i

1

Pollution Prevention Contacts

Stu Clark, Air Programs (360) 407-6873

Hugh O’Neil, Central Programs (360) 407-6339

Jerry Gilliland, Education & Information (3 60) 407 -6 149

Stewart Lombard, EILS, Manchester Lab (36 1) 895-4649

Lynn Helbrecht, Hazardous Waste/ Toxics Reduction (360) 407-6760

Donovan Dorsey, Nuc Waste

Tim D’Acci, Water and Shorelands

Jim Pendowski, Solid Waste Services

Carol Kraege, Toxics Cleanup Program

Dan Swenson, Waste Management Grants

Dan Wrye, Water Quality

Dan Filip, Water Qualilty

Doug McChesney, Water & Shorelands

(509) 736-3032

(360) 407-6796

(360) 407-6 104

(360) 407-7175

(360) 407-607 1

(360) 407-6459

(360) 407-6509

(360) 407-6647

Role of Procram Contact People for Pollution Prevention

Monitor and assist in the implementation of the Agency Pollution Prevention Strategy w i h your program.

Serve as a focal point for information on pollution prevention into and out of your program. Distribute information to interested parties in your program and inform other programs and/or Agency Coordinator of activities that may be of interest.

Be an advocate for pollution prevention strategies. Look for opportunities in your program.

Assist in coordinating your program’s technical assistance activities with other programs to make them as “multi-media’’ as possible. Advocate for a pollution prevention focus on technical assistance activities.

The contact person is m t h e person who is responsible for pollution prevention for herkis program. All agency staff are responsible for incorporating pollution prevention into their jobs.

... I

Department of Ecology

PUBLICATIONS

The following pollution prevention resource publications are available through our Ecology's Publication Oftice. To receive a copy please call (360) 407-7472.

BROCHURES

Empty Pesticide Container Disposal, #92-BR-8 Guidance for Growers and Commercial Applicators

Now Your Company can Save 'Ibo Things at Once, #93-BR-09 Pamphlet explains how waste reduction protects the planet and your bottom line. Includes where to go and who to call for help.

Your Home, Your Health and Pesticides Safe Handling and Disposal of Home-Use Pesticides

FACT SHEETS

Dry Cleaners- Fact Sheet #5 Pollution prevention information for the industry.

FOCUS SHEETS

Floor Drains and Waste Don't Mix, #94-117 This short publication gives information on why floor drains should be sealed, and outlines steps to follow that will keep existing drains from polluting the environment.

Used Shop Towels, #92-116 This focus sheet provides guidance on ways to handle shop towels that become contaminated with hazardous solvents.

GUIDANCE DOCUMENTS

Auto Wastes and Containers, #95-405A Best Management Practices Manual for Automobile Dealerships

Waste Processes, #95-405B Best Management Practices Manual for Automobile Dealerships

A Guide for Screen Printers, #94-l37 Best management practices for screen printers.

A Guide for Photo Processors, #94-138 Best management practices for photo processors.

A Guide for Lithographic Printers, #94-l39 Best management practices for lithographic printers.

Best Management Practices for Agricultural Chemicals, #94-189 A guide for pesticide secondary containment to contain pesticide and fertilizer products, rinsates, and washwaters to prevent them from being spilled or released into the environment.

Chlorinated Solvents: A Guide to Evaluation Alternatives for Vapor Degreasers and Cold Cleaning Operations, #93-BR-02

This guide provides a detailed cleaning alternatives chart, emissions control information and other process, cleaning and pre-cleaning suggestions to reduce solvent use.

Cost Analysis for Pollution Prevention, #95-400 -A guidance document that can help compare the total costs of a current process to the total costs of a pollution prevention altemative by using the net present value.

Hazardous Waste DO’S and Don’ts These guides offer industry specific guidelines with direct answers about how to manage the wastes generated by these industries: Dry Cleaning #91-12c, Electroplating #91-12g, and Pesticide Application #91-12d.

Hazardous Waste Pesticides Determining if Your Pesticide Waste is a "Hazardous Waste" and Pesticide Waste Reduction Guidance

Leasing Equipment for Pollution Prevention, 3Y93-BR-04 This information sheet provides guidelines for leasing pollution prevention equipment, and includes a list of leasing companies.

On-Site Distillation: A Guide for Choosing and Operating an On-Site Distillation Unit #9431

This guide is designed to help businesses in reclaiming solvent wastes. It includes: questions to ask vendors, a cost-benefit analysis guide and information on regulatory compliance.

Pollution Prevention in the Fruit Packing and Storage Industry, #94-56 This technical assistance docment identifies usable ideas related to cost incentives, pollution prevention, and waste management available to the Fruit Packing and Storage Industry, SIC code 0723.

Reducing and Managing Wastes from Catch Basins, #94-186 A guide for pesticide secondary containment. This guidance identifies typical contaminated sediments that may be regulated by the state Dangerous Waste Regulations.

Reducing ~azardous Waste: Waste Reduction Guide for the Electroplating Industry

This guide offers industry specific waste reduction techniques for specific wastes types, including: plating baths, sludge, spent solvents, paint wastes and wastewater.

Waste- Reduction for Vehicle Maintenance Shops, #92-107 This guide offers industry specific waste reduction techniques for specific wastes types, including: solvent wastes, hot tank wastes, used antifreeze, used oil, oil filters, spent batteries, shop rags, refrigerant, steam cleaning, wastewater.

REPORTS

Waste Reduction In Your Business, #89-56 This manual is designed as a tool to help businesses reduce that amount of waste they produce. It includes worksheets and checklists and explains: the benefits of waste reduction; how to start a program; how to conduct an audit; how to evaluate options and who to call for assistance.

SUCCESS STORIES

These stories outline the waste xeduction and recycling successes of state businesses. Each story examines how one business developed and implemented successful strategies.

Auto Body Restoration and Painting Chemical Manufacturing Metal Recovery Aids Compliance Recycling Cuts Discharge Vapor Degreaser Alternative

Success Stories Volume I, 11 and 111 Washington businesses share their experiences with pollution prevention planning.

Examples of Pollution Prevention Integration Mechanisms

Multimedia Inspection Checklist

Functional Area

Enforcement Various

Enforcement Water

Enforcement Water

Enforcement I Various Enforcement Various

I-

Inspection

I Enforcement

Multimedia

Inspection Various

Inspection M u It i m e d i a

Source Washington

lepartment of Ecoloa Washington

lepartment of Ecolog)

Ohio EPA

NY DEC

Massachusetts DEP

Washington lepartment of Ecology

Massachusetts DEP

Vermont Pollution Prevention and

Education Division

NY DEC

Title -t C uidel ines Settlement Language reTating to Supplemental Environmental Project

Consent Order for Steelcraft Manufacturing

__

Anitec Image - Consent Order

Standard Cover Letter for All Notices of Noncompliance

Insurance Breaks for UST Compliance

final Draft FIRST Compliance Inspection Protocol

Multimedia Inspection Protocol

L Comments Guidance on incorporating supplemental environmental projects into "innovative" settlements

Portions of the consent order that contain water- related SEP language requiring Steelcraft to prepare a naste minimization plan and to undertake specific source reduction measures. Sections of Consent Order relating to pollution xeven t ion conditions. Example Notice of Non-compliance that points out source reduction opportunities the source may have md including referrals to pollution prevention :ethnical assistance sources. jummarizes effort in the Central Regional Office that arranged for insurers to provide lower rates to 'acilities whose USTs were certified to be in :ompliance. 3ackground memo and excerpts from Massachusetts' rNaste Prevention FIRST (Facility-wide Inspections to ieduce the Source of Toxics) inspection protocol.

Zontains a brief pollution prevention section on first page.

Multimedia Inspection Protocol, including: guidance memo on implementation coversheets inspection checklists.

Page 1 of 3

Examples of Pollution Prevention Integration Mechanisms

Pilot Supplemental Permit Information Form Uan, 1993)

Functional Area

background memo an addendum to applications for new permits

(question 10)

Permit

Draft NPDES permit

Dairy Farm - NPDES and State Discharge General Permit

Air Pollution Source Permit for 3M Tape Plant

Intel's Draft Federal Operating Permit and EPA Fact Sheets on the Pollution Prevention in the Permitting Process (P4) project in which it was written.

Permit

adopt pollution prevention oriented Best Management Practices to address its discharges. Portions of a NPDES General Permit mandating or rewarding pol I ution prevention. Sections of the permit that grant modification flexibility in exchange for phased VOC emissions reductions. Included are language addressing emission cap, authority to make operational change! what changes are authorized, & toxics reduction plan. Permit grants operational flexibility in return for commitments to pollution prevention. Section of permit relating to pollution prevention conditions ar included here.

Permit

Permit

Permit

Permit

Permits

Permits

Permits

~~

Media

Various?

