Environmental Accounting and Life Cycle Analysis

Outline

Some basic concepts Inflation Discounting Accounting

Environmental AccountingLife-cycle Analysis

Inflation

Price increases due to macroeconomic factors5% annual inflation means prices increase by

5% each year. FV = PV(1+i)

PV is price todayFV is price next year i is rate of inflation

Accounting for inflation is important if you are comparing expenditures or revenues across time periods.

Discounting

Time value of money Would you rather have $100 today? Or

$100 next month? If you know you will get $10,000 in 10

years, would you agree to take less money if you could have it now?

Discounting

$10,000 10 years from now I will give you $5,584 now and I will get

your $10,000 in 10 years.Why did I pick $5,584?PV = FV/(1+r)n

r is discount raten is number of years into the future

$5584 = $10,000/(1.06)10

Would you accept $5,584?If I give you $5,584 and you deposit it

into a savings account that earns 6% per year for 10 years,

$5584 (1.06)10 = $10,000Discounting is important if you are

comparing expenditures or revenues across time periods.

Discounting

Accounting

Credits Money in

Debits Money out

An business’s accounting system keeps track of everything that is spent and everything that is earned.

Environmental Accounting

What is spent on environmentally related inputs or outputs?

What income is generated from environmentally related inputs or outputs?

Environmental audits are conducted to discover these things and whether they are being accurately accounted for.

Conventional Company Costs Often Factored Into Decision-making

Environmental costs potentially overlooked in decision-making – regulatory, voluntary, upfront, operational, back-end, overhead, future, contingent and image/relationship costs

Social Costs

Social Costs

Evaluating Abatement Options

1. Measure baseline waste generation2. Measure baseline abatement costs3. Identify options4. Measure costs and benefits of each

option5. Discount costs and benefits to present

value6. Compare options and baseline7. Conduct sensitivity analysis

Measure Baseline Waste Generation

Describe production processLocate waste sourcesIdentify types of waste for each

sourceMeasure waste generation per

source

Measure Baseline Costs C(W)

Abatement costs (estimate inputs and input prices) Waste water (e.g., waste water

treatment plant) Waste gases (e.g., baghouse,

electrostatic precipitator) Solid waste (e.g., incineration, landfill,

hazardous waste disposal)

Measure Baseline Costs C(W)

Regulatory costs (estimate inputs and input prices) Up-front (e.g., permits, training) Operating (e.g., record-keeping,

reporting, monitoring) Back-end (e.g., decommissioning) Contingent (e.g., noncompliance fines,

accident clean-up)

Identify Abatement Options

Waste management (disposal, treatment, recycling)

Waste reduction (product redesign, good housekeeping, material substitution, process redesign)

Measure Costs and Benefits of Options

Costs Abatement costs

Investment costs (equipment, installation, training, permits)

Annual operating costs (labor, energy, materials, depreciation)

Regulatory costsBenefits

Revenue gains (e.g., recycled materials)

Discounting Costs and Benefits

PV = FVt / (1 + r)t

Choose r to reflect next best opportunity forgone (e.g., rate of return earned in next best investment)

Compare Options

Change in costs from baseline

Sensitivity Analysis

Inflation assumptionDiscount rate assumptionRisk assumption

Example

Firm that cleans used metal parts

Measure Baseline Waste Generation

New solvent

Waste disposal

Fugitive emissions

CLEANING PROCESS

4,000 gallons

3,950 gallons

50 gallons

Measure Baseline Costs

Input solvent $3.50/gallon × 4,000 = $14,000 per

yearWaste disposal

$2.50/gallon × 3,950 = $9,875 per year

Assumptions

5% inflation rateReal price increase for solvent of 1%

annuallyReal price increase for disposal of

4% annuallyDiscount rate of 6%

Baseline Costs

Year Annual Cost

Inflation 5%+real price increases

PV (using 6%)

1 23875 23875 23875

2 23875 25603.75 24154.50

3 23875 27462.89 24441.87

4 23875 29462.64 24737.4

5 23875 31614.05 25041.29

6 23875 33929.07 25353.77

7 23875 36420.63 25675.11

8 23875 39102.71 26005.54

9 23875 41990.43 26345.31

10 23875 45100.15 26694.71total 252324.00

Identify Options

1. Recycle solvent2. Use non-hazardous cleaning

method

Measure Waste Generation for Option 1

New solvent

RECYCLE

Fugitive emissions

CLEANING PROCESS

360 gallons

3,950 gallons

50 gallons

Waste disposal

3,640 gallons

310 gallons

Measure Benefits Option 1

No change in production of output, so no revenue change for output

No revenue from recycled solvent because it is used rather than sold.

Measure Costs Option 1Investment Expense ($66,500)

$40,500 Tanks, pumps, mixers $20,000 Installation (design, piping, labor) $6,000 Contingency

Operating Expense $240 Utilities $5,000 Operations labor $3,325 Maintenance $1,260 New solvent (360gallons @ $3.50

per gallon) $775 Waste disposal (310 gallons @ $2.50

per gallon) $120 for training

$8,565

Assumptions10 year equipment life, no salvage valueStraight-line annual depreciation (divide

capital cost by 10)Cost of capital is 12% annually for 3 year

equal payments5% inflation rateReal price increase for solvent of 1% annuallyReal price increase for disposal of 4%

annuallyDiscount rate of 6%

Measure Waste Generation for Option 2

New solvent

Non-hazardous waste disposal to sewer

CLEANING PROCESS

4,000 gallons

4000 gallons

Assumptions

5% inflation rateWaste solvent can be sewered at

negligible costDiscount rate of 6%

4000 gallons solvent at $4.60/gallon.$120 for training

Measure Costs Option 2

Outcome?

Comparing recycling to current practice, would save $81,317.23 over 10 years

Comparing material substitution to current practice, would save $75,702.02 over 10 years