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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

16. Traditional Cost Accounting System

17. Modified Cost Accounting System

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

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

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

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

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

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