Various

Water

Water

Air

Air

Water

Water

Water

Source

%GGchusetts DEP Northeast Regional

Office (NERO)

3regon Department of invironmental Quality

Unknown

Washington lepartment of Ecology

M N Pollution Control Agency

Oregon DEQ, EPA Region 10

Unknown

New Jersey DEP

Wisconsin

Title I Comments P2/Multimedia Pilot Project - Summary 3f discussions with industry

e permit process an to reduce barriers to or increase incentives for P2. \Cross-media impact forms with P2 questions. Ilncludes:

1. an addendum to applications for modifications to (existing permits (question 5). IPortions of the draft permit requiring permittee to

~~~ ~

Best Management Practices / Pollution Prevention (BMP3) Conditions

NPDES Permit

Various WPDES Permits

Model permit language requiring the permittee to develop prevention-oriented BMPs and conduct a Waste Minimization Assessment. Language from a NPDES permit containing pollutior

I mevention reauirements. ixamples of pbllution prevention clauses inserted into different Dermits.

Page 2 of 3

Examples of Pollution Prevention Integration Mechanisms

Oregon Administrative Rules

Chapter 340, Division 28-610

Rulemaking 1 Air I pollution prevention components. Inclusion of a pollution prevention hierarchy in Oregon's rules implementing Title V permitting

I I

Massachusetts DEP Northeast Regional

Office (NERO)

Rulemaking I Air I prevention measures. Comments from the regulated community on how P2/Multimedia Pilot Project - Summary the permit process and guidances could be modified of discussions with industry to reduce barriers to or increase incentives for P2.

1 Rulemaking I Air

City of Olympia

Washington Administrative Code

Environmental Law Institute

I Rulemaking I Various? Per-can collection rates rise with the number of cans -

Garbage and Recycling Rates

173-305-1 10 through 240

New State and Local Approaches to Environmental Protection - Bay Area

used; recycling families get break on rates.

Washington rules creating a per-ton fee for hazardous waste generators. The Bay Area Air Quality Management District, under California's Hot Spots Act, assesses fees and

i

AQMD's toxics fee structure

I Rulemaking I Solid Waste

toxic air pollutant emissions on a sliding scale.

Rulemaking Hazardous Waste

Rulemaking (Fees)

Toxics (Air) I

process. Form that allows permit applicants to describe how it met a permit condition through pollution

Title V air permit application form CP- 708

Oregon DEQ

Page 3 of 3

I

indina P2 Information on the Internet

David Leviten Pacific Northwest Pollution Prevention Research Center

d leviten@pnl.gov Scott Butner

Shapiro & Associates, inc.

rs-butner@pnl.gov

(206) -223-1151 -

(206) -624-9190

I I I

mailto:leviten@pnl.govmailto:rs-butner@pnl.gov

T 00 - - 1s for Accessinq

+ E-Mail and Newsreaders + Gopher + Telnet + World Wide Web L Mosaic + Other Tools E-Mail and Newsreaders

Internet

+ FTP + Resource Discovery tools (Veronica, Web Crawler, etc.) + " know-bo t s"

I I I

es of P2-Oriented Mailincr Lists

+ P2TECH +info from kl - peterson@pnl.gov

+ P2Info +info from kl peterson@pnl.gov

+ Industrial Poliution Prevention +info from majordomo.an.gov

+ EPA Federal Register Notices +info from LISTSERVER@unixmail.rtpnc.epa.gov

+ Stanford NetNews Filter +info from netnews@db.stanford.edu

mailto:peterson@pnl.govmailto:peterson@pnl.govhttp://majordomo.an.govmailto:LISTSERVER@unixmail.rtpnc.epa.govmailto:netnews@db.stanford.edu

:amrJles of - GorJher-based Resources

+ P2 Projects Database +gopher://gopher.pnl.gov:2070/1/.pprc

+ P2TEC Archieves +gopher://gopher.great-lakes.net:22OO/gl~n/ma~ordo~o/p2tech

+ EPA Future Studies Gopher +gopher://futures.wic.epa.gov

+ EPA Main Gopher Service +gopher://gopher.epa.gov

gopher://gopher.pnl.gov:2070/1/.pprcgopher://futures.wic.epa.govgopher://gopher.epa.gov

lrld Wide Web Sites

+ +http://envirolink.org/envirowebs.html + EPA PIES Server (WWW version) Prototype +http://wastenot.inel.gov/pies/ + UC Berkeley Green Design Program +http://euler.berkeley.edu/green/cgdm.html

+ EPA Web Site +http://www.epa.gov/

+ Global Network for Environmental Technoloqy

Enviro-link Directory of Environmental Web Sites

-- .ere org/

http://envirolink.org/envirowebs.htmlhttp://wastenot.inel.gov/pieshttp://euler.berkeley.edu/green/cgdm.htmlhttp://www.epa.gov

Pollution Prevention Research Projects Database he Polluti- Re- vention Research Projects Database provides the latest information on pol- htion prevention research activities

and funding oppornrnitiu in the United States.

west Pollution Prevention Research Center (PPRC) in Seattk, Wash., the online data retrieval system (a "gopher sewer") is availabk f i e of charge EO users with an Intsmet service that indudes gopher or

ba& is funded by a p t from the U.S. apartment of Energy, and in-kind support is provided by

comprehensive and up-to-date in- formation available - it cumnt ly includes more than 200 projecu, and wil l continue to gmw as more research is conducted.

Managed by rhe pacific Narth-

-

World Wide Web 'Ihe data-

Pacific Northwest Laboratory. The database indudes the most

indudes information on current and pending RFPs related to poh- tion prevention. The PPRC plans to track the prop- of thcse

RFF' stage to implemeniation and completion, and incorporate the - multsintothedatabasc. .

base is beneficial to industry repre- sentatives, technical assistance pro- viders, researchers, hnders of pollution prevention activities, and others. For example, industzy r e p resentatives and technical assis-

obtain geneml infimnitioq on. cutting-edge approaches to envi- . ronmenral problems, and to'icknti-

professionals with technical expertise in specific SubjM areas.

pollution prevention activities access the database to learn about ocher projects, which helps mini- mize redundant researdl efforts. The database also gives them ideas

projecu as they advance fiord; the

The R m h projecw Data-

tance providcn use the database to

Researchers and funden of

It also offers a Request b r Pro- pod (RFP) Clearinghouse, which

for ocher projects, H well as infor- mation on individuals gr organha-

The following information is pro- vided for users to wss the gopher:

1. URL:gopher://gopher.pnl.gov

2. s" (or host): gopher.pnl.gov :207O/l/.pprc

port: 2070 selector. l/.pprc

S. The gopher is registered with the University of Minnerota's

Computer and idonnation Ser- vices Copher Consultant Service. Users can locate the gopher by choosing the "Other Gopher and Motmation Servers" option in the University of Minnesota's gopher, and then looking for "Pacific NW Pollution Prevention Research Center" under the list of gophers registered for the State of Washington.

Prow name 0Abriefsu"cr)r - ' Researcher contact k&x" Funder informatidm

~Startandfinthdates Approximate prow cost Publications

tions with which to coordinate funrneffbns. -

included in thedatdskarc those conducted by state and fnleral governmcbt agencies, and uniwr- sities and nonprofit maarch iasti- tutions. Other sources of infbrma- tion arc fiom local government and private industry research.

Users can search records using keyword or menu-based sevching strategies, and retrieve documents

The ma..* i t b e projects -

to their computer systems. projects included m the data-

base meet the following criteria: RoWu with coplipkcion dates after Jan- 1,1990

future compktion dates). Projects focuring on pollution preven tion or dosely related topics. - Project results in the genera-.

If you are working on a project

(including p r o w with

~

tion of new information.

and would like it included in the database, or if you need more information. contact David Lcviten at the PPRC at 206-223- 1 15 1 or d-leviten@ccmail.pnl.gov.

http://URL:gopher://gopher.pnl.govhttp://gopher.pnl.govmailto:d-leviten@ccmail.pnl.gov

3 Spring 1995

d(

Looking for Hard-To-Find Pollution Prevention Information? Try PZTECH David S. Liebl Solid and Hazardous Waste Education Center, University of Wisconsin

Many have had the experience of working with a manufacturer on a well-defined waste reduc- tion project, only to be stymied by a lack of .information that could help us solve the prob- lem. Whether it was a new technology, an expert on a given topic, or a case study to prove our point, once we had searched our libraries and talked with our colleagues we often were forced to give up the chase and move on to other problems.

Now there is a new resource that can be used to plug in the combined experience of over one hundred other pollution prevention providers to help us with those difficult prob lems and hard to find information. That n& resource is P2TECH. which the Roundtable's Information and Technology Transfer Workgroup has helped develop. PZTECH is available to all Roundtable members with access to lntemet

P2TECH is an email listserve device that functions as an information sharing forum for pollution prevention technical assistance providers. The goal of FZTECH is to foster infor- mation exchange by making it easy for technical assistance providers to communicate with each other in searching for solutions to the many problems encountered while providing technical assistance to industry.

Here is how RTECH works: If you have been searching for some tekhnical information or expertise without success you can, by sub scribing to P2TECH. post a question describing your problem to the email address:

p2techQgreat-lakes.net

Your question will automatically be forwarded to the other listserve subscribers (in this case Over one hundred other pollution prevention technical assistance providers from around the world) and will appear as an email message on their computer. Any of the @TECH subscribers

that can answer your problem or can steer you in the right direction can respond to you simply by sending a message directly to RTECH. Their responses will also be forwarded to all the other subscribers so that everyone can follow the dialogue.

The questions and responses that take place on P2TECH are stored in an electronic archive and can be reviewed at any time. The contents of the archive are organized by topic headings which contain all the discussion and information relevant to that topic. This allows new users to review the information and pre- serves unsolved problems to be solved at a later date. The archive is kept on an lntemet server that is accessible by several client software packages including ftp, gopher, and mosaic. Here is the connection, host, and path informa- tion for accessing the P2TECH archive:

go phec//go pher-great-

http://gopher.great-

f&ftp.great-lakes.neVpub/great-

lakes.net:2200/glin/majordomo/p2tech-archive

lakes.n~~~/l/glin/majordomo

lakes/glin/majordomo/p2tech-archive

