motor vehicle wholesale shops, over 7,100 used wholesale motor vehicle parts shops, and over 42,500 automotive parts and accessories stores ( U. S. Census Bureau 2002).

As a result of these factors, 1.5 million pounds of illegal imports of CFCs, valued at $ 18 million on the black market, had been seized by the late 1990s ( FBI undated). As an example of annual illegal trade, in 1995 it was estimated that 16,000 to 38,000 tons of CFCs were traded illegally worldwide ( UNEP 2001). Since the illegal trade was first detected in the 1990s, both the United States and the international community have taken, and continue to take, a number of steps to stem the flow of illegal CFCs, including actions such as collaboration of environmental agencies with customs agents and UNEP led national training programs for customs agents ( UNEP 2001).

It is reasonable to investigate whether the same potential exists for illegal trade in methyl bromide as a result of the phaseout. Methyl bromide phaseout schedules are different in developing and developed countries; methyl bromide is to be phased out in developed countries in 2005, with the exception of certain uses, and in developing countries by 2015 ( UNEP 2000), suggesting the existence of a supply of methyl bromide that could be imported illegally into the United States. Methyl bromide is also in high demand by thousands of farmers in the United States, suggesting that profits could be made from its illegal sale. However, most of the conditions for the development of a black market do not exist for methyl bromide and, as described below, the situation for methyl bromide is very different from that of CFCs.

It is unlikely that an illegal market for methyl bromide will arise for a variety of reasons. First, it is difficult and risky to produce methyl bromide illegally. The number of producers of methyl bromide is smaller, and thus more easily monitored, than the number of producers of CFCs. Only three major facilities produce methyl bromide in appreciable amounts; the U. S. and Israel combined produce 80 percent of global methyl bromide supplies. In total, only five industrialized countries have reported methyl bromide production facilities: France, Israel, Japan, Ukraine, and the United States. The four known developing countries with methyl bromide production, which together produce only about 5 percent of methyl bromide supplies, are China, India, North Korea, and Romania, and North Korea reportedly no longer produces methyl bromide ( GTZ 2001).

Second, it is difficult to illegally transport methyl bromide into the United States. A key factor is that the health risks involved with illegal transport of methyl bromide are much higher than the risks posed by CFCs. As a colorless and odorless gas that is classified as a poisoninhalation hazard, methyl bromide can enter the respiratory tract and cause pulmonary edema if inhaled ( Albemarle 1999), presenting the risk of death if a leak occurs during shipment.

Finally, the distribution chain for methyl bromide is highly regulated through applicator and end user certification requirements. As a federallyregistered " restricted use" pesticide, any individual who uses methyl bromide or oversees its use for any purpose must possess a valid Qualified Applicator Certificate, typically issued by state agricultural departments ( EPA 2003b). This reduces the ability of importers to introduce methyl bromide illegally into the market.

Based on the above considerations, there are a host of factors that would tend to indicate that conditions are not ideal for the development of a black market for methyl bromide. One factor that may impact this preliminary determination is the price differential for methyl bromide that exists between domestic and international markets ( i. e., methyl bromide prices have tended to be higher in the U. S. and other developed countries than they are in Article 5 countries, and over the past few years the magnitude of this price differential has increased). In spite of this ( slightly increasing) difference, the small number of producers of methyl bromide, the limited distribution chain, and danger to human health associated with illegal transport of the substance will likely outweigh the price differential's ability to encourage black market development ( Land 2003).

For all of the above reasons, it is unlikely that a significant black market for methyl bromide would develop under the 2005 phaseout. Moreover, to the extent that the proposed rule examined in this economic analysis allows extended uses for which methyl bromide is a critical input, the options examined herein would tend to depress the demand for methyl bromide in the near term and further weaken any incentive for a black market to develop. If a black market were to develop for methyl bromide it would likely have already been detected, as evidenced by the rise of a black market in CFCs within several years of CFC phaseout. Since the first phaseout step in 1999 for methyl bromide, no illegal trade in methyl bromide has been identified by industry or regulatory agencies ( Land 2003). *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 89  Under the Allocation Rule, the phaseout occurs more gradually than under the baseline. In each year of the allocation phaseout, therefore, methyl bromide prices will be lower than under the baseline.

The amount of transfer from end users to methyl bromide producers will be determined by the extent of the price rise under the Allocation Rule and the limits on quantity produced and consumed. Whether or not the transfer is higher or lower than under the original phaseout will depend on the magnitude of the increase in the price of methyl bromide, which in turn depends on the nature of the demand for methyl bromide, and how responsive or flexible prices are ( the elasticity of demand) in response to the restrictions on quantity. The more inelastic ( i. e., the higher the price rise for a given quantity restriction),

the greater will be transfers to methyl bromide producers under the original phaseout than under the allocation phaseout. ( It should be noted that under the baseline scenario, the bulk of the market for methyl bromide ceases in 2005 because there is no CUE. Therefore, while producers and importers may have a surplus that could be equal to or higher than the baseline scenario, the end users ( i. e., farmers and other commodity producers) have a benefit, which is the use of methyl bromide that would not otherwise be available.)

The effects will be slightly different under the three regulatory options. Each of the three broad options uses a different mechanism for conveying to end users the initial right to purchase methyl bromide. 46 Because this right is a valuable asset, the options will have different distributional consequences. Under Option 2, the allowance system for producers and importers is combined with tradable permits allocated to end users. To the extent that some end users must pay for additional permits over and above those that they have been allocated under Option 2, their bid prices for methyl bromide will be slightly lower and so the transfer to methyl bromide producers will be lower under Option 2 than Option 1. Under a permit auction ( Option 3), end users must pay for permits covering all methyl bromide that is purchased, as well as paying for the methyl bromide they purchase. Methyl bromide end users will be worse off under Option 3 than Option 2, because they must purchase under Option 3 what they receive for free under Option 2. In the auction case, the transfers are in the form of auction revenues that go from end users to the government, rather than to methyl bromide producers. 47 46 Depending on its design, a tradable permit scheme can control the distributive effects of environmental protection policies, achieving desired income distribution or transfers among different groups through the choice of initial permit allocation methods. Not surprisingly, the distributional implications of the initial permit allocation method are some of the most controversial and politically sensitive aspects of designing a tradable permit system ( OECD 2002). However, in the case of methyl bromide there will be few cost differences among the various trading schemes, assuming that methyl bromide will be first purchased by growers with the highest substitute costs, then by those with the next highest substitute costs, etc.

47 A recent study of alternative mechanisms for distributing carbon emission allowances to the electricity sector ( Burtraw et al. 2001) gets analogous results. This study finds that electricity consumers lose the most surplus under an auction approach ( although they gain it back through lump sum distribution of revenues), while electricity producers gain the most under the system that allocates allowances based on historical generation, rather than auction. In general, the uses to which auction revenues are put will affect both the efficiency and the distributional implications of Option 3. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 90  5.3.2 Economic Impacts Across Sectors As discussed in Chapter 3, two approaches are used in this analysis to estimate and bound the compliance cost of the regulatory options. Because the surplus changes calculated using this method provide the basis for many of the impacts reported below, it is worthwhile to review the methodology briefly. Under each approach, changes in consumer and producer surplus are calculated for the baseline phaseout and the Allocation Rule phaseout, relative to a situation of no regulation. This interim result is used to calculate the incremental compliance cost of the Allocation Rule. Specifically, the compliance cost of the rule is the difference between the estimated changes in surplus ( 1) for the baseline phaseout in 2005, and ( 2) for the critical use exemption phaseout. This difference gives the incremental cost of the Allocation Rule, relative to the baseline phaseout. Note that, because the allocation rule increases the quantity of methyl bromide that can be used for some years, this incremental cost is negative, i. e., the Allocation Rule generates cost savings relative to the original phaseout.

Overall, the change in aggregate producer surplus ( for methyl bromide users) of moving from the phaseout baseline to the Allocation Rule phaseout is negative ( i. e., costs are lower so that the increased availability of methyl bromide produces compliance cost savings). However, it is possible for some sectors to gain and others to lose, particularly in the short term. 48 Exhibit <IP_ADDRESS> presents the annualized and NPV compliance costs for individual sectors for Approach 1, high scenario, using discount rates of 3 and 7 percent. 49 The analysis estimates that most of the compliance cost savings resulting from the critical use exemption will occur in the strawberry, tomato, nursery, and orchard sectors. However, for the forest seedlings sector, it maybe more cost effective to invest in alternatives to methyl bromide. It is important to remember that no one is forced to use methyl bromide under the Allocation Rule; thus, no one can in reality be made worse off by the increased availability of methyl bromide.

What happens when we compare the compliance cost savings accruing to individual sectors under the sector specific and the universal allocations? In Exhibit <IP_ADDRESS>, illustrative results are displayed for annualized compliance cost savings, for the high substitute cost scenario, using a 7 percent discount rate. Again, the universal allocation cost estimate is intended to be illustrative, not predictive.

