Regulatory Proposal for Reducing Fire Risks from Cigarettes

Appendix C

Estimated Incremental Cost of a Paper Modification

This appendix estimates the incremental cost to a representative cigarette manufacturer of complying with a proposed ignition propensity standard by implementing a paper modification approach.  The incremental cost estimate was based upon the cigarette-paper modification analysed by the Technical Study Group on Cigarette and Little Cigar Fire Safety.⁹⁰

The Technical Study Group examined the cost of increasing cigarette paper weight from a 24-g/mm² basis weight to a 45-g/mm² basis weight.  The costs analysed included the additional costs of manufacturing the paper itself as well as additional cigarette manufacturing costs attributable to a thicker paper. `

Additional paper manufacturing costs included increases in capital, operating, and material costs.  The capital and operating costs in Exhibits C-1 and C-2, respectively, were calculated based upon the incremental cost of paper, the increase in basis weight relative to traditional paper, and the relative cost structure of the pulp and paper industry shown in Exhibit C-3.  The material cost in Exhibit C-4 is attributable to a doubling of calcium carbonate costs necessary to decrease the paper porosity. ⁹¹

The incremental paper-modification manufacturing costs include increases in bobbin changes, adhesives, and flavour additives necessary to adjust for increased paper thickness.  These calculations are shown in Exhibits C-5 through C-7.

Finally, the Technical Study Group calculated an incremental cost of new cigarette-manufacturing equipment.  These costs are shown in Exhibit C-8.

The incremental costs in Exhibit C-8 were converted to Canadian dollars using OECD's Purchasing Power Parity Index (PPPI), inflated to 2002 values using the Canadian Consumer Price Index (CPI), and adjusted to reflect costs for a carton of 200 cigarettes.

The resulting incremental manufacturing cost figures are shown in Exhibit C-9.

To adjust the Baseline Cost Structure (see Chapter 2 and Appendix A), the incremental manufacturing cost figures were first allocated across the relevant manufacturing process categories.⁹²   Then an estimate was developed to account for the incremental cost of toxicity testing required by the proposed regulations.  The cost per year per brand for the required tests would be approximately $20,000.⁹³  These costs would apply to each of the approximately 275 brands of cigarettes manufactured in Canada.⁹⁴  Multiplying these figures and dividing the result by the 206.5 million cartons of cigarettes produced in Canada in 2002 yields an approximate annual testing cost of $0.027 per carton.  This figure is shown in the Toxicity Testing line in Exhibit C-10,which compares the modelled Baseline and Post-Compliance cost structures.

Exhibit C-1 - Paper Manufacturing Capital Costs

Incremental Capital Costs = Incremental Capacity Requirements × Proportion Capital Costs × Cost of Paper per 1,000 Cigarettes = $0.042 (1986, USD)

Where incremental capacity requirements were calculated to be 76.8 percent as shown below, proportion capital costs, or the proportionof paper cost due to capital, was 0.322 as seen in Exhibit C-3 below, and the cost of paper per 1,000 cigarettes was $0.17 (1986, USD)

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 92.

Exhibit C-2 - Paper Manufacturing Operating Costs

Incremental Operating Costs = D BW BW_o × Proportion Operating Costs × Cost of Paper per 1,000 Cigarettes = $0.105 (1986, USD)

Where DBW was 21g/mm² (=45-24), BW_o was 24g/mm², proportion operating costs, or the proportion of paper cost due to operating expenses, was .593 as seen in exhibit C-3 below, and cost of paper per 1,000 cigarettes was $0.17 (1986, USD)⁹⁵

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 92.

Exhibit C-3 - Relative Cost Structure of the Pulp and Paper Industry

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 91.

Exhibit C-4 - Adjustments for Paper Porosity

Incremental Costs for Porosity = Cigarette Paper Weight × Proportion of Paper Weight for Calcium Carbonate × % Increase in Calcium Carbonate 100 ×Price Calcium Carbonate per lb. = $0.0139 (1986, USD)

Where unaltered cigarette paper weight was .09438 lbs/1000 cigarettes, calcium carbonate constituted 29.5 percent of paper weight, percent increase in calcium carbonate was 100,and price of calcium carbonate in 1986 USD was $0.50/lb.  Sumner et al. also calculated porosity costs by comparing costs of premium brand paper, which used electrostatic or microlaser perforating equipment to adjust for porosity, with the costs of regular paper.  They found that there was a three dollar (1986 USD) premium per bobbin which, assuming 100,000 cigarettes per bobbin, translated to a cost of $0.03 (1986 USD) per 1,000 cigarettes.

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 93.

Exhibit C-5 - Increased Bobbin Changes

Incremental Costs for Bobbin Changes = BW_h BW_o × 1000 Cigarettes per Bobbin Change × Operating Cost per Bobbin Change = $0.0005- $0.012 (1986, USD)

Where BW_h was 45 g/mm², BW_o was 24 g/mm², cigarettes per bobbin change were 100,000,and operating cost per bobbin change ranged from $0.029 to $0.677 (1986, USD).

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 94.

Exhibit C-6 - Adhesive Costs

Incremental Costs for Adhesives = Cost of Adhesives × % Increase in Adhesives 100 = $0.043 1986, USD)

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 94.

Where the cost of adhesives per 1,000 cigarettes was $0.043 (1986 USD) and the percent increase in adhesives was 100.

Exhibit C-7 - Flavouring Costs

Incremental Costs for Flavourings = Cost of Flavouring × % Increase in Flavouring 100 = $0.016 (1986, USD)

Where the cost of flavouring per 1,000 cigarettes was $0.016 (1986 USD) and the percent increase in flavouring was 100.

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 94.

Exhibit C-8 - Incremental Manufacturing Costs of Increased Paper Thickness (1986 U.S. Dollars per 1,000 Cigarettes)

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 97.

Exhibit C-9 - Estimated Incremental Manufacturing Cost of a Paper Modification (2002 $CAD per Carton of 200 Cigarettes)

Note 1:
When replicating the results of the technical study group paper, manufacturing operating costs were calculated to be $.0347 per thousand cigarettes.  The paper's calculation of $0.0413 was used since it provided a more conservative estimate.

Source:
Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards.

Exhibit C-10 - Estimated Baseline Cost Impact of a Paper Modification (2002 $CAD per Carton of 200 Cigarettes)

	Current Costs	Post-Compliance Costs
Purchased Leaf Tobacco	1.152	1.152
Handling, Transport and Storage	0.978	0.978
Tobacco Processing	0.223	0.230
Plug Making	0.419	0.428
Cigarette Making	0.451	0.535
Packaging/Shipping	0.766	0.766
Business Expenses	1.708	1.708
Toxicity Testing (see Note)	n/a	0.027
TOTAL COSTS =	$5.697	$5.823

Note:
The costs in the Toxicity Testing line reflect only the additional tests required by the proposed regulations.  Numbers may not add because of rounding.

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⁹⁰ Sumner et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, pp. 89-98.

⁹¹ Ibid., pp. 90-93.

⁹² Paper costs, incremental costs for new equipment, costs of bobbin changes, and 50 percent of adhesive costs were allocated to the "Cigarette Making" process, while the other 50 percent of adhesive costs were allocated to the "Plug Making" process. The costs of flavour additives were allocated to "Tobacco Processing."

⁹³ Health Canada Tobacco Control Programme.

⁹⁴ Ibid.

⁹⁵ While using these numbers gives a result of $0.088, Sumner et al. calculated this to be $0.105. The latter value is used in the calculations shown, to be conservative.