P2TECH intends to serve the P2 technical assis- tance community. Bridges have been built to 000, DOE and NIST in such a way that the forum should not be overrun with basic questions on pollution prevention. @TECH is intended primarily for discussion of technical questions. The list server will also accept infor- mation that will improve the level of collabora- tion among the subscribers such as: identifying significant new technical assistance resources, requests for proposals. or announcements of collaborative research or training projects.

To subscribe to P2TECH. contact the administrator: David S. Liebl University of Wisconsin-Solid and Hazardous

liebl@epd.engr.wisc.edu Waste Education Center

Small Business Assist a nc e Program Profile: North Carolina

Debbie 0'8rien National Pollution Prevention Roundtable

"Small business owners don't care what box you're in, only the government cares about such internal squabbles. "

The foregoing quote is the response Edythe McKinney of North Carolina's Small Business Assistance Program (SBAP) gave when asked how her 507 Clean Air Act program interacts with the NC Office of Waste Reduction (OWR), which is muiti-media in nature and gives pollu- I . tion prevention (p2) technical assistance to husi- nesses. The synergy between the two offices is an excellent example of how P2 programs and '

SBMs can work together to gwe small business- es comprehensive multi-media compliance assis-' tance and expand the resources of two small . . programs to better serve the small business . community.

The North Carolina SBAP and OWR pro- grams have a great deal in common that enables them to work together and to better utilize their resources. Both programs are non-regulatory, and provide multi-media technical advice free of charge to small businesses in North Carolina. Furthermore, the two shops often make joint site visits. If a request for a site visit is initiated in the SAP. small businesses benefit from the P2 housekeeping advice OWR gives, according to McKinney. These P2 tips often save the small businesses money, giving them a favorable impression of the government's fiscal concem for the small business' well being. Altematively, if a site visit is requested of the P2 office and there are no known air problems, McKinney will o f t y accompany the OWR on their site visit for educa- tional purposes. Eventually, both programs leam about the others' expertise and can subsequentb represent one another in a variety of forums. This allows both shops to augment the scope Of their impact on the state's businesses and the technical and compliance assistance that is given.

-

~

- ~

They have also developed a cross-referenc- ............................................................................ -*.t.-- continued as S W - page 5 t h , z -

http://p2techQgreat-lakes.nethttp://gopher.greatmailto:liebl@epd.engr.wisc.edu

OF TOTAL

An exploration of the In 1991, Total Cost Assess- when deciding whether to ment (TCA) made its debut as p~*pfoducfh hferface make P2 (and other environ- an approach to evaluating the mental) investments. Al- true benefits of industrial pollution prevention (P2) though TCA by no means ensures u priori that all projects.' The underlying premise of the early work P2 projects will beable to compete successfully with on TCA was simple: because pollution prevention altemative uses of capital, it can level the playing projects often produce financial savings to the firm field by including in the evaluation certain less that are hidden, neglected, or misallocated, and tangible (and often neglected) cost and benefit because such benefits often materialize beyond a items such as liability, future regulatory compli- three- to five-year time horizon, conventional ance, marketable emissions credits, employee project financial analysis frequently fails to pro- health and safety insurance benefits, and green vide a clear, unbiased picture of the economics of market share. such projects. The result is that profitability analy- As TCA methods have continued to evolve, ses of P2 projects often fail to reflect a level of value and cost inventory and allocation practices have that can compete successfully with altemative uses been refined, another and potentially more pow- of capital. This may be leading to systematic erful use of TCA has emerged. This application fo- underinvestnient in P2 projects, to the detriment cuses on the links between pollution prevention of both firms and the environment. projects and "production flexibility"-that is, what

Various studies have demonstrated how TCA products a manufacturing firm makes, how much can correct these bi&s through enlarging the in- it produces, and (in the case of multisite opera- ventory of costs/benefits that are considered, im- tions) where the production takes place. proving allocation of costs, lengthening time ho- rizons, and selecting multiple profitability indica- tors? Collectively, these studies reveal that the original premise behind TCA is valid-i.e., that firms often do not act in their own best interest

Deborah E. Savage Allen 1. White

This article shows how TCA can make a major contribution in shifting environmental projects out of their traditional classification as must-do, compliance-driven projects and move them up the corporate investment hierarchy to a profit-add- ing-and even market-expanding-classification. In some cases, by showing how P2 projects can improve production flexibility and efficiency (both of which are integral to long-term competitive- ness), TCA may allow P2 projects to shed their “en- vironmental” label altogether and become part of the firm’s overall quality management process. This direction marks the next frontier for Total Cost Assessment.

Elements of Total Cost Assessment (TCA) TCA provides a way to perform a comprehen-

sive and balanced financial analysis of P2 and other environmental projects. TCA has four specific com- ponents designed to eliminate some of the biases against environmental projects that are embedda in more conventional capital budgeting practices:

comprehensive costbenefit inventory, appropriate cost allocation, profitability indicators that take into account

long analysis time horizons. the time value of money, and

Each component is discussed briefly below. A comprehensive costbenefit inventory is a

critical component of financial analysis, particu- larly for environmental projects. For example, a P2 project that reduces the use of a hazardous substance as a raw material, while correspond- ingly decreasing hazardous waste generation from the manufacturing process, can affect not only waste disposal costs, but also less-tangible items such as corporate or product image, and waste-related liabilities (such as Superfund liabil- ity). These types of items often are omitted from project analyses because they are probabilistic,

8 I Wlntar1994-95 I P o l l a t i o n P m v o a U o a ~ ~

difficult to quantify, or both. Other relevant items may be omitted because

of inappropriate cost allocation within the firm’s accounting system. For example, environmental management costs, such as labor time for internal waste handling (e.g., manifesting), spill reporting, or compliance planning often are retained in gen- eral facility overhead accounts rather than being allocated to the process or product that is actually responsible for the activity. Even when these costs later are allocated to processes/products for pur- poses of product pricing or capital budgeting, the basis for allocation (for instance, amount of raw materials used per production line) may not ap- propriately relate the overhead costs to the activ- ity generating the cost.

The inventory and allocation components of TCA are intended to include as many relevant and significant items in the analysis as possible. Start- ing with the universe of potentially relevant costs and benefits (as set out in Exhibit l), each item is considered for relevance to the specific project at hand. Some items (such as capital costs and basic operating, labor, and materials costs) are obvious and easily quantifiable. In the case of other rel- evant items, more effort may be required to track down the information necessary to attach a dollar figure to the activity.

Although an attempt should be made to evalu- ate all costbenefit items (including less tangible ones, such as liability), the same level of analysis is not necessarily appropriate for every item. In some cases, the analysis of a particular item will go no further than simply determining that the item is not significant enough to warrant the time and effort that would be needed to rigorously quan- tify it. It is important to determine not only whether a particular costbenefit item is relevant to the analysis, but also whether the item is sig- nificant in comparison to more readily quantifi- able capital and operating costs.

The last two components of TCA-time-value

Deborah E. Savage and Allen L. Whae

4

Exhibit 1. Inventory of Potential CostslBeneflts

k p l b l casts

Purchawd Equipment Equipment cost

(e.g., equipment for processes. monitoring, preparednesdprotection, safety, storage and materials handling, laboratoty/analytical uses)

Delivery Sales Tax Insurance Price for Initial Spare Parts

Materials Piping Electrical Instruments Structural Insulation Other Materials

(e.g., painting, ducting)

WIny @SblnS 8 d &nmCfhB General Plumbing Electricity Steam Water (e.g., coding, process) Fuel (e.g., gas, oil) plant Air Inert Gas Refrigeration sewerage

S h Pnpantlon (lab06 Supe?vhion, Materials) in-house ContractorNendor/

consultant Fees Demdition and Clearing Old Equipment/

Rubbish Disposal Grading, Landscaping Equipment Rental

ConstructioMnstaliation (Labor, Supewkion, Mateflals) In-house ContractorNendorl

Consultant Fees Equipment Rental

P/anningEngineedng (Labor, Supervision, Materials) In-house PlanningEngineering

(e.g., design, drafting, accounting)

Con tractorNendorl Consultant Fees

Procurement

Statt-upfltainlng (Lab06 Supetvislon, Materials) In-house ContractorNendorl

Consultant Fees TrialsNanufacturing Variances Training

Permitting (Lsboc Supetvision, Materials).

ContractorNendorl Consultant Fees

Permit Fees

WotWng Capltal Raw Materials Other Materials and Supplies Product Inventory

contingency

Sahge Value

In-house

Oprmtlng Costs

Direct Materials Raw Materials

(e.g., wasted raw materials costdsavings)

Solvents Catalysts Transport Storage

Direct Labor Operating

(e.g., worker productivity changes)

Supervision Manufacturing Clerical InspectionlQAIQC

utiilties Electricity steam Water (e.g., cooling, process) Fuel (e.g., gas, oil) Plant Air Inert Gas Refrigeration Sewerage

Waste Management (Lab04 Supewlsion, Materiais) Pretreatment On-site Handling Storage Treatment Hauling Insurance Disposal