Strawberries and tomatoes, the sectors that are assumed to get a larger share of methyl bromide under 48 To some extent, as discussed in Section 5.1, the presence of winners as well as losers under the increased availability of methyl bromide reflects the fact that end users may require time and training to make effective use of alternatives to methyl bromide. Put another way, the negative cost savings associated with the increased availability of methyl bromide under the Allocation Rule may result from the modest yield losses, or even gains, that are assumed in the cost analysis for many substitutes. While the analysis assumes that these yields occur immediately upon switching, in reality it make take time for end users to learn how to use substitutes to methyl bromide most effectively. In addition, cost is not the only factor influencing sectoral decisions to continue using methyl bromide under the phaseout or employ substitute technologies and products. Thus, while in the short run, some end users appear to be made worse off ( in terms of compliance or control costs) by the Allocation Rule, in the long run, compliance costs for all end users cannot be higher under the Allocation Rule than under the original phaseout.

49 As explained earlier in the chapter, this approach provides a conservative estimate of costs and cost savings. Further, the model results are most analogous to the sector specific allocation, for any of the three broad options. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 91  the universal allocation ( see discussion in Section 5.2 for additional detail), have greater compliance cost savings under the universal allocation than under the sector specific allocation. In comparison, other sectors have slightly lower compliance cost savings.

Exhibit <IP_ADDRESS>. Compliance Cost Savings Based on Approach 1, High Scenario ( 1997$) 3 Percent Discount 7 Percent Discount Annualized NPV Annualized NPV Cucurbits 222,801 7,062,436 317,649 4,533,271 Eggplant 98,430 3,120,068 144,303 2,059,398 Forest Seedlings ( 17,534) ( 555,813) ( 25,728) ( 367,173)

Ginger 48,533 1,538,423 71,205 1,016,191 Lettuce 0 0 0 0 Nursery 1,432,451 45,406,507 2,101,821 29,995,786 Orchards 3,228,038 102,323,863 3,120,442 44,532,875 Pepper 380,278 12,054,217 552,216 7,880,858 Post Harvest 702,005 22,252,492 1,030,045 14,700,118 Strawberry 7,570,791 239,982,490 11,067,925 157,954,059 Sweet Potato 203,376 6,446,696 292,064 4,168,148 Tomato 5,581,986 176,940,408 8,145,142 116,242,041 Total 19,451,154 616,571,788 26,817,084 382,715,573 Note: Positive numbers indicate compliance cost savings from the 2005 phaseout. Negative numbers ( in parentheses) indicate increased costs associated with continued methyl bromide use. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 92  Exhibit <IP_ADDRESS> Compliance Cost Savings under Approach 1: Annualized Value High scenario ( 1997$) Sector Specific Allocation 7% Discount Rate Illustrative Universal allocation 7% Discount Rate Eggplant 144,303 63,519 Forest Seedlings ( 25,728) ( 11,130)

Ginger 71,205 30,824 Lettuce 0 0 Nursery 2,101,821 413,435 Pepper 552,216 309,924 Strawberry 11,067,925 17,759,937 Sweet Potato 292,064 205,257 Tomato 8,145,142 10,378,010 Cucurbits 317,649 253,220 Orchards 3,120,442 1,456,291 Post Harvest 1,030,045 445,582 Total 26,817,084 31,304,869 Note that under the sector specific allocation, which follows the nomination, strawberries and tomatoes receive a little over half to the total methyl bromide in 2005. For the universal allocations, it is assumed that approximately 80 percent of total methyl bromide goes to these two sectors, combined. Note that this scenario is intended to be illustrative only, rather than a projection of what is likely to occur under the universal allocation.

The foregoing discussion highlights one of the key issues in the choice between a universal allocation and trading system and one that is sector specific: the tradeoff between efficiency and equity.

While universal trading tends to redistribute methyl bromide consumption in the direction of the economically efficient outcome, it does so at the expense of certain individual sectors. In particular, to the extent that the CUE analysis and nominations, which are the basis of the sector specific quantity limits,

are based on some notion of economic need, moving away from this pattern of consumption has not only distributional, but perhaps also equity implications.

Under Option 2, it can be argued that if the pattern of methyl bromide consumption shifts away from the initial allocations based on historical consumption, the shift is voluntary on the part of end users ( i. e., end users can choose to sell their allowances, but are not forced to). Thus, the voluntary switching by end users from methyl bromide to substitutes, or a decision to go out of business, does not constitute an undesirable economic impact on the end users. However, to the extent that the pattern of methyl bromide consumption differs from the initial allocation, it may be said to have equity impacts on affected sectors, or at the least to be at odds with the initial intent of the Critical Use Exemption according to some opinions. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 93  5.3.3 Equity Effects: Small Farmers in Affected Sectors It is important to point out that because the Allocation Rule provides each sector with the opportunity to purchase more methyl bromide than under the 2005 phaseout, no farmer   not even a small farmer   can be a loser under the rule. There may, however, be differences in the impacts across the regulatory options. This section addresses those relative impacts.

There are three possible routes by which small farms could be adversely affected or benefited by the Allocation Rule. First, as discussed in Section 5.2 on economic efficiency, it is possible that larger farms may have several advantages, relative to smaller farms, under all the regulatory options. To the extent that many of the administrative and transactions costs under Options 2 and 3 are fixed rather than related to the size of the transaction, larger farms may more easily be able to bear the costs of participating in these systems. They may also be more able to engage in transactions and trades because transaction sizes will be larger.

Second, to the extent that suppliers and distributors have historical relationships with large customers, small farms may or may not be adversely affected by moving from the sector specific allocation to the universal allocation. Under Option 1, if purchasing relationships are with cooperatives or other groups of end users, then historical relationships may benefit small farms that are in largeconsuming sectors. To the extent that ongoing relationships are with large individual farms that are also historically large consumers of methyl bromide, however, small farmers may be at a relative disadvantage under the universal allocation and Option 1.

Third, and this is the focus of this section, the pattern of consumption of methyl bromide by end use sector will be different under universal allocation and trading than under a sector specific approach.

If small farms are disproportionately located in sectors that are adversely affected by using a framework with universal allocation, there may be equity impacts of moving to a system with fewer restrictions on trading, as in the universal approach.

Unfortunately, there are few data on the relative size distributions of farms by sector, and equally little agreement on what constitutes a small farm. The Economic Research Service of the USDA and the Bureau of Labor Statistics define small farms as those with less than $ 250,000 in annual sales ( ERS 2003, BLS 2003). 50 The " small" classification used by the Small Business Administration depends on the crop or farm sector; for the farm sectors included in the CUE nominations, the cutoff is generally $ 750,000 or less ( SBA 2002).

By the foregoing definitions, most of the farms in the United States are small. About 2.1 million farms comprise the agricultural production industry in the United States. According to the U. S.

Department of Agriculture, an establishment must sell at least $ 1,000 worth of produce per year to qualify as a farm. Almost 1.9 million, or 91 percent, of U. S. farms are small family farms with less than $ 250,000 50 In the past, the Economic Research Service of USDA used $ 50,000 in agricultural sales as the delineation between large and small farms ( ERS 2003). *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 94  in annual sales, but they own about two thirds of the Nation's farmland. Operation of these farms is the primary occupation of about one third of their owners; two thirds are operated as a secondary source of income, primarily as homes for the rural lifestyle they provide, or as limited retirement enterprises. Large family farms numbered about 150,000 and commercially operated farms barely 40,000, but together they were responsible for just over half of the total output of the agricultural production industry. Analogous farm data specific to the minor crops using methyl bromide is not generally available through USDA. If however, these farms are similar in size to the rest of the industry, the number of small farms relative to large farms will be similarly high. It appears that there is considerable concentration of output and sales among the nation's largest farms. Thus, possible effects of the regulatory options that disadvantage small farms could affect a large number of enterprises. Moreover, to the extent that large farms may be spread out throughout the farming industry, options that tend to favor large farms may have effects that are spread out across sectors, rather than concentrated in specific sectors.

It is unclear whether farms using methyl bromide are representative of all farms or all farms in a given sector. Even if they are, the multiplicity of definitions suggests that it would be difficult to determine,

whether particular sectors will be adversely affected as a result of a preponderance of small farms, or conversely whether a sector that is adversely affected contains a disproportionate number of small farms. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 95  6. Private Administrative and Transaction Costs Farm businesses and other entities in the agricultural community will incur costs associated with administering requirements of the Allocation Rule. Additionally, certain transaction costs associated with permit trading will accrue under Option 2. Affected entities include producers, importers, distributors and other suppliers, and end users of methyl bromide. This chapter discusses administrative and transaction costs to the private sector for the two methyl bromide allocation options. The administrative costs analyzed include costs of self certification under Option 1, costs of a permit trading system under Option 2, and reporting and recordkeeping under both options. Transaction costs are analyzed qualitatively for the permit trading system under Option 2.

