Economics of Sustainability

1. Economics of Sustainability When money speaks, nobody cares for the grammar!

2. Economics of Sustainability Efforts • Detailed financial / profitability analysis of sustainability projects necessary to get top management commitment • Translate the project outcomes in $ and ¢ • Available Tools: • Environmental Management Accounting or Total Cost Accounting • Traditional Profitability Analyses: Payback Period, Net Present Worth, Internal Rate of Returns

3. Environmental Management Accounting (EMA) • Combination of life cycle analysisand activity based costing approaches • Identify total (internal) costs associated with environmental activities • Make apparent the financial burdencreated by material, energy, inventory andother operational inefficiencies • Provide additional inputs for business decisions • Based on “true” operational costs

4. Current ENV Cost Situation • Most ENV/OEHS costs often treated as fixed and unavoidable • ENV costs not directly allocated to activity or process generating wastes and emissions

5. Do You Know All Your ENV Costs ? • 50 to 70 % of ENV costs for a typical facility are HIDDEN in general overhead accounts • Administration • Legal • Facilities • Maintenance • Transportation

6. The Significance of ENV Costs • What gets measured gets managed • Simply quantifying costs will lead to questions • Potentially identify savings • Distinction between some “environmental” and “operating” costs may not be obvious • But costs are costs and need to be managed

7. Total Environmental Cost Components • Conventional (or Direct) Costs • Potentially Hidden (or Indirect) Costs • Opportunity Costs (or Production-related costs) • Contingent (or Future) Costs • Intangible (or Less Real) Costs

8. Direct Costs • Storage,handling, and disposal of residuals • Onsite and offsite • Pollution control equipment costs • Capital costs • Operation and maintenance • Required Permits • Applicationsand fees

9. Potentially Hidden Costs • Waste packaging and shipping • Insurance Premiums • Monitoring, recordkeeping, andreporting • Facility audits • Qualifying contractors

10. Potentially Hidden Costs (Cont’d.) • Training and meetings • Environmental data management • Equipment and product labeling • Legal support

11. Lost Opportunity Costs • Operational shutdowns • Loss of operating flexibility • Loss of raw materials • Unrealized product revenue • Unrealized new product ideas • May be more significant than other costs

12. Future compliance costs Future liability costs Future remediation costs Unexpected shutdown costs Property damage Personal injury damage Natural resource damage Contingent Costs

13. Intangible Costs • Corporate image • Working conditions • Employee morale • Relationship with customers and suppliers • Relationship with investors & shareholders • Relationship with regulators

14. Cost Data Gathering • Identify and define environ-mental categories and activitiesrelevant to your operations • Initially focus on tangible costs

15. Let’s Begin With ABC..... • Activity Based Costing • Create a “cost” pool for each “activity” or transaction that can be identified as a cost driver • Gather data relating to activity centers and cost drivers (i.e.,true reasons for costs) • More complex operations will have more cost drivers

16. Traditional Cost Accounting System

17. Modified Cost Accounting System

18. CP Costs incurred Benefits obtained Profitability Analysis Profitability Analysis • Simple payback; • Net Present Value; • Internal Rate of Return

19. Simple Payback Period • Simplest method of profitability analysis • Payback Period (yrs): (Total Investment) / (Total Annual Savings) • There are two main problems with the payback period method: • It ignores any benefits that occur after the payback period, and so does not measure profitability • It ignores the time value of money

20. Net Present Value • Takes into account time value of money • PV: Present Value • FV: Future Value = Net Savings – (Investments + Operational Costs) • i: Rate of interest in the market • n: No. of years

21. Internal Rate of Return • Often used in capital budgeting • It is the interestrate that makes net present value of all cash flow equal zero. • Essentially, this is the return that a company would earn if it expanded or invested in itself, rather than investing that money elsewhere.

22. Capital Costs Saveall Equipment = $345,985 Saveall and White Water Pump Materials = $374,822 Piping, Electrical, Instruments and Structural Installation = $397,148 Engineering = $211,046 Contingency = $140,403 Equipment Life = 15 years Borrowing Rate of Interest = 15% Total = $1,469,404 Annual Savings* = $350,670 Profitability Indicators Simple Payback period 4.19 years Net Present Value: Years 1-15 = $359,544 Internal Rate of Return: Years 1-15 = 21% *Annual operating cash flow before interest and taxes Example: Recycling Project in Paper Industry

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