Regulatory Compliance (Labor, Supewislon, Materiais) Permitting Training (e.g., Right-to-Know

training) Monitoringhnspections Testing Labeling Manifesting Record keeping Reporting Generator F M a x e s ClosurePostclosure Care Value of Marketable Pollution

PermiWCredits (e.g., SO,) Avoided Future Regulation

(e.g., CAA amendments)

Insurance

Futufe Llabiilty Fineflenalties Cost of Legal Proceedings

(e.g., transaction costs) Personal Injury Property Damage Natural Resource Damage Superfund

Revenues sale of Product

(e.g., from changes in manufacturing throughput, market share, corporate

profitability indicators and long analysis time ho- rizons-are meant to ensure that the longer-term costs and benefits of pollution prevention and other environyental projects are captured in the analysis. Profitability indicators, such as net present value (NPV) and internal rate of retum (IRR), use discounting to appropriately value out-year cash flows in terms of present-year dollars; by contrast, simpler indicators, such as payback, neglect both the time value of money and out-year costs/ben- efits, both of which may have a significant impact

on the analysis. A long time horizon (e.g., 10-15 years) further enables the analysis to capture costs, savings, and revenues that occur in investment out- years, such as recurring waste disposal savings or a future avoided liability savings.

Case Study: Showing How P2 Can Increase Production Flexibility

To date, TCA (and other capital budgeting methodologies with similar goals) generally have been confined to single-project analyses. These

New Applications of Total Cost Assessment

I

efforts have been focused on demonstrating the value of the approach and refining the various as- pects of methodology implementation. Collabo- rating firms generally have sought to improve the analysis of particular projects of interest and to

understand internal barriers to balanced environmental capital budgeting. Little previous work has applied TCA as a broad ana- lytical tool that links environ- mental projects with broader fa- cility, division, and corporate- wide issues. The following case study takes a step in this direc-

tion, showing how TCA can illuminate the criti- cal-but largely unexplored-connection between environmental projects and the traditional firm goals of expanding production capacity and in- creasing production flexibility.

TCA can illuminate the critical connection between environmental projects and traditional f i n goals.

Project background This study, which was completed in the sum-

mer of 1994, was performed for the chemical manufacturing operations of a multinational, high technology firm. The project involved the analy- sis of the costs and benefits of completing a dosed- loop, multipurpose batch still solvent recovery sys- tem that had been halted during construction be- cause of cash flow constraints. At the time of the study, approximately six million dollars had been spent on this state-of-the-art system, including costs for building construction and equipment purchases. An additional four million dollars was needed to complete the system as originally de- signed, primarily for equipment and control com-

to uncertainty in the potential savings that could be realized from reduced raw material purchases and waste disposal fees, two of the primary monetizable benefits of locating a recovery still on

cant construction downtime that had elapsed, ren- dered the firm’s initial profitability analysis invalid. Thus, the objective of our study was to revise the original financial analysis of the solvent recovery project before returning to management for a de- cision on approval of still completion.

Adding to the complexity of the analysis were multi-facility production planning issues, company and government hazardous waste reduction goals, and air emission regulatory issues. For example, the production facility at which the batch still had been partially constructed had no other solvent recovery capacity on site. A second production site in the same region had several operating recovery systems, but all of them were running at full ca- pacity. This limitation on available solvent recov- ery capacity had clear production implications for process lines that used expensive raw materials or that generated solvent wastes deemed too expen- sive to simply ship off site for disposal. In addi- tion, govemment regulations restricted shipment of wastes between the two sites for solvent recov- ery, further constraining the company’s produc- tion planning flexibility.

Having a batch still system on site would also affect the company’s ability to meet both internal, company-wide hazardous waste reduction goals, as well as similar state-mandated goals. The plan to hard pipe the batch still unit-i.e., to make the system an integral, closed-loop part of the produc-

site. This factor, in conjunction with the signifi- -

-

ponents. \ tion processes on site-qualified the solvent recov-

for capital funds, the construction delay had lasted der both the stringent state law requirements and several years. During this time, facility production the company’s own strict guidelines. plans changed, clouding the question of how many The fate of process line air emissions was also on-site waste streams would be suitable for still affected by the solvent recovery capacity at indi- recovery in both the near and long term. This led vidual sites. For example, one of the waste streams

,Because of stiff competition within the firm ery system as a form of pollution prevention un- - ~

__

Deborah E. Savage and Allen L. White

originally destined for the batch still under con- struction was the vapor recovery stream from one of the major production lines at the site. Although the firm recently had reached an air emission com- pliance agreement with the state without the ben- efit of batch still recovery of process vapor emis- sions, the negotiation experience had convinced company personnel that they needed to provide for future air emission and hazardous waste treat- ment flexibility in the face of complex and chang- ing regulations. The batch still was viewed as an important component of such flexibility.

Proponents of the solvent recovery project within the firm were comfortable revising certain basic capital and operating cost estimates them- selves. However, they felt it necessary to seek out- side assistance in quantifying certain less tangible items that they viewed both as potentially impor- tant components of a comprehensive project analy- sis and as key points in presenting the project to upper management. Thus, we were asked to revisit the original project analysis with a particular fo- cus on identifying and-if warranted and feasibie- quantifying less tangible cost items.

Project approach We approached the project analysis with a TCA

focus in order to ensure that all the relevant com- ponents would be included-that is, a comprehen- sive cost/benefit inventory, accurate allocation of costs to the production processes involved, use of financial indicators that take into account the time value of money, and a long analysis time horizon. In this case, the firm’s environmental staff re- quested a special focus on the costbenefit inven- tory; cost allo&tion was investigated only as nec- essary to ensure a comprehensive cost inventory.

Our use of appropriate financial indicators (such as NPV and IRR) and a long time horizon (in this case, 12 years) was consistent with previous practice in the firm and in many other large com- panies. The time value of money was particularly

relevant to this project because of the significant construction delays that had occurred. Tellus’s P2/ FINANCE financial analysis software was modified to handle both the time delays and the fact that future capital expenditures would need to be made regardless of whether the firm chose to complete or cancel the project. Project completion would require new capital expenditures on both build- ing and equipment, whereas canceling the project permanently would require capital expenditures to bring the existing building up to safety code.

In addition to these one-time capital costs, we considered other one-time costsbenefits. For the project cancellation option, we included tax write- off and depreciation of past capital expenditures, as well as a revenue stream from selling some of the previously purchased equipment internally. For the project completion option, we depredated all capital costs for tax purposes as in any normal prof- itability analysis.

During the process of reviewing the costs and benefits included in the company’s original prof- itability analysis, several waste-related cost items that had been omitted from the previous analysis were identified as relevant and potentially signifi- cant enough to warrant further investigation. The more easily quantifiable items included internal waste manage- ment costs, such as annual recy- cling permit costs, labor costs for waste shipment manifesting, and labor and travel costs for annual inspection of the vendor facili- ties used for off-site waste dis- posal. As cost estimation proceeded, it was deter- mined that these costs, although relevant to the analysis, were not significant enough to materi- ally affect the profitability of a project that had capital costs in the millions of dollars. Thus, it was decided not to spend time further q u a n w g these costs-a decision that demonstrated the value of step-wise screening of items on the costmnefit

One issue of particular interest was the potential

importance of waste- related liabilities.

New Applications of Total Cost Assessment

I Mlblt 2. Facility Waste Stream Flow Diagram Stream A

component 1 - 45% component 2 - 48% component 3 - 5% component 4 - 2%

component 5 - 70% component 6 - 20% component 7 - 9% component 8 - 1 YO component 9 - trace

component 1 component 7 component 5 component 7

component 1 IS distilled and either

sold as is or used on-site to manufacture paint stripper.

idortl I

component 4, a sludge, is mixed with

thinners and other sludge and sent to a

U.S. cement kiln

Nonbeneficial incineration at a Canadian, facility.

I

Incinerator ash is

Canadian landfill. DESTR. BURNED CANADIAN LANDFILL

U.S. Vendor #1

4 Nonbeneficial

incineration at a U.S. facility.

i Incinerator ash is

deposited in a US. landfill.

U.S. LANDFILL

RE-USED US. KILN

inventory in order to home in on those which are critical to informed management deasion-making.