A significant portion of administrative costs under Options 1 and 2 will result from preparing and submitting various reporting forms and maintaining records of transactions. Although the exact content of these forms is not currently known, estimated administrative costs associated with reporting and recordkeeping are based on the existing phaseout requirements, industry reports, other notification requirements under existing EPA programs such as the Toxic Substances Control Act ( TSCA) and the Clean Air Act, and ICF estimates. Because the permit trading system for methyl bromide has not yet been implemented, the costs of trading are difficult to estimate quantitatively. Costs of permit trading are estimated based on cost analyses for the SO2 Trading System under the Acid Rain Program. This program was established by Title IV of the 1990 Clean Air Act Amendments and aims to reduce sulfur dioxide ( SO2) and nitrogen oxides ( NOx) emissions from electric power generation in the United States by setting a cap that changes annually. A program was implemented for SO2 trading to help utilities meet this cap in a flexible manner. The trading program will be referred to as the SO2 Trading Program in the remainder of this document. Costs of the programs used to estimate CUE permit and allowance allocation options were revised to fit the specifics of the options and updated to 2002 standard dollars.

The remainder of this chapter is organized as follows:

  Section 6.1 discusses the administrative activities that would be performed under Option 1 and the hours and costs associated with these activities.

  Section 6.2 discusses the administrative activities that would be performed under Option 2 and the hours and costs associated with these activities.

  Section 6.3 presents a qualitative discussion of market evaluation and transaction costs that could be faced by the private sector in addition to administrative costs.

6.1 Private Administrative Activities   Option 1 Administrative activities that would be performed by private sector participants under a critical use exemption allowance and/ or permitting system for methyl bromide for Option 1 include those associated with rule familiarization, reporting and recordkeeping, general inventory preparation, allowance trading,

and self certification. The estimated total hours and costs associated with each of these activities are *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 96  summarized in Exhibit 6.1.1. Hour estimates were based on similar programs currently operating in the United States. To determine total costs, hour estimates were multiplied by a blended average hourly industry wage rate of $ 80, including fringe benefits and overhead ( ICF estimate). Activities that would only be performed in the first year of the Allocation Rule ( i. e., one time activities) are highlighted in gray.

The remainder of Section 6.1 describes each of the administrative requirements for Option 1 and their associated costs in detail.

6.1.1 Rule Familiarization Potentially regulated industries will need to understand reporting requirements and become familiar with rules before completing forms and reports. This will require complete review of the forms and research into areas where questions may arise. The level of effort for this activity is an estimated 20 hours per entity for all reports combined ( ICF estimate), including self certification forms. There are 2 methyl bromide producers and 2 methyl bromide importers in the United States, and at least 50 distributors. 54 entities would therefore participate in rule familiarization, resulting in a total estimated level of effort of 1,080 hours. This would be a one time cost because forms are not expected to change greatly from year to year. Given an assumed average hourly rate of $ 80, the estimate one time cost associated with rule familiarization is $ 86,400. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 97  Exhibit 6.1.1. Private Administrative Activities, Option 1 ( 1997$)

Activity Type No. of Entities Total Responses Hours per Response Total Hours Total Cost Rule Familiarization Activities Producer rule familiarization 2 2 20 40 $ 3,200 Importer rule familiarization 2 2 20 40 $ 3,200 Distributor rule familiarization 50 50 20 1,000 $ 80,000 Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 1,080 $ 86,400 General Inventory Activities Producer annual methyl bromide general inventories 2 2 20 40 $ 3,200 Producer quarterly methyl bromide general inventories 2 8 10 80 $ 6,400 Importer annual methyl bromide general inventories 2 2 20 40 $ 3,200 Importer quarterly methyl bromide general inventories 2 8 10 80 $ 6,400 Distributor annual general inventories 50 50 20 1,000 $ 80,000 Subtotal: Annual Burden 1,240 $ 99,200 Subtotal: One Time Burden 0 $ 0 Annual and Quarterly Reporting Activities Complete quarterly producer reports 2 8 2 16 $ 1,280 Complete annual producer reports 2 2 2 4 $ 320 Complete quarterly importer reports 2 8 2 16 $ 1,280 Complete annual importer reports 2 2 2 4 $ 320 Complete annual distributor reports 50 50 2 100 $ 8,000 Subtotal: Annual Burden 140 $ 11,200 Subtotal: One Time Burden 0 $ 0 Allowance Trading Activities Producer trading of methyl bromide allowances 2 2 8 16 $ 1,280 Importer trading of methyl bromide allowances 2 2 8 16 $ 1,280 Subtotal: Annual Burden 32 $ 2,560 Subtotal: One Time Burden 0 $ 0 Self Certification Activities Producer processing and recordkeeping of distributors' selfcertification forms: inventory, tracking and verification 2 2 96 192 $ 15,360 Importer processing and recordkeeping of distributors' selfcertification forms: inventory, tracking and verification 2 2 96 192 $ 15,360 Distributor processing and recordkeeping of distributors' selfcertification forms: inventory, tracking and verification 50 50 96 4,800 $ 384,000 Distributors complete self certification forms for producers/ importers 50 50 8 380 $ 30,400 End users and applicators complete self certification forms for distributors 2,600 2,600 8 20,800 $ 1,664,000 Subtotal: Annual Burden 26,364 $ 2,109,120 Subtotal: One Time Burden 0 $ 0 TOTAL ANNUAL BURDEN 27,776 $ 2,222,080 TOTAL ONE TIME BURDEN 1,080 $ 86,400 *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 98  6.1.2 General Inventories To complete the producer, importer, and distributor reports, inventories of methyl bromide will also need to be completed. These inventories are referred to as " general inventories," to distinguish them from inventories performed for self certification tracking. Annual inventories require approximately 40 hours ( Godbehere 2003), but 20 of these hours are assumed to be used for inventory of self certified methyl bromide that is purchased and sold, and are addressed below under " Self Certification Form Processing and Recordkeeping" ( see Section 6.1.5). An additional 10 hours annually are estimated to be necessary for quarterly inventories, prepared by producers and importers, for completion of quarterly reports.

Combined, the annual level of effort for producers, importers, and distributors to complete these annual and quarterly inventories is estimated to be 1,240 hours. Given an assumed average hourly rate of $ 80, the estimate annual cost associated with general inventories under Option 1 is $ 99,200.

6.1.3 Annual and Quarterly Reporting Producers and importers will need to submit annual reports of the amount of methyl bromide created and transferred during the year. It is estimated that report completion will require two hours per report, resulting in a total of 8 hours annually for the annual reporting of the two producers and two importers.

Producers and importers will also need to submit quarterly reports of the amount of allowances expended and unexpended. These reports are also estimated to require two hours each for completion.

Given that there are two producers and two importers, a total of 16 quarterly reports will be submitted annually, resulting in 32 hours per year for producer and importer quarterly reports.

In addition, methyl bromide distributors will need to submit annual reports of the amount of methyl bromide transferred to EPA under Option 1. For the purposes of this report, it is assumed that there are approximately 50 distributors of methyl bromide in the United States. It is estimated that report completion will require two hours per report, therefore resulting in a total annual level of effort of 100 hours.

Given an assumed average hourly rate of $ 80, the estimate annual cost associated with annual and quarterly routine reporting activities for producers, importers, and distributors under Option 1 is $ 11,200.

6.1.4 Allowance Trading After receiving methyl bromide allowances from EPA, producers and importers may trade allowances among themselves to increase the amount of methyl bromide they are permitted to import or produce, in the case of allowance purchasers, or to gain profit from extra unneeded production or import allowances, in the case of allowance sellers. It is estimated that each producer and importer will make *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 99  one trade, and that each trade will involve 8 hours of staff time to identify buyers or sellers, and settle upon selling prices. The total estimated level of effort for allowance trading for the 4 producers and importers is 32 hours annually. Given an assumed average hourly rate of $ 80, the estimated annual cost associated with allowance trading is $ 2,560.

6.1.5 Self Certification Producers, importers, distributors and other suppliers will need to process certification forms verifying that methyl bromide is sold to CUE certified purchasers, and will need to maintain records of CUE certification for three years. Specifically, the activities that will be performed by producers,

importers, and distributors for self certification report processing and recordkeeping include:

  track certification forms throughout the year and verify reports; and   perform annual inventory of methyl bromide to compare actual amounts sold and certification amounts indicated.

Completing these activities will require managerial effort that will total 96 hours annually for each producer, importer, and distributor ( EPA 1994, ICF estimate). There are 2 methyl bromide producers, 2 methyl bromide importers, and approximately 50 methyl bromide distributors in the United States ( a total of 54 entities), such that the total estimated annual level of effort will be approximately 5,184 hours.

In addition, applicators and end users will need to certify to distributors or other suppliers that they have been approved for use of methyl bromide for CUE purposes before they can purchase and subsequently use methyl bromide. Distributors and other suppliers, in turn, will need to certify to producers and importers that methyl bromide purchased will be used for CUE approved purposes.

Affected parties will be required to self certify. The activities that will be performed to complete selfcertification forms are as follows:

  perform research necessary to complete the self certification form ( e. g., historic use, substitute availability and feasibility); and   prepare and submit the self certification form.

The estimated level of effort required to perform research and complete each form is 8 hours ( ICF estimate). It is assumed that there are 600 applicators and 2,000 end users in the United States and, as previously stated, this analysis assumes that there are 50 methyl bromide distributors. Hence, there are 2,650 affected entities, and the total estimated annual level of effort for this activity will be 21,180 hours ( ICF estimate).

