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Costs and environmental issues: glossary of the
different approaches
Total Cost Assessment or Accounting (TCA)
- an approach to allocate indirect costs linked to environmental
and risk issues to activities of a production site (using account
figures and ABC approach)
Life Cycle Costing (LCC)
- an approach to calculate all costs generated by the life
cycle of a product, e.g. suppliers, production, use and end of life
A TCA approach may be applied at each step of
a LCC analysis
Cost-Effectiveness Analysis (CEA)
- starts from a pre-defined goal (e.g.reduce greenhouse gas
emissions, increase packaging recycling)
- identifies those technical and policy options which achieve
the goal at lowest cost
Cost-Benefit Analysis (CBA)
- identifies which level of targets should be envisaged for
environmental policies (e.g.reduce greenhouse gas emissions, ban
of a substance, creation of a tax)
- and whether or not an environmental policy / large investment
(e.g. building a dam, implement a national Park) is justified by
its environmental benefits
CBA was first used in the U.S. Flood Control
Act (1936):
- the Army Corps of Engineers was required to evaluate the
cost and benefit of all water resource projects
Both CEA and CBA approaches require a clear definition of the
system boundaries and of the definition of the cost studied (what
is included, what is not…)
Both approaches are presently promoted by the European Commission
to better inform policy decision-making processes
How to perform a CBA?
There are four stages in a CBA model
- stage 1: scheduling. Define the project including the delimitation
of the analysis, the possible scenarios and the “ without-project
” case
- stage 2: quantification of CBA costs
- stage 3: stability test. Sensitivity analyses are performed
to determine to which parameters the total cost is the most sensitive
– stage 4: discussion of the results, including the effects
not quantified in stage 2
What is included in stage 2 of a CBA?
Internal effects (caused intentionally)
- business effects: investment costs (annuities), operational costs,
risk and profit surcharge, some taxes (on wages)
- substituted business effects: in case of recycling, energy
recovery
External effects (unintended side-effects)
- air/water emissions, incidental emissions, additional risk surcharge
for landfilling
- external benefits from saved emissions (recycling, energy recovery)
- collective goods (e.g. beauty of landscape), for which there
is no market price
How to monetise external costs?
Example of the assessment of the external costs of an oil spill
- lost revenues for tourism, fish and sea-food industry, increased
health problems
- build only boats with double hulls instead
of simple hull boats
- cost of cleaning beaches, estuaries after the oil spill
- assess through questionnaires how much are people ready to pay
to avoid the oil spill (or to accept compensation)
- assess the loss of values of real estates
due to the oil spill
Damage cost approach
Method
- Perform a life cycle inventory and life cycle impact assessment
- Identify targets (health, buildings, crops, forests, water)
- Assess the impact of the LCI and LCIA results on these targets
Pros and cons
- the most frequent method used nowadays
- sensitive to the local context and scientific knowledge, a
lot of additional data to be gathered: high uncertainties
- ethical issues such as valuation of human life, technical issues
(effect of combination of pollutants) have to be addressed
- what about intangible effects such as beauty of nature?
Prevention/averting cost approach
Method
- Perform a life cycle inventory and life cycle impact assessment
- Define the present-day technical/regulatory means to reduce
pollution and acheive standards/ reach sustainable development
- Quantify the marginal/average costs that the European society
has to pay for each of the effect chosen
- Apply these coefficients to the LCI and LCIA results
Pros and cons
- less sensitive to the local context: market prices, expression
of a consensus expressed in the regulations
- fewer data sets available than for the damage-cost approach
Other approaches
Remediation/replacement cost
- the method is close to damage costs and is easy to apply
- the is complete replacement feasible?
Contingent approach
- direct valuation method carried out by experimental means (questionnaires)
- can be used to monetise intangible goods (the value of a landscape)
- the values obtained are hypothetical and depends on the way questions
are asked
Hedonist pricing/market pricing
- assess the sensitivity of a market price through the variation
of one parameter (noise)
- the variations of the market price are often correlated to more
than one parameter: many data sets + statistical skills are requested
Limits to monetisation of externalities
Discounting: costs to be paid in the future and benefits to be
accepted in the future are considered to have a lower value than
costs and benefits arising now
- the discount rate for externalities should be discussed
The list of external effects which are included in the calculation
should be quoted, as well as the external effects which are not
- note 1: depending on the method used, the list of external effects
not quantified (because of lack of knowledge and/or available
data) can be hug
- note 2: depending on the method used, the quantification
of external costs can vary
Why and how to link CBA and Life Cycle Assessment?
The CBA and LCA
methodologies overlap and they may both be used to inform decision-making
The LCA framework is standardised but CBA methodology is not
- increases transparency, reproducibility
LCA results can be used to monetise the environmental costs
- databases for LCI/LCIA are available
Eco-Efficiency
The concept of eco-efficiency was developed by the World Business
Council of Sustainable Development (WBCSD) in 1992
- acheive more value from lower inputs of material and energy
and with reduced emissions
Indicators thought to be valid for all business and bringing together
economy and ecology by relating product or service value to environmental
influence have been defined
- product or service value divided by environmental influence
Company managers and external stakeholders are encouraged by WBCSD
to use eco-efficiency indicators as a means of making and measuring
progress toward economic and environmental sustainability
WBCSD Eco-efficiency indicators
Product/service value indicators relevant for any industry are:
- sale units, mass quantities, net sales/turnover, product
performance, services delivered
Environmental influence indicators relevant in product/service
creation for any industry are:
- energy consumption, materials consumption, water consumption,
greenhouse gas emissions, ozone depleting substance emissions
The following indicators can also be used if properly defined
- acidification emissions to air, total waste
Other indicators can be defined but they are thought to be business
specific
How to use eco-efficiency ratios with TEAM™
All the generic indicators for environmental influence are
available in Ecobilan's LCA software TEAM™
The indicators for product/service value can either be the
functional flow of the TEAM™ system or derived from accountancy
information
The operations to calculate the eco-efficiency ratios then
involve some simple spreadsheet divisions
The results can then represent
- the mass of product per greenhouse gas emissions
- the net sales per greenhouse gas emissions
Conclusion
The methods presented (CBA, eco-efficiency) both define criteria
for decision support combining environment and economy
There is a strong interest for the persons using these methods
to use LCA
as a framework
The monetisation of environmental costs is in fact a valuation
method
Report structure could become
- economic results, environmental results (LCA), eco-efficiency
results, CBA results with several monetising methods
The indicators presented can be calculated with TEAM
Bibliography
About CBA
About eco-efficiency
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