One issue of particular interest to the firm’s environmental staff was the potential importance of waste-related liabilities-something that is vir- tually always a prominent issue in TCA. The im- plications for project profitability were investigated by tracking all of the waste streams designated for the batch still from production to fmal disposition. In this case, “final disposition” included a num- ber of different activities, depending on the waste stream: treatment or recovery by multiple, sequen- tial vendors; and landfill disposal in both the

-United States and Canada. The waste stream flow diagram that was con-

structed from this analysis is shown in Exhibit 2. -This diagram was generated in order to ensure that there would be systematic consideration of all the waste-handling steps that occurred after a waste stream was removed from the facility (and thus from direct supervision by firm personnel). Al- though many of the company’s personnel were familiar with some aspects of waste stream disposal and final fate, only the hazardous waste manager

was fully aware of the multiple layers of handling and treatment illustrated in Exhibit 2. As the sche- matic was constructed, it was possible to pinpoint and pay particular attention to links in the waste handling chain where future disposal availability, cost, and liability were of potential concem. For example, issues relating to the intemationd ship- ment of hazardous waste, the reliability of current vendors, the future availability of cement kiln treat- ment in a tightening regulatory environment, and liability under Superfund were considered.

Many of the issues considered were not deemed significant enough to have a major im- pact on the final evaluation of project options. However, generation of the waste stream flow dia- gram did allow identification of one less tangible, waste-related cost item that was relevant, quanti- fiable, and significant: waste disposal availability and the associated cost implications. One of the facility’s waste streams (designated Stream A) was being handled by a waste vendor that had had safety problems in the past. Although the vendor allegedly had solved these problems, the firm’s hazardous waste manager felt it was likely that the

-

~

-

Deborah E. Savage and Allen L. white

firm would have to turn to an alternative vendor in the future in order to minimize potential liabil- ity and raise the firm’s internal “comfort level.” For the waste stream in question, the only alterna- tive treatment method that was currently available (or would be available in the foreseeable future) was a cement kiln. It was conservatively estimated that cement kiln treatment would cost eight times as much as the current disposal option.

Through this process, the list of relevant cost items was narrowed down to those that had a sig- nificant impact on batch still profitability. In ad- dition, certain unresolved production issues were more clearly linked to the solvent recovery project. Among these issues were production technical fea- sibility, production volume planning, and multi- facility capacity and flexibility needs.

Financial analysis scenarios The final financial analysis of the batch still

project evolved into a series of scenarios that pin- pointed critical, unresolved management issues and showed how altemative decisions would af- fect the fmanaal viability of the project. Five of the profitability scenarios are illustrated in Exhibit 3 and discussed briefly below.

The Base Case scenario conservatively esti- mates how profitable the batch still would be if only three waste streams cur- rently generated on-site (not including the air emission recovery stream) were re- covered via the proposed still. These waste streams include Stream A, along with two other waste streams designated B and C. The scenario results in a nega- tive NPV of approximately $1.4 million- an outcome that clearly would not war- rant batch still completion.

The next three scenarios build on the Base Case, but are independent of each other-that is, the profitability figures are not cumulative. The Streum A to Kiln sce-

nario itlustrates the effect that an increase in the cost of disposing of Stream A would have if, as feared, the relationship with the current waste ven- dor failed and the firm were forced to send the waste stream to a cement kiln. Factoring in the potential increased cost of disposing of Stream A effectively makes the batch still more attractive since it increases the annual waste disposal sav- ings that would accrue if the firm could avoid dis- posal by sending the waste to the on-site still for solvent recovery. The IRR for this scenario (8 per- cent) is double that of the Base Case scenario (4 percent).

The Reduced Capital scenario illustrates how scaling back the original state-of-the-art design of the batch still by eliminating noncritical compo- nents could reduce the future capital outlay nec- essary to complete the project. For example, hav- ing more of the installation work done in-house (rather than by a contractor) and eliminating part of an expensive automated control system purchase (among other items) would reduce planned future expenditures by approximately two million dol- lars. This reduction in required capital results in an I R R that is almost triple that of the Base Case Scenario (11 percent versus 4 percent).

However, as illustrated by the Stream X scenario,

Exhibit 3. Batch Still Financial Analysis Scenarios Wpicai pasi production schedule Anamis time period: 12 pats

Scenario IPV IRR Payback

Base Case (Streams A, 8, C)

Stream A to Kiln (Streams A, B, C)

Reduced Capital (Streams A, B, C)

stream x (Streams A, 8, X)

-$1,441,000 4% 9.6 years

-$756,000 4% 7.2years

-$88,OOO +11% 5.7years

+$2.066,000 +21% 3.6 years

Combination of Reduced Capital and Stream X +$3,419,000 +33% 2.1 years (Streams A, B, X)

I

New Applications of Total Cost Assessment a Pollution Pmnt lon M e w / Winter 1994-95 I 13

the major determinant of project profitability turns out to be related to production planning. At the time of the study, the firm was purchasing a major inter- mediate product from another manufacturer but was considering producing this product itself, either at the facility that would house the batch still or at its other nearby production site. Taking into consider- ation the several waste streams that would result from producing this product (cumulatively desig- nated Stream X) significantly affected the financial analysis of the batch still. When Stream X replaced Stream C (because of still capacity) as batch still in- put, the IRR increased from approximately 4 per-

Finally, a Combination scenario both assumes that the still will be completed with reduced capi- tal expenditures and includes consideration of Stream X. This scenario produces an IRR of 33 per- cent, which was deemed competitive wen in the face of intense competition for capital from other potential projects within the firm.

The financial analysis scenarios clearly illus- trated that the viability of the batch still project depended in large part on a production decision- that is, the decision on whether to produce the intermediate product in-house. And the viability of in-house production in turn depended on the

batch still decision-company staff did not consider it feasible to adopt the new production pro- cess in the absence of a system that could handle the waste from such production (Stream X) and recover the solvent for reuse; without such a system, costs for waste disposal and raw materials would make in-house production

too expensive. Thus, there was a critical link be- tween a pollution prevention project (the batch still) and broader questions of production planning capacity and flexibility. It is just this sort of con- nection that TCA helps illuminate.

cent to 21 percent.

There was a critical link between a pollution prevention project and broader questions of production planning capacity and flexibility.

After reviewing the financial analysis sce- narios, the firm’s environmental and production staff became convinced that the batch still solvent recovery system played an integral role in produc- tion planning. As a result, they now almost unani- mously support the batch still project and are pro- ceeding to resolve the remaining production un- certainties, before making a final presentation to corporate management in support of batch still completion.

Conclusion In the case study set out in t h i s article, TCA

components such as costbenefit inventory and cost allocation were important to developing a comprehensive and defensible financial profile of the pollution prevention project under consider- ation. However, making a truly accurate financial analysis of the project required applying TCA as a broad analytical tool that could link the project with wider corporate issues. Here, the decisive fac- tors in determining project viability involved chemical production-what and how much would be produced, and where production would take place. As TCA was used to construct altemative scenarios that gathered waste-generating activities at a single site and brought new products in-house, the profitability of the proposed P2 technology looked increasingly attractive.

Clearly, production issues could prove to be decisive in many profitability assessments-but their importance cannot be appreciated unless the ’ assessment adopts a sophisticated TCA approach. When used in this way, TCA can serve as a very valuable decision support tool for management. And it can help move pollution prevention projects up the financial hierarchy toward profit-adding status-where many P2 projects rightfully belong.

For Mom Information For more information (including information

on the P2FINANCE financial analysis software

14 / Winter 1994-95 I Pollutloa Pfweation -1- Deborah E. Savage and Allen L White

referenced in the text), contact: Deborah E. Savage or Allen L. White Tellus Institute 11 Arlington Street Boston, Massachusetts 021 16-3411

~ Telephone: (6 17) 266-5400 Fax: (61 7) 266-8303

Notes ' 1. See A. White, M. Becker, and J. Goldstein, "Total Cost As- sessment: Accelerating Industrial Pollution Prevention Through Innovative Roject Financial Analysis, with Applications to the Pulp and Paper Industry," prepared by Tellus Institute for US. PA, Office of Pollution Prevention, December 1991; A. White, M. Beck and J. Goldstein, "Alternative Approaches to the Fi- nancial Evaluation of Industrial Pollution Prevention Invest- ments," prepared by Tellus Institute for the New Jersey Depart- ment of Environmental Protection, Division of Sdence and Research, November 1991.