Combined, the estimated annual level of effort associated with self certification activities under Option 1 is 26,364 hours. Given an assumed average hourly rate of $ 80, the total annual cost associated with this rule component is $ 2,109,120. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 100  6.1.6 Total Private Administrative Costs: Option 1 In total, the estimated level of effort associated with private sector administrative costs for Option 1 is 27,776 hours. When multiplied by the assumed average hourly rate of $ 80, this translates into an estimated annual cost of $ 2,222,080. The one time costs associated with rule familiarization are estimated to total $ 86,400. The contribution of this option's private administrative costs to all costs considered for the options are summarized in Chapter 9.

6.2 Private Administrative Activities   Option 2 Option 2 would require all activities and associated costs described under Option 1, for the following:

  Rule familiarization activities;

  General inventory activities;

  Annual and quarterly reporting activities;

  Allowance trading activities; and   Self certification activities.

It is assumed that all of the above listed overlapping activities incur the same costs under Options 1 and 2. Detailed sub task activity descriptions for these overlapping activities are located above in Section 6.1. Activities under Option 2 that would not be required under Option 1 include submission of information for permit baseline construction, trading system familiarization, and allowance trading activities. Exhibit 6.2.1 provides the annual and one time estimates of hour and cost burdens associated with each of these activities and their individual components. Those overlapping activities that would be required under both Options 1 and 2 are included in summary form in the exhibit, without descriptions of individual components.

Hour estimates have been based on similar programs currently operating in the United States. To determine total costs, hour estimates were multiplied by a blended average hourly industry wage rate of $ 80, including fringe benefits and overhead ( ICF estimate).

The remainder of Section 6.2 describes each of the administrative requirements for Option 2 and their associated costs in detail. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 101  Exhibit 6.2.1. Private Administrative Activities, Option 2 ( 1997$)

Activity Type No. of Entities Total Responses Hours per Response Total Hours Total Cost Rule Familiarization Activities Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 1,080 $ 86,400 General Inventory Activities Subtotal: Annual Burden 1,240 $ 99,200 Subtotal: One Time Burden 0 $ 0 Annual and Quarterly Reporting Activities Subtotal: Annual Burden 140 $ 11,200 Subtotal: One Time Burden 0 $ 0 Allowance Trading Activities Subtotal: Annual Burden 32 $ 2,560 Subtotal: One Time Burden 0 $ 0 Self Certification Activities Subtotal: Annual Burden 26,364 $ 2,109,120 Subtotal: One Time Burden 0 $ 0 Submission of Baseline Information End user submission of information for permit 2,000 2,000 20 40,000 $ 3,200,000 Subtotal: Annual Burden 40,000 $ 3,200,000 Subtotal: One Time Burden 0 $ 0 Trading System Familiarization Producer tracking system familiarization 2 2 12 24 $ 1,920 Importer tracking system Familiarization 2 2 12 24 $ 1,920 Distributor tracking system familiarization 50 50 12 600 $ 48,000 End user tracking system familiarization 2000 2000 12 24,000 $ 1,920,000 Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 24,648 $ 1,971,840 Permit Tracking and Reporting End user annual tracking and entry of methyl bromide trades into tracking system, verification reporting 2,000 2,000 6 12,000 $ 960,000 Subtotal: Annual Burden 12,000 $ 960,000 Subtotal: One Time Burden 0 0 TOTAL ANNUAL BURDEN 79,776 $ 6,382,080 TOTAL ONE TIME BURDEN 25,728 $ 2,058,240 These costs are also incurred under Option 1. These costs are also incurred under Option 1.

These costs are also incurred under Option 1.

These costs are also incurred under Option 1.

These costs are also incurred under Option 1. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 102  6.2.1 Submission of Baseline Information End users will need to submit information in addition to that already submitted in CUE applications to EPA on historic use so that EPA may create individual operator level baselines. EPA will then issue prorated permits based on baseline use. This analysis assumes that approximately 2,000 end users will apply to receive CUE permits, based on an estimate of the number of farms identified in CUE applications. EPA has received 56 CUE applications, with each application representing a number of entities with similar characteristics ( i. e., a group of growers in a state or a number of states that grow a particular crop). See Appendix D for more data on the number of entities that submitted CUE applications in 2002. The activities that will be required for end users to complete the CUE permit application process are as follows:

  perform research necessary to provide information to EPA ( e. g., historic use, substitute availability and feasibility);

  complete permit form with information; and   provide documentation ( e. g., receipts).

It is estimated that approximately 20 hours will be required for preparation and completion of each form that provides EPA with information to construct end user baselines. Assuming that EPA will receive 2,000 applications from end users, the estimated total annual level of effort for these activities is 40,000 hours, at an annual cost of $ 3,200,000 ( assuming an average hourly rate of $ 80).

6.2.2 Annual and Quarterly Permit Tracking To record methyl bromide permit trades under Option 2, methyl bromide producers, importers,

distributors and end users will report trades and sales of methyl bromide through an electronic tracking system developed and operated by EPA. This tracking system, in addition to maintaining a running tally of trades conducted amongst end users and producers and importers, will also take the place of the reporting forms used under Option 1. Through this system, after a permit holder submits an order with a distributor or other methyl bromide supplier, permit holders will debit permits from their account, which will be recorded in EPA's Permit Tracking System. The tracking system will then send an e mail to the methyl bromide supplier from whom methyl bromide was ordered indicating redemption of a certain amount of the permit holder's methyl bromide allotment.

Similarly, producers and importers will enter trades into the system as well as methyl bromide purchases and transfers on an annual basis. Distributors will also submit data on an annual basis.

Although it is difficult to predict the level of trading activity that will occur under a permit trading system,

and therefore difficult to estimate the total number of end users and associated costs of tracking activity,

this analysis assumes that one third of all methyl bromide end users ( 660, or approximately one third of 2,000 applicators) will conduct trades. All end users, however, will still be required to submit annual *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 103  reports. Additionally, two producers, two importers, and 50 distributors are assumed to enter data into the tracking system. The activities performed for tracking system data entry are as follows:

  enter methyl bromide transfers and purchases into the EPA online trade tracking system.

This analysis assumes that annual tracking and entry of methyl bromide sales and trades will require the same hours and costs as similar inventory activities under Option 1. Because end users would not be required to perform tracking and verification reporting activities under Option 1, however,

Option 2 incurs an additional level of effort of 12,000 hours, resulting in costs of $ 960,000.

6.2.3 Tracking System Verification Reports Although resources required for these online reports will be minimal, tracking system users will need to submit verification that data entered into the tracking system over the course of the year are correct for an annual " true up." It is assumed that completion of these verification forms will require a level of effort comparable to that required to complete expended and unexpended allowance/ permit reports and reports of the amount of methyl bromide purchased, sold, or used ( see Section 6.1.2). The activities performed for preparing verification reports to submit to EPA are as follows:

  prepare verification forms annually.

This analysis assumes that verification reporting costs will be identical to costs of reporting activities under Option 1. For end user verification reports, see Section 6.2.2 above.

6.2.4 Trade Tracking System Familiarization To record methyl bromide permit trades under Option 2, methyl bromide producers, importers,

distributors and end users will report trades and sales of methyl bromide through an electronic tracking system developed and operated by EPA. This tracking system, in addition to maintaining a running tally of trades conducted amongst end users and producers and importers, will also take the place of the reporting forms required under Option 1. It is assumed that all 2,000 end users will need to become familiar with rules and entry methods for the tracking systems. It is also assumed that two methyl bromide producers, two importers, and approximately 50 distributors will need to become familiar with the system. Based on a familiarization estimate of 12 hours per entity, a total of 24,648 hours are estimated to be devoted to this activity, at an estimated one time cost of $ 1,971,840.

6.2.5 Allowance Trading As described in 6.1.4, producers and importers may trade allowances among themselves to increase the amount of methyl bromide they are permitted to import or produce, in the case of allowance purchasers, or to gain profit from extra unneeded production or import allowances, in the case of allowance sellers. It is estimated that each of the two producers and two importers will make one trade, *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 104  and that each trade will require 8 hours in order to negotiate identify buyers or sellers, and settle upon selling prices. The total estimated level of effort for allowance trading is, therefore, assumed to be 32 hours annually. Given an assumed average hourly rate of $ 80, the estimated annual cost associated with allowance trading is $ 2,560.

6.2.6 Total Private Administrative Costs: Option 2 As shown in Exhibit 6.2.1, this policy option is associated with a one time cost for rule and trading system familiarization of $ 2,058,240, resulting from a level of effort of 25,728 hours. In addition, the total estimated annual level of effort associated with all private administrative costs under Option 2 is 79,776 hours, resulting in a total estimated annual cost of $ 6,382,080   when multiplied by the assumed average hourly rate of $ 80.

The contribution of this option's private administrative costs to all costs considered for the options are summarized in Chapter 9.

