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

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Economics of sustainability

Economics of Sustainability

When money speaks, nobody cares for the grammar!

Economics of sustainability efforts
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

Environmental management accounting ema
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

Current env cost situation
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

Do you know all your env costs
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

The significance of env costs
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

Total environmental cost components
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

Direct costs
Direct Costs

  • Storage,handling, and disposal of residuals

    • Onsite and offsite

  • Pollution control equipment costs

    • Capital costs

    • Operation and maintenance

  • Required Permits

    • Applicationsand fees

Potentially hidden costs
Potentially Hidden Costs

  • Waste packaging and shipping

  • Insurance Premiums

  • Monitoring, recordkeeping, andreporting

  • Facility audits

  • Qualifying contractors

Potentially hidden costs cont d
Potentially Hidden Costs (Cont’d.)

  • Training and meetings

  • Environmental data management

  • Equipment and product labeling

  • Legal support

Lost opportunity costs
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

Contingent costs

Future compliance costs

Future liability costs

Future remediation costs

Unexpected shutdown costs

Property damage

Personal injury damage

Natural resource damage

Contingent Costs

Intangible costs
Intangible Costs

  • Corporate image

  • Working conditions

  • Employee morale

  • Relationship with customers and suppliers

  • Relationship with investors & shareholders

  • Relationship with regulators

Cost data gathering
Cost Data Gathering

  • Identify and define environ-mental categories and activitiesrelevant to your operations

  • Initially focus on tangible costs

Let s begin with abc
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

Profitability analysis


Costs incurred

Benefits obtained

Profitability Analysis

Profitability Analysis

  • Simple payback;

  • Net Present Value;

  • Internal Rate of Return

Simple payback period
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

Net present value
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

Internal rate of return
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.

Example recycling project in paper industry

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

Thank you very much

Thank You Very Much!