TCA is conremed only with costs to the company itself. Unlike 'NI cost accounting," it does not consider both inter- nal and external (or social) costs. 2. See A.L. White, M. Becker, and D.E. Savage, "Environmen- tally Smart Accounting: Using Total Cost Assessment to Ad- vance Pollution Prevention," Pollution Prevention re vie^, Vol. 3, No. 3, Summer 1993; A. White, "Accounting for Pollution Pre- vention," &PA joumafl July-September 1993, pp. 23-25; A. White, N. Talbot, and D. Savage, "Internat Cost Accounting: Concepts, Cases, and Recommendations for the New Ontario Hydro," prepared by Tellus Institute for the Full Cost Account- ing Team, Task Force on Sustainable Energy Development, Ontario Hydro, November 1993; M.L. Kennedy, "Getting to the Bottom Line: How TCA Shows the Real Cost of Solvent Substitution," Pollution Revention Revim, Vol. 4, No. 2, Spring 1994.

Deborah E. Savage, Ph.D., and Allen L. White, Ph.D., are, respectively, research associate and director in the Risk Analysis Group at Tellus Institute in Boston, Massachusetts. The authors thank Angela Dierks of Tellus for contributions to this article.

New AppllcaUons of Total Cost Assessment

Allen L. Whfte, Monlca Becker. and Deborah E. Savaae

Table 3. Summary of Financial Data for White Water and Fiber Reuse Project

Costs and Savings Company Analysis TCA

Total Capital Costs $1,469,404 $1,469,404

Annual Savings (BIT)a $ 350,670 $ 911,240

Financial Indicators Net present value-years 1-10 $ 47,696 $2,073,607 Net present value-years 1-15 $ 360,301 $2,85 1,834 Internal rate of return-years 1-10 17 % 46 % Internal rate of return-years 1-15 21 % 48 % Simple payback bears) 4.2 1.6

Annual operating cash flow before interest and taxes.

proven technology without inclusion of some of the more indirect, less tangible financial benefits that may well occur with more complex and hazardous production technologies.

'

Looking Ahead

how TCA affects profitability depends on several conditions: Aside from the specifics of our white watedfiber reuse example,

The degree to which hazardous materials management and liability costs are part of each process; The extent to which savings actually materialize through, for example, reallocation of unneeded labor from waste manage- ment functions to new, productive activities; The extent to which company practices already have moved in the direction of TCA;

. The degree to which a proposed project yields a marketable green product or company image; and The degree to which alternative technologies generate new costs that may neutralize, or even exceed, cost savings associ- ated with shifting away from an existing process.

.

A priori, TCA does not ensure profitability for a pollution preven- - tion project. Depending on project specifics, projects can range from dramatically positive results (as shown above), to those with positive but modest advantages, to those in which NPV and IRR actually diminish when applying a TCA approach. Of course, even in the latter case, diminished profitability is not synonymous with social undesirability. In other words, it is entirely possible that a pollution prevention project may yield net positive benefits to society as whole,

~

~

Pollution PreoentIon Reolew/Summet 1993

Env~nmentally Smart Accounting: Using Total Cost Assessment To Advance Pollution Prevention

The dramatic dffferew in the analyses of the profltabU1ty for thk project using thecompany and “ethodsccurbe traced to t h e m and total omlssion of several key reductions in direct and indirect costs.

An increase in labor cost of approximately $3,120 a year is expected for operation of new equipment.

Table 2 presents a comparison of the company versus TCA cost inventory. The company entries reflect those normally included by the firm in a project justification analysis. The “P‘ in Table 2 indicates costs that are partially included in conventional analysis. The TCA column incorporates a more expansive inventory based on discussions with the firm regarding cost items that rightfully belong in the analysis, but are normally omitted. To ensure comfort on the part of the collaborating company, only the most obvious and significant omissions were highlighted. This led to results that most likely err on the conservative side (lesser TCA effect) than a more expansive analysis incorporating, for example, regulatory compliance costs, might show.

In this white water/fiber reuse project, a number of cost items appear in the TCA column that are either partially or entirely omitted from the company analysis. These include savings in raw materials costs from recovev of fiber and filler; a savings in fresh water usage and costs, as well as associated fresh water treatment and pumping; a savings in energy use for fresh water heating, and a savings in wastewater pumping and treatment fees.

The dramatic difference in the analyses of the profitability for this project using the company and TCA methods can be traced to the partial and total omission of several key reductions in direct and indirect costs. Table 3 shows the financial impact of these omitted savings by comparing the company and “CA profitability analyses. A project costing $1.47 million using the company analysis yields an annual savings of $350,670 versus $911,240 in the TCA analysis. NPV over a fifteen-year time horizon jumps from $360,301 to $2.8 million. The IRR over fifteen years increases from 21 percent to 48 percent. At the same time, the payback period declines from 4.2 to 1.6 years.

Neither the existing nor alternative technology generates Re- source Conservation and Recovery Act (RCRA) wastes. Thus, the project does not affect wastestreams that require on-site manage- ment or disposal, nor does it affect any regulatory compliance activi- ties at the site; therefore, the financial analysis does not include costs for these activities. Thus, unlike projects that potentially reduce or eliminate the use of hazardous materials, this project produces no significant regulatory compliance savings. In addition, no impacts on revenue are expected, because neither product quality nor production rates will be improved. A project of this nature is also unlikely to affect product or company image in a way that reduction or elimination of a major air toxic (e.g., volatile organic compound emissions from solvent-based coating processes) might achieve. Finally, no tangible impact on avoided future liability is expected for this project.

In sum, the TCNcompany differential in profitability occurs in a pollution prevention project involving a relatively straightforward,

Pollutbn Preuentfon Reulew / Summer 1993 257

Men L. White. Monlclr Becket. and Deborah E. Savage

. ..

Table 21. Overview of Coet Indudon by Company and TCA for Whitewatew/Fiber Recycle Project

Capital Costs Purchased equipment X Materials (e.g. piping, elec.) X Utility systems X Site preparation X Installation X Engineer inghntrador X Start-up/training Contingency X Permitting Initial chemicals Working capital Salvage value

Operating Costs R-

Raw materials/supplies Waste disposal Labor Revenues-general Revenues-by-products Other:

transportation Indirect Cos@ b

hauling storage handling waste-end fees/taxes hauling insurance

Waste management:

P

X

Utilities:

water energy P

sewerage (POTW) X Pollution controVsolvent recovery Regulatory compliance Insurance Future liability

X X X X X X

X.

x : X

X X X

X = Cost(s) Included P = cost(s) Partiallp Included * W e use the term "direct costs"here tomean costs that are typically allocated to a

product or process line (i.e., not charged to an overhead 8ocount) Md are trpicdy included in project financial anal-. We use the term "indirect costa" here to mean costa that are typically charged to an overhead account Md typically not included in project fmancial analysis.

256 Pollutton Preuentfon Reotew/Su"er 1993

Envlron-mentally Smart Accountlng: Uslng Total Cost Assessment To Advance Pollution Preventlon

The company analysis consists of the 1989 capital estfmate (@usted for matlon and escalated by 12.5 percent) and only those operating costs and savings that the "PanY tYPhUY Lncludes lnpmject Jlnancial analyses. . .

recovery of fiber from white water, but only permit recovery of clarified white water if the grades being produced on the machines were compatible. Otherwise, the water would have to be sewered.

Under Phase 11, the white water systems would be split, so that each machine would have a dedicated system. In combination with Phase I, Phase I1 would permit fiber, filler, and water reuse on both machines at all times. This phase would require installation of a new save-all, a new pump, piping, and controls. Available pulping and stock storage capacity could be used to pulp separately for each machine.

At the request of the mill, we focused our analysis on the combined Phases I and 11. This option was most interesting to the mill because it maximizes recovery of water, fiber, and filler and reduction of BOD and solids in wastewater.

-

Company financial analysis versus TCA The company analysis consists of the 1989 capital estimate (ad-

justed for inflation and escalated by 12.5 percent) and only those operating costs and savings that the company typically includes in . project financial analyses for projects of this type, which are

Raw material-fiber and filler;

Wastewater treatment fees; and Changes in labor costs.

Energy and chemical use for new equipment;

The TCA contains these and other operating costs and savings that were developed in the course of this study. On the savings side, the TCA includes the following:

An average reduction in fiber and filler loss of 1,200 tons a year for an annual savings of $421,530; A reduction in fresh water usage of 1 million gallons a day and a commensurate reduction in cost for fresh water treatment and pumping, for a savings of approximately $112,420 a year; A reduction in energy use for fresh water heating amounting to a savings of approximately $393,400; and A reduction in wastewater generation of approximately 1 million gallons a day for a savings of approximately $54,750 a year in wastewater pumping and $68,240 a year in wastewater treatment fees.

-

~

Annual operating costs are expected to increase in the following areas: -

Chemical flocculating agents used in the save-all to promote solids/water separation will cost approximately $28,700 a ye=, Electric costs for new equipment operation will increase oper- ating costs by approximately $107,280 a year; and

Pollution Reuentlon RevlewlSummer 1993 255

Allen L. Whlte, Monks Baker. and Deborah E. Savage

variety of uncoated and on-machine and off-machine coated papers, as well as carbonizing, book, and release base papers. The coating used is a latex (Le., nonsolvent) formulation containing clay, styrene butadiene, starch, and polymers. This example was chosen because it is a particularly powerful illustration of the value of a TCA approach. Other cases may demonstrate more or less dramatic results for reasons discussed below.

Background on the manufaturingprocxm Paper machine white water, a mixture of water and residual fiber