6.2.7 Comparison of Total Private Administrative Costs: Options 1 and 2 Exhibit <IP_ADDRESS> compares the total annual and one time costs for Options 1 and 2. Note that Option 2 costs include the costs of all activities that would be conducted under Option 1, plus the costs of participating in a permit trading system. Total annual costs associated with private administrative activities under Option 1 are approximately $ 4.2 million less than those under Option 2, with approximately 52,000 less hours of effort required on a yearly basis. Similarly, total one time costs associated with rule familiarization under Option 1 are approximately $ 2 million less than those associated with trading system familiarization under Option 2, with approximately 25,000 less hours of effort required during the first year. Option 2 costs are higher because of the additional hours and resources required for permit trading. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 105  Exhibit <IP_ADDRESS>. Private Administrative Activities, Options 1 and 2 ( 1997$)

Activity Type Option 1 Option 2 Rule Familiarization Activities Subtotal: Annual Burden $ 0 $ 0 Subtotal: One Time Burden $ 86,400 $ 86,400 General Inventory Activities Subtotal: Annual Burden $ 99,200 $ 99,200 Subtotal: One Time Burden $ 0 $ 0 Annual and Quarterly Reporting Activities Subtotal: Annual Burden $ 11,200 $ 11,200 Subtotal: One Time Burden $ 0 $ 0 Allowance Trading Activities Subtotal: Annual Burden $ 2,560 $ 2,560 Subtotal: One Time Burden $ 0 $ 0 Self Certification Activities Subtotal: Annual Burden $ 2,109,120 $ 2,109,120 Subtotal: One Time Burden $ 0 $ 0 Submission of Baseline Information Subtotal: Annual Burden NA $ 3,200,000 Subtotal: One Time Burden NA $ 0 Trading System Familiarization Subtotal: Annual Burden NA $ 0 Subtotal: One Time Burden NA $ 1,971,840 Annual and Quarterly Permit Tracking Subtotal: Annual Burden NA $ 960,000 Subtotal: One Time Burden NA $ 0 TOTAL ANNUAL BURDEN $ 2,222,080 $ 6,382,080 TOTAL ONE TIME BURDEN $ 86,400 $ 2,058,240 6.3 Participation in Permit Trading System ( Option 2)

In addition to the administrative costs that will be faced by private entities participating in a methyl bromide permit trading system under Option 2, trading activities will lead to market evaluation and transaction costs. Applicators and end users participating in a trading system will need to evaluate the market and methyl bromide substitute options before conducting trades. These administrative costs are referred to as " market evaluation costs" and are discussed qualitatively in Section 6.3.1, below.

Additional transaction costs of participating in a permit trading system, including identifying other market participants, negotiating prices, and conducting actual trades, are discussed qualitatively in Section 6.3.2,

below. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 106  6.3.1 Market Evaluation Costs Market evaluation costs to participants for allowance/ permit trading systems are not quantified because it is difficult to predict how the option of trading allowances or permits will affect trading participants' costs of evaluation ( EPA 1992). Market evaluation costs are trading participants' evaluation of the best method to comply with the methyl bromide phaseout and CUE requirements. Market evaluation choices vary based on the level of complexity of compliance choices under a regulation and the resulting level of effort invested to evaluate various choices. This analysis does not provide a quantitative cost estimate for market evaluations because it is difficult to quantify trade participant choices, or even the number of participants, at this time.

6.3.2 Transaction Costs Transaction costs involve the time and resources spent identifying trading partners willing to sell the quantity of desired permits. More specifically, this requires identifying and contacting permit holders and negotiating deals, or hiring a broker that gathers information on permit supply and demand to help negotiate a price ( EPA 1992). Transaction costs vary depending on the volume of trades, the costs incurred for each trade, and the value of traded permits ( e. g., if transferring parties hire brokers who charge for services based on a percentage of permit value, permits with higher value will lead to higher transaction costs). In this analysis, transaction costs have been estimated quantitatively for producers and importers, but not for end users because of the numerous variables involved in estimating such costs for end users. This section discusses transaction costs to end users qualitatively.

Other market factors that lead to varying transaction costs include the frequency of transactions,

the amount of public information available on prices and trading volumes, and the complexity of trades.

For example, markets where transactions are simple and occur frequently, and public information on price and volume is readily available, tend to create lower transaction costs for market participants ( EPA 1992).

Because information is not yet available on the volume of methyl bromide permit trading that will occur under Option 2, the market price that will emerge for permits, the amount of information that will be available to market participants, and the complexity of the trades that will be negotiated, transaction costs have not been quantified at this time. However, based on similar permit markets that currently operate and the known characteristics of various trading options for methyl bromide, some comparisons of transaction costs can be made.

By way of comparison, existing trading markets can be examined to assess to predict the types of transaction costs that may arise under a methyl bromide trading program and the various transaction costs of within versus across sector trades. For example, California's RECLAIM program can be compared to methyl bromide trading under Option 2. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 107  The RECLAIM ( Regional Clean Air Incentives Market) program was created in 1993 by California's South Coast Air Quality Management District ( SCAQMD) to control pollution in the form of nitrogen and sulfur oxides. The program initially set a cap on all power plants and other industrial pollution sources that emitted more than a certain amount of these pollutants. The caps on each plant are reduced annually through 2003, and remain at the level of the 2003 allocation in ensuing years. The plants receive a set number of pollution allowances annually and can either implement technology to reduce pollution, or buy extra pollution allowances from firms that over comply. The allowances are in the form of RECLAIM Trading Credits ( RTCs) that are each equal to one pound of RECLAIM pollutant and expire after one year. Participants in the RECLAIM program must report monthly aggregated emissions,

a Quarterly Certification of Emissions, and total daily mass emissions ( SCAQMD Regulation XX [" 20"]

2001).

The RECLAIM program is similar to the system envisioned for methyl bromide permit trading, in that allowances would be allocated annually to end users based on historic levels. The allowances would also expire annually, and individual allocations would be reduced based on the overall phaseout of methyl bromide required by the Parties to the Montreal Protocol. One significant difference between the RECLAIM program and potential trading under methyl bromide allocation is the number of parties involved in trading. RECLAIM involves approximately 370 potential trading participants ( EPA 2002) to which allowances are allocated, while methyl bromide allocation could potentially involve thousands of end users.

The RECLAIM program has resulted in significant cost savings compared to estimated costs of a system of strict command and control ( e. g., dictating to each utility the amount of emissions reductions required). Although no exact estimates of savings compared to command and control have been made ( 40% savings were estimated when the program was developed), the high volume of trading that has occurred ( as of 2001, over 300,000 tons worth of NOx RTCs and over 100,000 tons worth of SO2 RTCs has been traded) suggest high savings. Transaction costs under the current RECLAIM trading structure have also been relatively low ( Ellerman et al. 2003). One possible reason for these low transaction costs is that trades are conducted directly between RECLAIM companies with the assistance of brokers or agents ( Ellerman et al. 2003). The Air Quality Management District ( AQMD) believes that certain types of transaction costs would be higher if a centralized market were used for permit trading ( e. g., all credits would be traded through a " single point of exchange") ( AQMD Board Meeting 2001). Transaction costs could be higher because a centralized system would be expensive to operate. Because the methyl bromide trading program would also be a decentralized system, involving exchanges between individual end users, transaction costs could be lower than other trading programs.

However, decentralized trading programs such as RECLAIM and the potential trading program for methyl bromide CUE permits, can lead to high transaction costs in some areas. Although relatively low compared to other trading programs, transaction costs have prevented some trades in the RECLAIM *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 108  market. In the first few years of RECLAIM, transaction costs were believed to reduce trading probabilities by 40 percent. Some of these transaction costs may result from firms' need to search for and identify trading partners on their own, without the help of a centralized system. In a heterogeneous market such as RECLAIM, which includes many types of firms, transaction costs may be higher because the firms do not tend to participate in the same markets for everyday business. Therefore, participating in a permit market requires additional effort to identify trading partners ( Gangadharan 2000). A methyl bromide trading system under Option 2, especially for across sector trading, could involve similar transaction costs because participants are relatively heterogeneous ( e. g., post harvest versus pre plant users of methyl bromide) and would be participating in a decentralized system, albeit with the aid of an electronic database. However, methyl bromide trading would be less heterogenous than RECLAIM, since the majority of methyl bromide end uses are pre plant uses.

Transaction costs could be lower under the more homogeneous within sector trading program for methyl bromide because participants could be easier to identify and contact, and information on prices could be more apparent within a sector. However, compliance cost savings could be lower. Because permits purchased under the within sector trading program can only be redeemed for use in the same sector as the original permit holder, trading volume and frequency could be limited. Limited trading volume means that there will be fewer opportunities for costs savings ( i. e., there will be fewer participants with substitution cost differentials that lead to savings when trades occur).

As indicated by the RECLAIM experience, even after permit or credit trading programs have been operating for years, it is difficult to predict the levels of transaction costs that will emerge. Overall,

however, the similarity of the methyl bromide trading system under Option 2 to RECLAIM suggests that transaction costs for the trading program could, like RECLAIM, be relatively low.

Although industry would face administrative and transaction costs as a result of participating in a methyl bromide permit trading system for CUE, trading itself, as indicated by the above description of RECLAIM, also provides industry with the opportunity to reduce compliance costs. Because trading is voluntary, end users will only trade if the benefits of trading outweigh the costs. The cost savings of trading are described in more detail in Section 4.6. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 109  7. Public Administrative Costs EPA has jurisdiction over public implementation of an allocation system for CUE for 2005 and beyond and will bear the associated cost burdens of regulating and distributing methyl bromide under the allocation system. Costs to the government associated with these options are discussed in this chapter and include estimates of staffing and extramural resources ( contractor costs) required for development and implementation of an allocation system ( distribution of allowances to producers and importers under Option 1 and distribution of permits to end users under Option 2). Additionally, costs associated with development and operation of a trading system and EPA's Permit Tracking System under Option 2, and all report processing and recordkeeping activities are discussed. Because the allocation options have not been empirically " tested," staff and extramural cost estimates for methyl bromide allocation are based on administrative costs faced by EPA and other public administrators under programs similar to the options discussed.

