Harvard Business School 9-183-133

Rev. 11/83

Gartland Steel

Thursday, October 11, 1979. Dan Crossan, Director of Environmental Engineering at Gartland Steel,
returned from lunch and found a memo left for him by Jay Peeler, Senior Project Engineer. Crossan had spent a
good deal of time in the past year promoting the new “bubble” method of determining air pollution emissions
compliance for industrial plants. Rather than restricting pollution from each individual point source
(smokestacks, vents, etc.) within the plant, the bubble method restricted the total pollution output of a plant – as
if it were under a bubble. This new method promised both capital spending reductions and energy savings to
industry while giving the same pollution emissions performance, since industry would be left to meet the goals
in the most cost-effective production processes at Gartland’s Salem, Ohio steel mill. Crossan, who was
attempting to convince the EPA to approve a bubble plan for the Salem mill, felt this information would be very
helpful.

Gartland Steel:

Gartland Steel was a fully integrated steel producer. In 1978, it had nine plants in the US and was the
country’s fourth largest steel maker in tonnage and third largest in sales. Gartland, since its founding in 1901,
had led the industry in method and product innovations, starting with commercial development of taconite ores,
large-scale direct reduction furnaces, continuous flat rolling, development of electrical steel products and many
grades of stainless steel, among others.

Gartland had also led the industry in both sensitivity to environmental questions and in actions to
alleviate pollution. By the end of 1978, Gartland had spent over $300 million on pollution control; 85% of this
was spent before being required by state or federal authorities. A 1977 report, by the Council on Economic
Priorities, concerning pollution in the steel industry placed Gartland’s performance first, with the other six
major firms “tied for last.”

The Clean Air Act and the EPA:

The Clean Air Act (CAA) of 1970 created the Environmental Protection Agency (EPA) to establish and
enforce air quality goals. (The EPA was also responsible for control of water pollution and solid wastes). The
EPA set up National Ambient Air Quality Standards (NAAQS) for six airborne pollutants: sulphur oxides,
nitrogen dioxide, carbon monoxide, photochemicals, hydrocarbons, and particulates. These standards postulate
“threshold levels” beyond which ambient pollutants are damaging to health and welfare. States were given the
primary responsibility to develop and implement programs to achieve these standards. In the attempt to bring
regions or firms into compliance, emission rate standards were also set “stack-by-stack” for most industrial

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This case was written by Assistant Professor Richard E. Stone as a basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
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processes. In most cases, the state specified what equipment had to be installed and where. In addition, 247 “air
quality control regions” were established and classed either as “clean” or “non-attainment” regions. “Non-
attainment” meant that the NAAQS for at least one pollutant was not met. (Air Quality Control Region
boundaries were set according to the geographic size of the regions and the availability of personnel to monitor
pollution levels. The dispersal characteristics of the pollutants were not considered).

The EPA’s first task was to bring non-attainment regions into compliance. The EPA brought pressure on
the companies within the regions to clean up or shut down existing pollution sources and threatened to deny
permits for further new industrial plants producing pollution until all NAAQS were attained. Despite these
actions, by the 1975 deadline set in the Clean Air Act, 160 of the 247 regions were classed as “non-attainment”.
Often, emissions improvements as stipulated stack-by-stack seemed to be more costly than industry could bear
and survive. Industries such as steel, however, were often crucial to local economies. Under conflicting pressure
from industry and local governments as well as the environmental movement, the EPA had by 1979 evolved
compromise policies.

The “Offset” Policy:

The EPA’s first step was the creation of the “offset” policy in late 1976. “Offsets” allow firms to trade
pollution “rights” within non-attainment regions. A firm may add a pollution source if it reduces pollution by a
greater amount somewhere within the air quality control region, by buying controls for another firm, by adding
controls to its own operations, or by shutting down one of its present sources to name a few possibilities. One
category of pollution could not be traded for another, for example, sulphur oxides could only be traded for
sulphur oxides. By 1977, firms could “bank” excess pollution reductions and a market in pollution “rights”
developed, though it was far from clear how a price per ton of pollutant could be set in such a thin market
without some idea of the value of an offset to a firm.

The Bubble Policy:

The “bubble” policy, which the EPA had officially proposed on January 18, 1979, is a conceptual
relative of the offset policy. Rather than installing mandated stack-by-stack equipment, a firm would be free to
decide how to bring the net level of pollution for the entire plant within the regulated standards for each type of
pollutant. However, approval procedures of federal, state, and local officials for a firm’s compliance plans,
prepared under the bubble policy, were rather complex. Industry faced the risk that a bubble plan prepared in
good faith would be rejected. Rejection involved retroactive non-compliance fines as well as having to go back
to the stack-by-stack controls. For this reason, industry had made few commitments to bubble policy
compliance plans.

The Salem Plant:

Crossan was currently concerned with bringing Gartland’s Salem plant into compliance with EPA
standards for particulate pollution. Monday he had spoken with Peeler about this. Peeler said he knew that a
local rubber company, in the same quality control region, was planning to shut down permanently one of its
plants. He felt that they would sell it to Gartland for $750,000. Gartland could then shut it down and receive a
250,000 pounds/year pollution “offset”. Crossan felt that this might alienate the EPA and asked Peeler what
could be done within the production process.
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Peeler referred to a memo he had sent Crossan as background for their meeting. (See Exhibit 1).
Offhand, the only thing Peeler could think of doing would be to change the mix in some of the open-hearth
furnaces. They would then consume .25 tons of pig iron and .95 tons of scrap to produce 1 ton of steel and .02
tons of scrap. The operating cost per open hearth would fall by $5/ton and pollution from each furnace would
decline to .795 pounds/ton. Peeler didn’t know if this was worth it. Then again, you could just cut back
production somewhere along the line, but the question was where and what would be the cost?

