1. The Forest Products Industry andthe Clean Air Regulatory Challenge Paul R. Noe Vice President for Public Policy American Forest & Paper Association Arkansas Forestry Association Annual Meeting Little Rock, Arkansas September 26, 2012

2. Overview Cumulative Burden of Air Regulations Highlights of Key Air rules Boiler MACT, etc Carbon Neutrality Need for Sustainable Regulations 2

3. Forest Products Industry Employment* 000 workers1,7001,6001,5001,4001,3001,2001,1001,000 900 800 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 * Includes paper and allied products, wood products, and logging. Source: Bureau of Labor Statistics

4. Rules, Costs and Timing Issued Final Rule Potential Cost2010 NOx NAAQS $0.6 B2010 SO2 NAAQS $0.2 B2011 GHG BACT ??2012 Boiler MACT rules ~$3 B ??2012 Paper Risk and Technology I $5M2012 PM NAAQS $ 0.1 to >$1 B2013 Paper Off-gas Venting Elimination $1.6 +2014 Pulp Risk and Technology II $3.3 B2014 Pulp and Paper GHG Rule ??2014 Ozone NAAQS $0.3 to 3 B2015 Wood MACT $0.8 B2016 Cross-state air pollution rule II $0.5 B2016 Hydrogen sulfide MACT $2.7 B

5. Boiler MACT Starting Point in 2010 Broadest MACT standards ever under the Clean Air Act Industrial, commercial and institutional boilers and process heaters at major sources of hazardous air pollutants. 1,600 facilities and 13,555 boilers (about 11,000 gas boilers) Emission standards for PM, HCl, Hg, CO, and dioxin Multiple controls and complex monitoring to meet limits

6. Initial Boiler MACT Rules June 2010: Responding to court decision, EPA proposed changes to the Boiler MACT rules. Original rule would have cost the FP industry $7- $9 billion in capital costs ($21 billion for all manufacturing). March 2011: EPA issued original final Boiler MACT -- $7 billion capital cost for FP industry. Jobs Study by Fisher International: over 20,000 jobs (36 mills) in jeopardy in P&P sector alone. 7

7. Fisher International Study of March 2011 Rules Pulp & Paper Mill Jobs Mills At Risk 36 20,541 Total 349 113,858 % At Risk 10% 18% 8

8. Re-Proposed Boiler MACT Rules December 2011: The EPA issued re-proposed Boiler MACT rules. The re-proposed rules would cost the forest products industry an estimated $4.3 billion. 9

9. Concerted Outreach Effort Allied Industries, Small Business, Agriculture Labor Congress Bill passed House and almost in Senate Governors, other state/local officials Administration EPA, USDA, DOC, SBA/OA, OMB, White House Arguments: economic/employment, engineering, science, legal, a nd political 10

10. Concerned Trade Groups American Forest & Paper Association Hardwood Federation American Chemistry Council Hardwood Plywood & Veneer Association American Coke & Coal Chemicals Institute Industrial Energy Consumers of America American Foundry Institute of Shortening and Edible Oils American Home Furnishings Alliance National Association of Manufacturers American Iron and Steel Institute National Cotton Ginners Association American Municipal Power, Inc. National Lime Association American Petroleum Institute National Mining Association American Public Power Association National Oil Recyclers Association American Sugar Alliance National Oilseed Processors Association American Wood Council National Petrochemical & Refiners Association Alliance of Automobile Manufacturers National Rural Electric Cooperatives Association Bioenergy Deployment Consortium Ohio Municipal Electric Association Biomass Power Association PA Anthracite Council Biomass Thermal Energy Council Pellet Fuels Association Brick Industries Association Rubber Manufacturers Association Composite Panel Association Society of Chemical Manufacturers and Affiliates Corn Refiners Association Southern Lumber Manufacturing Association Council of Industrial Boiler Owners The Aluminum Association Edison Electric Institute Treated Wood Council Fertilizer Institute U.S. Chamber of Commerce

11. HCl Emissions 2005 US Emissions of HCl by Boiler Type Utility Boilers: Coal ICI Boilers & Process Heaters - coal ICI Boilers & Process Heaters ICI Boilers & Process Heaters - wood or waste Utility Boilers: Oil ICI Boilers & Process Heaters - natural gas ICI Boilers & Process Heaters - oil Utility Boilers: Natural Gas Utility Boilers: Wood or Waste