and filler (clay and calcium carbonate) that drains out of a sheet of paper as it travels across the paper machine, is usually captured by a white water collection system dedicated to one paper machine. Typically, some or all white water is recycled back into the papermak- ing system to recapture water, fiber, and filler. As a pollution prevention measure to reduce water use and wastewater treatment, white water may be passed through a save-all screening device to separate fiber and filler from water; fiber, filler, and water are then recycled back into the system. The save-all produces a clear stream of water that can be used in numerous paper machine operations.

In this mill, two paper machines, sharing a common white water system, produce a variety of paper grades made with either acid-, neutral-, or alkaline-sizing chemistry.6 Machine 1 has a save-all system that filters fiber and filler prior to discharging into the joint white water system. This material is recycled back into the paper- making system. When the machines are using different sizing chem- istry (e.g., when Machine 1 is producing acid-sized paper and Machine 2 is producing alkaline-sized paper), the mixed white water from both machines is not reusable and must be sewered. Under these condi- tions, a large flow of potentially reusable water from both machines, and fiber and filler from Machine 2, is lost to the sewer.

Prompted primarily by the lack of spare water effluent pumping capacity and a desire to better understand the rather complex, old white water piping system, the mill commissioned a study titled "White Water Recycle Feasibility Study" in 1988. The study, com- pleted in August of 1989, had several objectives: " . . . to review the design and operation of the mill and recommend changes that would help reduce peak emuent flows, reduce BOD [biological oxygen demand] in the emuent and reduce total fresh water intake on a millwide scale." The resulting report contained detailed engineering

- ... .

drawings of the fresh water, white water, and paper machine systems and two recommendations for process modifications. Theflrst recommendation . . .G tttefeclsbuity study

second s a w 4 to handle the "mn ofa Pollution prevention project description

The first recommendation (called Phase I) in the feasibility study the whlte water from Machine 2.

was the installation of a second save-all to handle the white water from Machine 2. Because the white water systems under this scenario would remain separate for Machines 1 and 2, this phase would allow

w4 Pollutlon Preventlon RevlewlSummer 1993

Envlronmentdy Smart Accountlng: Uslng Total Cost Assessment To Advance Pollutlon Preventfon

When seueTcL( pmjects are uylt\gfOr - resources, altelse being equal, thepmject wlth the hlghestlRRshouldbe putsued.

project or combination of projects with the highest positive NPV should be chosen. The NPV method, particularly as applied to long- term projects with significant cash flows in later years, is very sensitive to the level of the discount rate. Thus, for a project with most of its cash flows in the early years, its NFV will not be lowered much by increasing the discount rate. On the other hand, the NPV of a project with cash flows that come later will be substantially lowered for an increased discount rate, rendering the project a much less attractive investment opportunity.

The Internal Rate of Return (IRR) method calculates the discount rate that equates the present value of a project's expected cash inflows to the present value of the project's expected costs. Thus, the basic formula to calculate the IRE is the same as that for the NPF for the IRR, the NPV is set to zero and the discount rate is calculated; for the NPV, the discount rate is known and the NPV is calculated. A project is worth pursuing when the calculated IRR is greater than the cost of capital to finance the project. When several projects are vying for limited resources, all else being equal, the project with the highest IRR should be pursued.

The profitabiU& I& (PI) is simply the present value of benefits (cash inflows) divided by the present value of costs (cash outflows). It shows the relative profitability of a project, or present value benefits per dollar of costs. Projects with profitability indices greater than 1.0 should be pursued, and the higher the PI, the more attractive the project.

Payback is the simplest and most mn"mn of the indicators for evaluating investment profitability. It provides a quick, back-of-the- envelope appraisal of the financial prospects of a project. Although the payback calculation may suffice for a preliminary assessment, it should not be relied upon as the sole method for project evaluation. The payback period is the expected number of years required to recover the original project investment; it can be calculated before or after taxes, and serves as a type of break-even calculation. If cash flows materialize at the expected rate until the payback year, then the project will break even. The regular payback, however, does not account for the cost of capital, so that the cost of the debt and equity used in the investment is not reflected in the cash flows or the calculation. Another major drawback ofthe payback method is that it does not take into account cash flows beyond the payback year. The payback period does, however, provide an estimate of how long funds will be tied up in a project. Thus, it is often used as an indicator of project liquidity.

~ ..

TCA in Practice To assess how TCA works in practice, we offer the following

example of a TCA project analysis from one of several fms that collaboratedwiththeTellusInstitutein itsTCAstudies. Thecompanfs manufacturing facility is a specialty paper mill that produces a

~ ~~

Pollution Preuention Reutew/Summer 1993 253

AUen & Whlte, Monlcu Becket, and Deborah E. Savage

Second, costs should be allocated in a manner that is reflective of the way that costs are actually incurred. Some firms, for example, allocate waste disposal costs across operating centers-administra- tive, research and development, and manufacturing--on the basis of floor space, rather than on the quantity and type of waste generated by each. This hampers a rigorous estimation of the financial benefits of reduced waste generation by uncoupling points of generation from points of reduction. Careful allocation, requires commitment, time, and financial resources, especially in large and complex production activities. Nonetheless, it is integral to identifying the sources of waste generation and the benefits of changing current practices to more preventative management.

Time horizon Time horizons of five years or more enable the financial analysis to

capture costs, savings, and revenues that occur well atter the initial investment. Thisextendsbeyondthetwo-to-fiveyeartimefFameusedby many f m to evaluate i"ent profitability. A longer time horizon, preferably ten to fifteen years, is particularly critical to capture out-year liability, recurrent savings due to waste avoidance, and revenue growth linked to market development of environmentally friendly products. Without a lo-r horizon, the financial analysis runs the risk of failing to capture the very benefits for which the pollution prevention invest- mentwasoriginallytargeted.ofcourse,thereadinessof~to~d their investment analysis to this longer horizon depends on numerous considerations, includingsize, capital availability, and competitionhm alternative investments of the same or hi&er priority. Notwithstanding these limitations, a longer time horizon should be applied at minimum to compare near and longer-term returns to a potential pollution preven- tion investment.

Financial indicators Financial indicators for pollution prevention projects should meet

two criteria: (1) a capacity to incorporate all cash flows (positive and negative) over the life of the project; and (2) a capacity to integrate the time value of money through appropriate discounting of fkture cash flows. Indicators that meet these criteria are best equipped to capture the broadest range of costs, savings, and revenues, many of which may occur years after the initial investment. Net Present Value, Internal Rate of Return, and the Profitability Index are examples of such indicators; payback is not. A brief description of each shows why.

Under the Net Present Value (NPV) method, the present value of each cash flow, both inflows and outflows, is calculated and dis- counted at the project's cost of capital. The sum of the discounted cash flows is the project's NPV. A pcsitive NPV means a project is worth pursuing, a negative NPV indicates it should be rejected. If the availability of capital is constrained (as it usually is), or if several projects are competingwith one another, other things being equal, the

252 _ _ _

Poflutfon Prevention Reoiew / Summer I993

Enu6wmen&aUg Smart Accounting: Using Total Cost Assessment To Advance Pollution Preuentlon

Figure 1. Project Investment Cost Boundaries

Social Cost Assessment

I

4

known as full-cost accoUnting. Proper allocation is indispensable to sound investment profitability analysis. When costs are improperly allocated either by lumping them into overhead accounts and/or by assigningthem incorrectly to production proc'esses, profitability analy- ses cannot proceed on a rationale basis.

Two methods of cost allocation are commonly practiced. One relies on a materials balance approach, using standard unit, batch, lot, product input requirements or recipes. The other is materials ac- counting, based on inventory data of material inputs at the beginning and termination of a reporting period, or on measurement (e.g., volume or weight) of waste materials from production lines. In some instances, the two methods may be used in tandem to reconcile discrepanciesbetween materials balance estimates (with batch model data) and materials accounting data (which rely on physical measure- ment). Such discrepancies invariably arise because of measurement/ instrumentation shortcomings, excursions from standard recipes, and exclusion of certain steps in the production process that consume material inputs (e.g., cleaning during and between production cam- paigns or testing prior to introduction of new products).

For purposes of investment analysis, the ideal cost allocation system has two principal attributes. First, the system should allocate all costs to the processes responsible for their creation. This is a perennial challenge to financial officers and cost accountants who oversee the assignment of costs into either overhead or, alternatively, product or process accounts. Waste disposal costs, for example, are often placed in overhead accounts. A more rigorous approach would assign such costs to a discrete operating unit or process in the firm's production system.