They decided to rerun the linear program described in the memo with a pollution constraint that would
require pollution to stay under 5163 thousand pounds per year. Current pollution levels were 5525 thousand
pounds per year. The EPA wanted Gartland to reduce particulate pollution by 6.6%, hence the restriction to
5163 thousand pounds per year. The Stack-by-stack approach, which Crossan was hoping to avoid being forced
to use, would cost $9 million per year (including operating expenses and amortisation of capital expenses).

Today’s memo contained the new linear program and its results. Included was a chart showing the
maximum level of contribution that could be achieved for each level of pollution restriction. Earlier this
morning, Crossan had written down some notes on a “bubble” plan for the Salem plant. Much of the plant’s
pollution came from the coal and ore yards -- .04 pounds per ton of coal and .589 pounds per ton of ore. This
would be relatively inexpensive to clean up. If Crossan could convince the EPA that this additional 1181
thousand pounds/year of particulate pollution should be included “under the bubble”, then reducing total
pollution by 6.6% would be much cheaper. However, convincing the EPA to go along with it would not be that
easy, and Crossan wanted more information before finalising any plans. He decided to ask Peeler to include the
pollution from the coal and ore yards into the linear program.

Crossan felt it would be a major advancement if Gartland could get the EPA to approve some sort of a
bubble plan. It would cause other firms and industries to try getting similar plans approved, which would help
convince the EPA that the bubble policy was good for everyone.

- Discuss the various options that Gartland Steel can explore to meet the required pollution norms.
- Develop appropriate linear programs to evaluate various options for Gartland Steel.
- Make recommendations to the EPA based on your analysis. Support your recommendation(s) with
cogent arguments.
- Include any information you get from the sensitivity report that can be useful.

(Note: The linear program mentioned in the case has not been included and you will need to develop it on your
own).
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Exhibit 1

MEMORANDUM

October 1, 1979

To: Daniel Crossan, Director of Environmental Engineering

From: Jay Peeler, Senior project Engineer

Subject: Linear Programming Model of the Salem Plant

As background to our meeting coming up this Thursday, I am sending you material describing the linear
program used to help set the levels of production at the Salem plant.

Briefly, Exhibit A is a process flow diagram of the activities in the plant. Exhibit B is a chart of required
amounts of input per unit of output for each activity. This includes expected 1980 unit operating costs. Exhibit
C is the expected 1980 market price for our raw materials and final products.

This will help us determine the consequences of any plans we develop on Thursday to deal with pollution, and it
might suggest some strategies or directions to follow.
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EXHIBIT A : PROCESS FLOW DIAGRAM

SCRAP
PURCHASES

OPEN
HEARTH

COAL COOKING
YARD PLANT

.
BLAST
FURNACE
ORE SINTER
YARD PLANT

BASIC
OXYGEN
FURNACE
PIG.IRON
PURCHASES

 Flows of particulate pollution and scrap not shown

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EXHIBIT - A (continued)

INGOT
CASTING

INGOTS
OLD
SOLD

PRIMARY SLABS
BREAKDOWN SOLD
MILL

HOT STRIP COILS

MILL
SOLD

CONTINUOUS
CASTING
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EXHIBIT B

PROCESS TECHNOLOGIES

COOKING SINTER BLAST OPEN BASIC INGOT PRIMARY CONTI- HOT

PLANT PLANT FURNACE HEARTH OXYGEN CASTER BREAK- OUS STRIP
FURNACE FURNACE DOWN CASTER MILL
MILL
1 ton of
Outputs Coke Sinter Pig Iron Steel Steel Ingots Slabs Slabs Coils

Produces
Scrap - - .01 .02 .02 .02 .18 .04 .04
(tons)
Produces
Particulate 1.254 .777 .474 .861 .505 - .156 - -
Pollution
(pounds)

Requires: 1.43 .52 1.12 1.08 .32 1.02 1.20 1.06 1.04
(tons) Coal Ore Ore Scrap Scrap Steel Ingots Steel Slabs

.65 .14 .81

Coke Pig Iron Pig Iron

.47
Sinter
Operating
Costs $36.21 $18.77 $57.82 $52.88 $28.10 $4.56 $19.76 $32.30 $53.72

Cost of
Coal $68.05 $18.82 $40.54 - - - - - -
& Ore used

Energy
Credits $ 1.86 $0.00 $0.16 $0.06 $0.13 $0.34 $3.45 $0.44 $0.41

Net costs $102.40 $37.59 $98.20 $52.82 $27.97 $4.22 $16.31 $31.86 $53.31
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EXHIBIT C

EXPECTED 1980 MARKET PRICES

(PER TON)

COAL $47.59

HOT ROLLED COILS $350.00

INGOTS $200.00

ORE $36.20

PIG IRON $191.10

SCRAP $98.48

SLABS $250.00

PROCESS CAPACITIES (1000’s tons/year)

Blast Furnace 1404

Open Hearth 1740

Basic Oxygen 2700

Ingot Caster 3408

Continuous Caster 720

Hot Strip Mill 3480