This chapter outlines the types of activities that will be faced by EPA for implementation and operation of a critical use exemption allowance/ permit system for methyl bromide under various allocation options. Estimates of EPA staff hours, one time costs, and extramural costs for each activity are provided. The specific activities that would be required under each option are described, and total cost estimates are provided for each option.

Costs are based on estimates from similar programs that include reporting and recordkeeping of chemicals, such as the methyl bromide phaseout program, the Premanufacturing Notification ( PMN)

requirements under Section 5 of the Toxic Substances Control Act ( TSCA) ( EPA 1994), and allowance trading under such programs as the Acid Rain Program ( referred to in this report as the SO2 Trading Program). Some of the costs under PMN, for example, provide estimates of the time required for EPA to screen forms it receives, to process forms, and to notify senders that forms have been received ( EPA 1994).

The remainder of this chapter discusses the types of costs that are expected under Options 1 and 2. It is worth noting that some activities are attributable to one option or the other, and some to both options. This chapter is organized as follows:

  Section 7.1 discusses the public administrative activities that would be performed under Option 1 and the hours and costs associated with these activities.

  Section 7.2 discusses the public administrative activities that would be performed under Option 2 and the hours and costs associated with these activities.

Total first year costs associated with public administrative activities under Option 1 are nearly $ 40,000, while those associated with Option 2 are significantly greater   estimated at over $ 2.4 million.

Similarly, recurring costs under Option 1 are significantly lower than those under Option 2, with annual costs under Option 1 estimated at approximately $ 25,000 compared to $ 1.9 million under Option 2. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 110  Costs are magnified in Option 2 over Option 1 because the number of controlled entities is significantly increased.

7.1 Public Administrative Activities   Option 1 This section summarizes the estimated labor and cost burden associated with the activities that would be performed by the public sector ( EPA) under a critical use exemption allowance and/ or permitting system for methyl bromide under Option 1. Specifically, these administrative activities include writing/ revising reporting forms, processing reports, determining historical baselines, distributing allowances, and reporting to the Parties of the Montreal Protocol. The estimated number of EPA or extramural respondents affected by each requirement, as well as the associated labor and cost burden is presented in Exhibit 7.1.1. Estimated levels of effort ( hours) for each activity were developed based on similar programs currently operating in the United States. Hours that only occur in the first year of the Allocation Rule are highlighted in gray. Cost estimates were developed using an average loaded hourly wage rate for government employees of $ 75 ( ICF estimates). Average labor cost for extramural staff is assumed to be $ 80/ hour ( ICF estimate).

The remainder of this section describes in detail the public administrative activities and labor/ cost assumptions presented in Exhibit 7.1.1.

7.1.1 Write/ Revise Reporting Forms and Guidance EPA will need to develop reporting forms for methyl bromide producers, importers, and distributors that participate in the methyl bromide allocation system. These reporting forms will allow EPA to monitor the amount of methyl bromide that is being purchased and sold on an annual basis and will help determine future allocation quantities. Two basic forms will need to be developed: a quarterly reporting form requesting data on expended and unexpended methyl bromide allowances from producers and importers,

and an annual reporting form requesting information on quantity of methyl bromide purchased, sold, or used by producers, importers, and distributors. These basic forms will only require slight revision for various applicant types ( e. g., distributors versus producers). EPA will also need to prepare a guidance document explaining use of the forms. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 111  Exhibit 7.1.1. Public Administration Activities, Option 1 ( 1997$)

Activity EPA or Extramural No. of Respondents Total Responses Hours per Response Total Hours Total Cost Write/ Revise Reporting Forms EPA   12 12 $ 900 Extramural   50 50 $ 4,000 EPA   12 12 $ 900 Extramural   50 50 $ 4,000 EPA   12 12 $ 900 Extramural   50 50 $ 4,000 Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 186 $ 14,700 Annual and Quarterly Report Processing EPA 2 8 2 16 $ 1,200 Extramural 2 8 1 8 $ 640 EPA 2 2 2 4 $ 300 Extramural 2 2 1 2 $ 160 EPA 2 8 2 16 $ 1,200 Extramural 2 8 1 8 $ 640 EPA 2 2 2 4 $ 300 Extramural 2 2 1 2 $ 160 EPA 50 50 2 100 $ 7,500 Extramural 50 50 1 50 $ 4,000 Tally reported information ( e. g., quantity of methyl bromide purchased, sold, used, and stockpiled) EPA   48 48 $ 3,600 Subtotal: Annual Burden 258 $ 19,700 Subtotal: One Time Burden 0 $ 0 Determination of Historic Production EPA 2 2 4 8 $ 600 Extramural 2 2 2 4 $ 320 EPA 2 2 4 8 $ 600 Extramural 2 2 2 4 $ 320 Subtotal: Annual Burden 24 $ 1,840 Subtotal: One Time Burden 0 $ 0 Distribution of Allowances EPA 2 2 8 16 $ 1,200 Extramural 2 2 2 4 $ 320 EPA 2 2 8 16 $ 1,200 Extramural 2 2 2 4 $ 320 Subtotal: Annual Burden 40 $ 3,040 Subtotal: One Time Burden 0 $ 0 Report to Parties of Montreal Protocol Report methyl bromide use to parties to the Montreal Protocol EPA   10 10 $ 750 Subtotal: Annual Burden 10 $ 750 Subtotal: One Time Burden 0 $ 0 TOTAL ANNUAL BURDEN 332 $ 25,330 TOTAL ONE TIME BURDEN 186 $ 14,700 Distribute methyl bromide allowances to importers  send allowance notifications Distribute methyl bromide allowances to producers  send allowance notifications Determine importers' historic production of methyl bromide Process quarterly producer reports, verify receipt Process annual producer reports, verify receipt Process quarterly importer reports, verify receipt Process annual importer reports, verify receipt Process annual distributor reports, verify receipt Determine producers' historic production of methyl bromide Write/ revise reporting forms and guidance document for distributors Write/ revise reporting forms and guidance document for producers Write/ revise reporting forms and guidance document for importers This analysis assumes that a total of 36 hours of EPA time and 150 hours of extramural staff time will be required to prepare drafts and final versions of each of the forms and associated guidance *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 112  documents, based on estimates of form preparation costs for CFC and HCFC reporting ( ICF estimates).

Thus, the total estimated one time cost associated with this activity is 186 hours at a cost of $ 14,700. It should be noted that quarterly reporting forms for unexpended and expended allowances from producers and importers, and quarterly reporting forms for unexpended and expended amounts of allowances have already been written for the QPS system. Many components of Option 1 will be similar to the QPS system, such that costs may be somewhat lower than those identified here.

7.1.2 Annual and Quarterly Report Processing All producer and importer reporting forms will need to be processed in order to tally methyl bromide information. Specifically, all participants in methyl bromide allocation systems will need to perform the following activities:

  submit forms reporting basic methyl bromide purchase, sale, and use information, which EPA will process as they are received on an annual and quarterly basis;

  assign tracking numbers to forms;

  notify submitters upon receipt of forms; and   record necessary information from forms.

I t is estimated that the processing of each report will require 2 hours of EPA time and one hour of extramural time ( ICF estimate). Because there are two producers, two importers, and an estimated 50 distributors of methyl bromide in the United States, there will be a total of 54 annual reports to process. In addition, because producers and importers must also submit reports on a quarterly basis, there will be an additional 16 quarterly reports to process. Combined, the estimated level of effort required from EPA and extramural staff is estimated to be 210 hours, at an annual cost of $ 16,100.

In addition to processing reports, EPA currently tallies expended and unexpended methyl bromide allowances under the QPS system, and will also need to tally this information for the CUE process based on reports it receives. EPA will need to tally the quantity of methyl bromide purchased,

sold, and used annually, and the amount of methyl bromide that is actually used versus stockpiled. The activities that will be required to tally this information include:

  track all information in applicator, producer and reporter forms; and   prepare report summarizing expended and unexpended allowances for the year.

Tallying methyl bromide information from reports will require an estimated 48 hours of EPA effort annually, at a cost of $ 3,600. It is assumed that EPA will perform this work independently and there will be no extramural costs for allowance tallying.

Combined, total activities associated with the processing of annual and quarterly reports by EPA and extramural staff will require 258 hours of effort, at an estimated annual cost of $ 19,700. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 113  7.1.3 Determination of Historic Production EPA will need to determine historic methyl bromide production levels in order to distribute methyl bromide allowances to producers and importers accordingly. The activities that will be required to distribute allowances are as follows:

  determine historic production through EPA's ODS Tracking System, which tabulates annual methyl bromide production information. Data on historic production provided by the tracking system will allow EPA to determine the number of allowances to be allocated to producers and importers.

