Gartland Steel was a fully integrated steel producer, the fourth largest in the US. It was the largely accepted industry leader in sensitivity to environmental issues and in its actions to alleviate pollution. The Clean Air Act of 1970 created the EPA (Environmental Protection Agency) to establish and enforce air quality goals. The standards postulated threshold levels beyond which ambient pollutants were damaging to health and welfare. Emission rates standards were set 'stack-by-stack' for most industrial processes.
Though the aim was to bring most of the geographical areas within the purview of the Act, 160 of the 247 regions were non-compliant by the 1975 deadline. The main reason was found to be the high costs of implementing 'stack-by-stack' standards. Offset Policy To counter this problem, the EPA created the 'offset' policy which allowed firms to trade pollution rights within non-attainment regions. In this policy, the companies were allowed intra-pollution category trading but not inter-pollution category trading. This led to a market in pollution rights.
Bubble Policy This was a derivative of the offset policy. As per this policy, a firm would be free to decide how to bring the net level of pollution within standards, as against installation of mandated stack-by-stack equipment. The policies were however complex and approval by authorities was subjective. Company Options Gartland Steel had to change its production policy to comply with the new pollution norms. One of the possibilities was of buying a factory for $750,000 and get an additional allowance of 250,000 pounds/year of pollution "offset".
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The company could also think of changing the production mix in the open hearth furnace, now requiring 0. 25 tons of pig iron (instead of 0. 14 tons) and 0. 95 tons of scrap (instead of 1. 08) creating 1 ton of steel and 0. 2 tons of scrap. The pollution would decline to 0. 795 punds/ton (instead of 0. 861 pounds/ton) and the operating cost of the furnace would also reduce by $5/ton. The major source of pollution for the plant was from the coal and ore yards, creating pollution at approx. at 0. 04 pounds/ton of coal and 0. 589 pounds/ton of ore.
If the pollution could be included under the bubble policy for the entire plant, the company may benefit from the policy. The pollution at the current levels of production and the current production mix currently stands at 5525 thousand pounds per year. The new bubble policy required the Gartland Steel to reduce the pollution to at most 5163 thousand pounds per year, thereby effecting a reduction of 6. 6%. This is as per the bubble policy. Had the stack-by-stack method been implemented for the company, it would have costed an additional 9 million dollars per year. We now evaluate the various options available for Gartland Steel.
Conclusion: As per the regulations, if the yard is included in the pollution calculation, the Scenario 6 is the best strategy for Gartland Steel to follow, to get a profit of 291,875,400. The strategy entails buying the factory, and not installing the new open hearth furnace. If the yard is not included in the calculation for pollution, the Scenario 5 is the best strategy to be followed for Gartland Steel, to get a profit of 249,691,000. The strategy entails buying the factory and not installing the new open hearth furnace.
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