Pollution Pteuentlon ReulewlSummer 1993 25 1

.* . Direct Costs

Capital expenditures -buildings -equipment -utility connections -equipment installation -project engineering

-raw materials -labor -waste disposal -utilities: energy, water, sewerage -revenue from recovered material

Operation and maintenance expenseshevenues

Id irec t or Hidden Cbsts

Compliance costs -permitting -reporting -tracking -monitoring -manifesting -training -waste handling -recordkeeping -labeling -testing

. -emergency preparedness -medical surveillance

Operation of on-site pollution control equipment Raw materials costs linked to nonproduct output ("PO) Environmental insurance (acute events, gradual impairment)

Waste storage

Liabizity costs

Penalties and fines Personal injury and property damage

Less Tangible Benefits

Increased revenue from enhanced product quality Increased revenue from increased share of green product markets Reduced worker compensation and absenteeism costs from im- proved employee health Increased productivity from improved employee relations Reduced staff burdens in dealing with community concerns

Pollution Preuentfon RevlewlSummer 1993 S O

EnvlronmentaIfy Smart Accounting: Using Total Cost Assessment To Advance Pollutlon Prevention

I t Ls essential to recognize that although an expanded cast inventory Is an essentlat hgredfent in rigomus pmfltabuity analysis. it does not incorpomtethesoclal costs of apmposed pmject.

project life cycle will they occur?). This uncertainty results from two conditions: (1) the complexity of

assessing risks associated with the use and transport of, and possible exposure to, hazardous substances; and (2) changing regulatory and judicial decisions that result in upward and downward shifts in project costs. Some costs are straightforward, although they are not necessarily routinely identified by managers. Such costs may include monitoring, training, and preparing manifest forms for the off-site shipment of hazardous waste. Others, however, fall into the category of contingent costs-those that may materialize if certain events occur. These could be exceeding a permitted emissions limit, an off- site spill during transport of waste, a leak in a lined and permitted hazardous waste landfill, disposal of wastes at an unpermitted site, or an acute event leading to an environmental release in an abutting neighborhood. All of these are events are probabilistic in nature, that is, they may occur, but we hope they won’t. If they do, certain costs will be borne by the firm.

Whereas conventional project financial analysis generally in- cludes only the most obvious, direct, and tangible capital and operat- ing items, TCA expands the inventory to encompass a broader range of costs, savings, and revenues. Selected examples from each of these categories are shown in Table 1.

It is essential to recognize that although an expanded cost inven- tory is an essential ingredient in rigorous profitability analysis, it does not incorporate the social costs of a proposed project. Figure 1’ illustrates these key differences. Costs conventionally covered in a project financial evaluation are shown inside the first rectangle. These costs are a subset of, or are nested within, a second rectangle that includes many of the indirect costs, liabilities, and less tangible items listed in Table 1. By our definition, this is what would appear in a project analyzed using the TCA approach.

An even broader approach than TCA is a larger inventory covering social costs resulting, for example, &om health and ecological dam- related to unregulated air toxics, wetlands loss, or unsustainable forest use. These externalities, which are no less real than ‘EA costs, are still conceptually distinct, because they have no financial consequences for the fulp under current legal and regulatory conditions. Although the trend in environmental regulation suggests there may be a gradual convergence of the inner two rectangles with the outer rectangle, TCA should not be construed as a social accounting methodology.

&8t dhcafion Cost allocation procedures define how production costs are as-

signed to specific product or process lines, or to overhead accounts. Allocation in medium and large firms is typically the responsibility of financial and production staff. They aim to properly debit and credit production processeshnits on an activity basis, thereby providing the foundation for pricing according to real costs, a practice commonly

~ ~~~ ~

Pollution PreventLon Revfew/Summer 1993 249

AUen t. Whlte, Monfca Becker, and Deborah E. Savage

By fumplng prevention pmjects lnto the ''must-do"

tendency ls td draw namw boundaries around costs, savlngs, and reuenues, dtspense

and thereby omit or wuierestImclte the potential returnsfrom Undertaking the huestmen&

category, the typlcal

wlul in-depth analgsls,

Biases in Conventional Capital Budgetfng Conventional capital budgetingprocesses often fail to captw the

full range of benefits from pollution prevention projects due to two distinct, but related, biases. The first bias arises from the tendency of firms to place prevention projects in the category of "profit-sustain- ing" or "must-do" compliance investments. This stands in contrast to "profit-adding" (including cost reduction) projects and market-expan- sion projects that are invariably the higher management priorities in terms of corporate growth and market development. By lumping prevention projects into the "mustdo" category, the typical tendency is to draw narrow boundaries around costs, savings, and revenues, dispense with in-depth analysis, and thereby omit or underestimate the potential returns from undertaking the investment.

The second bias in conventional budgeting processes is inherent - - in the nature of prevention investments. Because prevention, by definition, implies upstream changes in material inputs and choices of process technologies, such investments tend to trigger multiple, and often indirect or second-order midstream and downstream effects in the production process. These may take the form of reduced compliance, insurance, and waste management costs, reduced worker absenteeism, as well as avoidance of contingency costs linked to acute events caused by a sudden release of hazardous materials. Further- more, prevention measures increasingly are tied to less tangible and dflicult-to-quantify benefits such as corporate and product image, and gaining a foothold in the marketplace for green products. To the extent that prevention investmenta create such advantages, they tend to OcCuI: over periods longer than the two to five years often used in conventional project financial analysis. They also require the firm to identify and allocate costs at a level of detail that goes beyond what is typically practiced in capital budget analyses.

a

.

The Building Blocks of Total Cost Assessment Profitability analysis of a capital investment in pollution preven-

tion contains four elements: (1) cost inventory, (2) cost allocation, (3) time horizon for profitability analysis, and (4) profitability indicators. Total Cost Assessment (TCA) is an approach to these elements that accounts for the particular characteristics of P2 projects.

Cost inventory

prevention investment is the first element of TCA. As with any industrial investment, such costs may be classified as one-time capital costs incurred at the outset of the project, or as recurrent (normally annual) operating costs that are incurred repeatedly over the life of the project. Unlike most investments, however, environ- mental projects are associated with certain costs, savings, and rev- enues that are relatively uncertain in character (what are they?), magnitude (how large will they be?), and timing (at what point in the

Identifying all costs and savings associated with a pollution -

~~

Pollutfon Prevention Reufew / Summer 1993

Environmentally Smart Accounting Using %tal Cost Assessment Tb Advance Pollution Prevention

Allen L. White, Monica Becker, and Deborah E. Savage

DESPITE MOUNTING REGULATORY pressures and market incentives, industry has been slow to shift from end-of-pipe control strategies to more prevention-oriented practices.' If, as many argue, pollution prevention (P2) serves the interests of business by increasing efi- ciency and profits, what explains industry's continuing reluctance to

Conuentfonal pmject flmncral adysls Men falls to capture the full mnge of costs and sau- . lnrrs associated wlth

. pouution prevention (PZ) inuestments. Thus. man- agers need to rethWc the& approach b cost lnuen- tory. cost allocation, time horizon, andptofltablllty analysis to ensure that P2 fnuestments are treated

fialrly in the capltal bud- ge- process. Thls article shows how total cost assessment can often help Z&Z the prClylng&Zdfor P2 lnuestments that mlght othenulse be tagged as uncompetitlve and unprof- itable.

move aggressively toward a preventative mode of environmental management? And why, in light of the much-heralded benefits of prevention strategies, are firms often surprised with the profitability potential of P2 projects in contrast to the "must-do," compliance- driven capital investments?

The explanation for these contradictions stems from at least two aspects of corporate environmental management. First, organiza- tional structure and management behavior may impede pollution prevention projects from entering the firm's capital budgeting process from the outset, thereby precluding such projects from systematic consideration. Second, once a P2 project successfblly enters the capital budgetingprocess and competes with other projects for limited capital resources, current methods of profitability analysis may discriminate against the P2 project.

Profitability analysis reflects how managers inventory and allo- cate costs, and what time horizons and financial indicators are selected to estimate the return on investment. This article examines the proposition that conventional methods of profitability analysis may systematically diminish the prospects of prevention-oriented investments in the highly competitive capital budgeting arena. This analysis is based on recent studies for the Environmental Protection Agency's (EPA) Pollution Prevention Division2 and the New Jersey Department of Environmental Protection and Energy,3 a recent update of these studies for the Organization for Economic Coopera- tion and Development (OECD),' and ongoing work with a number of firms that are exploring alternative methods of project profitability analysis.

Dr. White and Dr. Savage w e , respectively, director and research associate in the risk analyskgm