Environmental Accounting and Life Cycle Analysis

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Environmental Accounting and Life Cycle Analysis

• Wednesday, April 12

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Outline

• Some basic concepts
• Inflation
• Discounting
• Accounting
• Environmental Accounting
• Life-cycle Analysis

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Inflation

• Price increases due to macroeconomic factors
• 5 annual inflation means prices increase by 5
  each year.
• FV PV(1i)
• PV is price today
• FV is price next year
• i is rate of inflation
• Accounting for inflation is important if you are
  comparing expenditures or revenues across time
  periods.

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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?

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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/(1r)n
• r is discount rate
• n is number of years into the future
• 5584 10,000/(1.06)10

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Discounting

• 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 10,000
• Discounting is important if you are comparing
  expenditures or revenues across time periods.

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Accounting

• Credits
• Money in
• Debits
• Money out
• An businesss accounting system keeps track of
  everything that is spent and everything that is
  earned.

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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.

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Social Costs
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
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Evaluating Abatement Options

• Measure baseline waste generation
• Measure baseline abatement costs
• Identify options
• Measure costs and benefits of each option
• Discount costs and benefits to present value
• Compare options and baseline
• Conduct sensitivity analysis

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Measure Baseline Waste Generation

• Describe production process
• Locate waste sources
• Identify types of waste for each source
• Measure waste generation per source

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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)

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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)

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Identify Abatement Options

• Waste management (disposal, treatment, recycling)
• Waste reduction (product redesign, good
  housekeeping, material substitution, process
  redesign)

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Measure Costs and Benefits of Options

• Costs
• Abatement costs
• Investment costs (equipment, installation,
  training, permits)
• Annual operating costs (labor, energy, materials,
  depreciation)
• Regulatory costs
• Benefits
• Revenue gains (e.g., recycled materials)

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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)

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Compare Options

• Change in costs from baseline

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Sensitivity Analysis

• Inflation assumption
• Discount rate assumption
• Risk assumption

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Example

• Firm that cleans used metal parts

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Measure Baseline Waste Generation
Fugitive emissions
50 gallons
4,000 gallons
3,950 gallons
CLEANING PROCESS
New solvent
Waste disposal
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Identify Options

• 1. Recycle solvent
• 2. Use non-hazardous cleaning method

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Measure Waste Generation for Option 1
Fugitive emissions
50 gallons
360 gallons
3,950 gallons
CLEANING PROCESS
New solvent
RECYCLE
310 gallons
3,640 gallons
Waste disposal
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Measure Waste Generation for Option 2
4,000 gallons
4000 gallons
CLEANING PROCESS
New solvent
Non-hazardous waste disposal to sewer
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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

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Using Life Cycle Analysis Results

• Remember the 2-sector input-output model?
• Electricity Water
• Electricity 0.333 0.167
• Water 0.286 0.375
• What is the total output of different sectors
  needed to meet an exogenous electricity demand of
  1?

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1 Electricity
Direct-Requirement
0.333 Electricity 0.286 Water
0.333.333Elect 0.3330.286 Water
0.2860.167Elect 0.286375 water
Tot. Electricity 1 0.333 (0.333.333
0.286.167) 1.693
Total Water 0.286 (0.3330.286
0.2860.375) . 0.775
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Economic input-output life cycle analysis
EIO-LCA

• What if we know how much SO2 is emitted for each
  1 of electricity produced?
• Electricity Water
• Electricity 0.333 0.167
• Water 0.286 0.375
• SO2 g/ 25 5
• What are total S02 emissions when demand for
  electricity increases by 1?

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Algebraic Method

• X110.333X10.167X2 ---------(1)
• X2 0 0.286X10.375X2--------(2)
• Solving for X1 and X2 we get
• X11.6932, X20.7748
• These represent total requirement to meet 1
  electricity demand
• Total SO2 emissions 1.693225 0.77485
• 46.204 grams

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EIO-LCA Software

• EIO-LCA does this type of calculations for 498
  sectors and a large number of environmental
  impacts
• Fuel use (11 fuels)
• Non-renewable ores use (Fe, Cu, Au, Ag, Al.)
• Conventional air pollutants
• Toxic Releases (TRI)
• Hazardous solid waste generation (RCRA)
• Fertilizer use (eutrophication) (7)
• Summary indicators Energy, CMU-ET(toxicity
  weighting), GWP, ODP, Acidification Potential
• Web version available at http//www.eiolca.net

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Steps in using EIO-LCA software

• Develop a list of inputs expressed in cost
• Identify appropriate commodity sector using the
  search function on the software (simple version)
• Select the commodity sector and enter the value
  for one input at a time. Click on Display
  results
• You can also look at individual impacts by
  selecting them in the prior screen
• Note down summary results for that input
• Repeat for other inputs and then sum all impacts.