The level of EPA effort required to tabulate and summarize historic production information is estimated to be approximately 16 hours annually ( ICF estimate). Contractors will likely perform some additional analysis and quality control of historic production information, resulting in estimated annual extramural levels of effort of 8 hours, at a cost of approximately $ 1,840 ( ICF estimate).

7.1.4 Distribution of Allowances Based on historic production levels, EPA will need to distribute methyl bromide allowances to producers and importers. Specifically, the following will be required:

  send allowance notifications to producers and importers. These allowances give producers and importers the right to produce or import a specific amount of methyl bromide in a given year.

There are two producers and two importers of methyl bromide in the United States. The estimated level of EPA and extramural effort for developing correspondence and sending allowance notifications is approximately 10 hours per notification ( ICF estimate). Four notifications will be sent, so the total level of effort will be approximately 40 hours, at an estimated cost of $ 3,040.

7.1.5 Reporting to Parties to the Montreal Protocol After tallying actual methyl bromide use and the amount of methyl bromide stockpiled, EPA will be required to report methyl bromide use to the Parties to the Montreal Protocol. Actual use of methyl bromide will be an important factor determining the amount of methyl bromide the United States receives annually from the Parties to the Montreal Protocol, so accurate international reporting by EPA under each of the options will be important. It is estimated that the level of effort for reporting methyl bromide use to the Parties to the Montreal Protocol will be approximately 10 hours for EPA annually ( ICF estimate) and that no extramural costs will be incurred for this activity. The total annual cost associated with this activity is $ 750. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 114  7.1.6 Total Cost of Public Administrative Activities: Option 1 As shown in Exhibit 7.1.1, there is a one time cost for writing/ revising reporting forms and guidance documents associated with this option of $ 14,700, resulting from a level of effort of 186 hours.

In addition, the total estimated annual level of effort associated with all public administrative costs under Option 1 is 332 hours, resulting in a total estimated annual cost of $ 25,330. The total first year cost of this option is $ 39,280.

The contribution of this option's public administrative costs to all costs considered for the options are summarized in Chapter 9.

7.2 Public Administrative Activities   Option 2 Option 2 would require all activities and associated costs described under Option 1 for the following:

  Write/ revise reporting forms;

  Annual and quarterly report processing;

  Determination of historic production;

  Distribution of allowances; and   Report to Parties of Montreal Protocol.

It is assumed that all of the above listed overlapping activities incur the same costs under Options 1 and 2. Detailed sub task activity descriptions for these overlapping activities are located above in Section 7.1. Additional activities under Option 2 that would not be required under Option 1 include writing requests for additional CUE information, allocating permits, and developing and maintaining a permit tracking system. Exhibit 7.2.1 provides the annual and one time estimates of hour and cost burdens associated with each of these activities and their individual components. Those overlapping activities that would be required under both Options 1 and 2 are included in summary form in the exhibit, without descriptions of individual components.

Estimated levels of effort ( hours) for each activity were developed based on similar programs currently operating in the United States. Cost estimates were developed using an average loaded hourly wage rate for government employees of $ 75 ( ICF estimate). Average labor cost for extramural staff is assumed to be $ 80 ( ICF estimate).

The remainder of this section describes in detail the activities and hour/ cost assumptions presented in Exhibit 7.2.1. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 115  Exhibit 7.2.1. Public Administrative Activities, Option 2 ( 1997$)

Activity EPA or Extramural No. of Respondents Total Responses Hours per Response Total Hours Total Cost Write/ Revise Reporting Forms Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 186 $ 14,700 Annual and Quarterly Report Processing Subtotal: Annual Burden 258 $ 19,700 Subtotal: One Time Burden 0 $ 0 Determination of Historic Production Subtotal: Annual Burden 24 $ 1,840 Subtotal: One Time Burden 0 $ 0 Distribution of Allowances Subtotal: Annual Burden 40 $ 3,040 Subtotal: One Time Burden 0 $ 0 Report to Parties of Montreal Protocol Subtotal: Annual Burden 10 $ 750 Subtotal: One Time Burden 0 $ 0 Writing of Information Requests EPA NA NA 8 8 $ 600 Extramural NA NA 8 8 $ 640 Subtotal: Annual Burden 0 $ 0 Subtotal: One Time Burden 16 $ 1,240 Allocate Permits EPA NA NA 50 50 $ 3,750 Extramural NA NA 50 50 $ 0 EPA NA NA 100 100 $ 7,500 Extramural NA NA 100 100 $ 7,500 EPA 2,000 2,000 2 4,000 $ 300,000 Extramural 2,000 2,000 1 2,000 $ 0 EPA 2,000 2,000 2 4,000 $ 300,000 Extramural 2,000 2,000 1 2,000 $ 150,000 Determine extenuating circumstances that limit MB alternative efficacy EPA 2,000 2,000 1 2,000 $ 150,000 EPA 2,000 2,000 0.5 1,000 $ 0 Extramural 2,000 2,000 0.5 1,000 $ 75,000 EPA 2,000 2,000 0.5 1,000 $ 75,000 Extramural 2,000 2,000 0.5 1,000 $ 75,000 Conduct appeals process for one tenth of applicants EPA 200 200 30 6,000 $ 0 Subtotal: Annual Burden 24,300 $ 1,853,250 Subtotal: One Time Burden 0 $ 0 Develop and Maintain Tracking System Plan structure of trade tracking systems EPA   40 40 $ 3,000 Identify software development team for trade tracking system design EPA   20 20 $ 1,600 Perform test run of trade tracking system EPA   60 60 $ 4,500 General development software and test run assistance for trade tracking system Extramural   6,250 6,250 $ 500,000 EPA   12 12 $ 900 Extramural   8 8 $ 640 EPA NA NA 48 48 $ 3,600 Extramural NA NA 250 250 $ 20,000 Subtotal: Annual Burden 298 $ 23,600 Subtotal: One Time Burden 6,390 $ 510,640 End User Verification Reports EPA 2,000 2,000 0.5 1,000 $ 75,000 Extramural 2,000 2,000 1 2,000 $ 160,000 Subtotal: Annual Burden 3,000 $ 235,000 Subtotal: One Time Burden 0 $ 0 TOTAL ANNUAL BURDEN 27,930 $ 2,137,180 TOTAL ONE TIME BURDEN 6,592 $ 526,580 Process end user tracking system verification reports and perform statistical analysis Write tracking system verification reports Maintain a trade tracking system Publicize permit application process Outreach and support workshops Process end user applications ( verify permit receipt, enter into computer)

Determine end users' historic methyl bromide use These costs are also incurred under Option 1.

These costs are also incurred under Option 1.

Create methyl bromide permits and place in accounts in tracking system Notify applicants of permits that have been allocated to their account Write CUE additional information requests These costs are also incurred under Option 1.

These costs are also incurred under Option 1.

These costs are also incurred under Option 1. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 116  7.2.1 Write Information Requests for Additional CUE EPA will need to write a form requesting additional information from end users to aid in the determination of the quantity of permits each end user will receive under Option 2. It is estimated that this one time activity will require 8 hours of EPA staff time and 8 hours of contractor support. The request will be for a subset of information in the CUE applications that have already been written, and will therefore not impose a large burden on each applicant ( in aggregate, it will require an estimated 4,000 hours of effort from the regulated community). Some new information in the form of records, receipts, etc. will be required to document data submitted in the CUE. The one time cost associated with this activity is estimated to be $ 1,240.

7.2.2 Allocate Permits EPA will need to distribute permits for methyl bromide use to end users under Option 2. This activity could potentially be very time consuming because thousands of permits may need to be distributed. This analysis assumes that at least 2,000 end users will apply to receive CUE permits, based on the number of applicants that initially applied. Although EPA received 56 CUE applications, many of the entities that originally applied for CUE were consortia of numerous end users. Permits will not be allocated to consortia, but rather to individual end users. Permits will need to be distributed based on the number of farms identified in CUE applications. The specific activities that will be required to allocate permits, as well as the assumed labor and cost estimates associated with each, are as follows ( ICF estimates):

  Publicize permit application process on website or through mass mailing ( e mail or paper) using EPA's Methyl Bromide Stakeholders Database, and post a Federal Register Notice. It is estimated that this activity will require 50 hours of EPA staff and 50 hours of extramural staff time annually, at a cost of $ 7,750 per year.

  Hold five workshops throughout the year for outreach and support of the application and permit allocation process ( 5, 3 day workshops with 2 staff members). It is estimated that this activity will require a total of 100 hours of EPA staff and 100 hours of extramural staff time, at an estimated annual cost of $ 15,500.

  Process end user CUE applications, create electronic versions of applications, track in computer database, verify three to five data receipts submitted by each end user, and prepare analyses. For each of the 2,000 applications, it is estimated that this activity will require two hours of EPA staff and one hour of extramural staff time. In total, the annual cost associated with this activity is $ 460,000.

  Determine historic methyl bromide use based on the information provided by end users. It is estimated that this activity will require a total of 6,000 hours per year of extramural/ EPA staff time, at an estimated annual cost of $ 460,000. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 117    Determine the extenuating circumstances that limit efficacy/ feasibility of methyl bromide alternatives. It is estimated that this activity will require 2,000 hours of EPA staff time, at an annual cost of $ 150,000.