12. Hg Emissions Small Contributors 2005 US Mercury Emissions By Boiler Type Utility Boilers: Coal ICI Boilers & Process Heaters - oil ICI Boilers & Process Heaters - coal ICI Boilers & Process Heaters ICI Boilers & Process Heaters - wood or waste Utility Boilers: Oil Utility Boilers: Wood or Waste ICI Boilers & Process Heaters - natural gas

13. SO2 Emissions from Pulp and Paper Mills in PM 2.5 Non-Attainment Areas (15/35, 2010) 4% SO2 Emissions within PM Non- Attainment Areas SO2 Emissions Outside of PM Non-Attainment Areas 96%

14. Boiler MACT Further Improvements Needed Key Improvements from 2010 through Dec. 2011 Reproposal: Cost-effective work practices rather than arbitrary and unachievable limits Emission limits accounting for variability in performance of top boilers Adjusted some limits to account for fuel variability Defined more biomass residuals as fuels Grouping like boilers together separate biomass from coal Further Improvements Sought: More compliance time -- one or two years Achievable standards -- esp. carbon monoxide Classify more biomass residuals as fuels -- encourage renewable, carbon- neutral alternatives to fossil fuels 16

15. Boiler MACT Estimated CostsEPA Action Cost to Forest Cost to All EPA Cost Products Sector Manufacturers EstimatesOriginal Proposal ~$9 B $21 B $11.1 B(June 2010)Original Final $7 B $14.3 B $6.3 B(March 2011)Reproposal $4.3 B $14.2 B $5.8 B(December 2011)Final ?? ?? ??(2012??)Cost Reductions > $4.7 B >$6.8 B >$ 5.3 17

16. Paper Risk and Technology Rules Final Clean Air rule (9/11/12) covers pulping and papermaking operations EPA found health risks acceptable EPA determined no control technology upgrades cost effective Costs reduced from $700-900M in proposal to only $5 M Next Step: litigation by stakeholders More EPA rules under Paper Sector program Risk & Technology rule Phase II furnaces and kilns, late 2013 Reevaluate existing venting allowances summer 2013 Determine if changes to Kraft Pulp New Source Performance Std court ordered deadline of May 2013 18

17. NAAQS Permitting Gridlock 2010 NOx and SO2 NAAQS plus 2006 particulate matter Modeled emissions exceeding standards stops projects PM NAAQS June proposal Tighter limits could impose more than $1 billion in added costs depending on how implemented Scientific uncertainty questions need for lower limits Ozone NAAQS proposal in late 2013 Big costs and scientific uncertainty 19

18. Carbon NeutralityFossil Fuel Releases Biomass Carbon Cycle 20

19. Timberland Growth/Removal Ratio By Region 5.00 4.50 Rocky Mtn 4.00 3.50 3.00 2.50 North 2.00 Pacific Coast 1.50 1.70 1.37 South 1.00 1.22 1.05 0.50 - 1976 1986 1996 2006 North South Rocky Mtn Pacific Coast 21

20. Biogenic Carbon Emissions Oct. 2009: Fixing A Critical Accounting Error, Science magazine Dec. 2009: EPA Endangerment Finding on GHG emissions May 2010: EPA Tailoring Rule to direct regulations at large emitters July 2011: EPA imposed 3-year deferral for regulation of biogenic emissions from stationary sources Sept. 2011: EPA proposed Accounting Framework for Biogenic CO2 Emissions from Stationary Sources July 2012: EPAs Scientific Advisory Board (SAB) issued draft report critical of the Agencys proposed accounting framework; supports anticipated future baseline 22

21. Regulations Can Undermine Competitiveness NERA/MAPI study: costs of major regulations increased at average rate of 7.6% a year since 1998. EPA imposes the largest regulatory cost burden on manufacturing sector ($117 billion in constant 2010 $). Cumulative impact of major regulations between 1993 and 2011 will lower manufacturing output by up to 6% over the next decade. Will reduce paper and wood products output by 6% and 3%, respectively. 23

22. Sustainable Regulations Need for sustainable regulation (meet economic needs, environmental concerns, and social expectations) Rigorous application of efficiency criteria and sound science. Consider employment impacts and need for compliance time; allow for economic recovery. The incorporation of job losses into regulatory cost-benefit analyses could alter the calculus for some propose regulations. 24

23. Wrap-up Uniquely challenging time. Worst economy since the creation of the modern administrative state. Stubbornly high unemployment. Aggressive foreign competition. Pressing need for smarter, more cost-effective regulatory approaches. 25

24. Questions ???Paul NoeVice President for Public PolicyAmerican Forest & Paper AssociationPaul_Noe@afandpa.org 26