  Create permits and place in an account. It is estimated that this activity will require a total of one half hour each of EPA and extramural staff time per application ( assumed to number 2,000), at an estimated annual cost of $ 155,000.

  Notify applicants of permits allocated. It is estimated that this activity will require a total of one half hour each of EPA and extramural staff time per application, at an estimated annual cost of $ 155,000.

  Conduct an appeals process. It is assumed that an appeals process will be needed for onetenth of applicants ( an estimated 200). It is estimated that each appeal will require 30 hours of EPA staff time, totaling an estimated $ 450,000 per year.

7.2.3 Develop and Maintain a Permit Tracking System If methyl bromide permits are initially allocated to end users, EPA will need to develop a new tracking system in which end users, distributors and other suppliers, importers, and producers report trades of permits and allowances. The level of effort estimated for the development of a permit tracking system is 120 hours of EPA staff time ( ICF estimate). This effort, estimated to cost $ 9,100, would include:

  planning the structure of the tracking system ( 40 hours);

  identifying a software development team for design of the system ( 20 hours); and   developing the system ( 60 hours).

I n addition, contractor support would be needed to develop the software, at an estimated onetime cost of $ 500,000, based on cost estimates for the SO2 Trading Program ( ICF 1992). This cost estimate is lower than that of the SO2 Trading Program because EPA now has more experience and familiarity with tracking systems. Also, the methyl bromide tracking system will be web based, which is less expensive than the mainframe technology used for the SO2 tracking system.

The level of effort for maintaining and operating the tracking system is estimated to require approximately 4 hours of EPA staff time per month ( 48 hours annually) to ensure that the tracking system is working properly and to address data entry issues raised by participants in the system ( ICF estimate).

In addition, annual extramural costs of approximately $ 20,000 are estimated to be required for system maintenance and upgrading.

7.2.4 Process Annual Verification Reports for Tracking System After a tracking system has been developed to automatically record methyl bromide allowance and permit trades, EPA will need to ensure that data entered into the system are accurate. This will be performed through an annual " true up" period, during which producers, importers, distributors and other suppliers, and applicators will submit signed forms verifying the accuracy of data entered into the system. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 118  In addition, all 2,000 end users must report on the use and/ or trade of methyl bromide permits.

Therefore, EPA will also have to process 2,000 verification reports annually, and contractor support will be needed for statistical analysis and report preparation. It is assumed that these activities will require the same level of effort and costs as those anticipated under Option 1 for report processing. Because EPA would not be required to process end user verification reports under Option 1, however, Option 2 incurs an additional level of effort of 3,000 hours, resulting in costs of $ 235,000.

7.2.5 Total Costs of Public Administrative Activities: Option 2 As shown in Exhibit 7.2.1, total one time public administrative costs associated with writing information requests and developing the Tracking System under Option 2 are estimated to require 6,592 hours and cost $ 526,580. On an annual basis, this option is estimated to require a level of effort of 27,930 hours, at an annual cost of $ 2,137,180. Total first year costs are estimated at approximately $ 2.66 million. The contribution of public administrative costs to overall costs considered for this option is summarized in Chapter 9.

7.2.6 Comparison of Total Costs of Public Administrative Activities: Options 1 and 2 Exhibit <IP_ADDRESS> compares the total annual and one time costs of Options 1 and 2. Note that Option 2 costs include the costs of all activities that would be conducted under Option 1, plus the costs of creating and maintaining a permit trading system. Total annual costs associated with public administrative activities under Option 1 are approximately $ 2.1 million less than those under Option 2,

with approximately 27,598 less hours of effort required on a yearly basis. Similarly, total one time costs associated with rule familiarization under Option 1 are approximately $ 511,880 less than those associated with trading system familiarization under Option 2, with approximately 6,406 less hours of effort hours required during the first year. *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 119  Exhibit <IP_ADDRESS>. Public Administrative Activities, Options 1 and 2 ( 1997$)

Activity Option 1 Option 2 Write/ Revise Reporting Forms Subtotal: Annual Burden $ 0 $ 0 Subtotal: One Time Burden $ 14,700 $ 14,700 Annual and Quarterly Report Processing Subtotal: Annual Burden $ 19,700 $ 19,700 Subtotal: One Time Burden $ 0 $ 0 Determination of Historic Production Subtotal: Annual Burden $ 1,840 $ 1,840 Subtotal: One Time Burden $ 0 $ 0 Distribution of Allowances Subtotal: Annual Burden $ 3,040 $ 3,040 Subtotal: One Time Burden $ 0 $ 0 Report to Parties of Montreal Protocol Subtotal: Annual Burden $ 750 $ 750 Subtotal: One Time Burden $ 0 $ 0 Writing of Information Requests Subtotal: Annual Burden NA $ 0 Subtotal: One Time Burden NA $ 1,240 Allocate Permits Subtotal: Annual Burden NA $ 1,853,250 Subtotal: One Time Burden NA $ 0 Develop and Maintain Tracking System Subtotal: Annual Burden NA $ 23,600 Subtotal: One Time Burden NA $ 510,640 Process End User Verification Reports Subtotal: Annual Burden NA $ 235,000 Subtotal: One Time Burden NA $ 0 TOTAL ANNUAL BURDEN $ 25,330 $ 2,137,180 TOTAL ONE TIME BURDEN $ 14,700 $ 526,580 *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 120  8. Benefits Analysis This chapter presents benefits of the Allocation Rule compared to a 2005 methyl bromide phaseout ( the Phaseout Rule). Because the Allocation Rule will involve increased levels of methyl bromide consumption compared to the Phaseout Rule, more damage to stratospheric ozone will result.

The quantified benefits from decreased stratospheric ozone levels will be negative, including increased cataract and skin cancer incidence and skin cancer mortality. Changes in the incidence and mortality for the numbers of skin cancers and incidence for cataracts, however, are not the only indicators of the damage to human health and the environment that result from increases in UV radiation due to ozone depletion.

Increased UV radiation can cause a wide variety of additional human health problems, including actinic keratosis ( a skin disease) and immune system disorders. Increased UV levels also lead to higher concentrations of tropospheric ozone ( smog) that can adversely impact human respiratory and pulmonary systems. Furthermore, the impact of ozone depletion is not limited to humans; plants and animals can also suffer serious consequences from UV radiation. Overall, in addition to skin cancers and cataracts, the following endpoints are expected to change due to the phaseout modifications. In particular, the following can be expected based on continued methyl bromide use:

  Increased mortality from acute exposure; 51   immune system suppression;   aquatic and terrestrial ecosystem disruption, including reproductive/ developmental effects, immune system suppression;   impacts on agriculture such as decreased plant productivity, slowed metabolism, hastened plant disease;   impacts on materials ( i. e., accelerated breakdown of plastics and other synthetics); and   lost productivity and evacuations associated with local methyl bromide exposure.

Therefore, negative impacts will follow in each of these areas as a result of the CUE. The level of negative benefit will vary depending on the quantity of methyl bromide allocated for CUE and the actual quantities consumed annually.

51 Incremental human health effects due to acute exposure expected from the CUE scenario were examined for this analysis. Between 2005 and 2018, 5.4 fatalities are expected due to acute methyl bromide exposure and 106.3 cases of acute methyl bromide exposure are expected in California. Benefits ( or lost benefits) associated with acute exposure to methyl bromide are not examined further in this document, as analysis of these exposures fall under the purview of the Office of Pesticide Programs ( OPP) and any re registration requirements under FIFRA. ( CADPR 2000, EPA 1999b, ICF 1999). *** DRAFT ( 8/ 20/ 2004) DO NOT CITE, QUOTE OR ATTRIBUTE***

 121  9. Cost Comparison: Options and Method of Allocation This chapter summarizes the total costs of the Allocation Rule compared to those associated with the Phaseout Rule ( EPA 1999a). In all scenarios analyzed for the Allocation Rule, it is assumed that methyl bromide will be distributed to end users in 2005 at a rate of 39 percent of baseline consumption with a gradual phaseout to 0 percent by 2018. For the Allocation Rule, costs are the total cost savings to industry ( end users) resulting from a new methyl bromide phaseout schedule and new methods of allocation. These include positive administrative costs to comply with the new allocation methods ( i. e.,

self certifying or applying for and trading methyl bromide permits, and reporting) and negative costs ( compliance cost savings) resulting from the increased levels of methyl bromide available under the Allocation Rule as compared to the Phaseout Rule.

Total costs are estimated for the time period 2005 to 2018 ( costs are presented at discount rates of 3 and 7 percent) in 1997 dollars. Additionally some costs are discussed qualitatively, including transaction costs and factors that could cause variations in economic efficiency and equity between the two options. Overall, the increased use of methyl bromide in excess of the original phaseout schedule results in total cost savings for industry as a whole.

9.1 Incremental Costs of Allocation Options All costs for the allocation options under the Allocation Rule will be lower than costs under the Phaseout Rule, resulting in negative costs ( total positive cost savings), because more methyl bromide will be available for use under the Allocation Rule than under the Phaseout Rule.