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

Economics of Sustainability

When money speaks, nobody cares for the grammar!

Economics of Sustainability Efforts

Detailed financial / profitability analysis of sustainability projects necessary to get top management commitment

Translate the project outcomes in $ and ¢

Available Tools: Environmental Management Accounting or Total Cost

Accounting Traditional Profitability Analyses: Payback Period, Net

Present Worth, Internal Rate of Returns

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 burdencreated by material, energy, inventory andother operational inefficiencies

Provide additional inputs for business decisions

Based on “true” operational costs

Current ENV Cost Situation

Most ENV/OEHS costs often treated as

fixed and unavoidable

ENV costs not directly allocated to activity

or process generating wastes and

emissions

Do You Know All Your ENV Costs ?

50 to 70 % of ENV costs for a typical facility are HIDDEN in general overhead accounts Administration Legal Facilities Maintenance Transportation

The Significance of ENV Costs

What gets measured gets managed

Simply quantifying costs will lead to questions Potentially identify savings

Distinction between some “environmental” and “operating” costs may not be obvious But costs are costs and need to be managed

Total Environmental Cost Components

Conventional (or Direct)

Costs

Potentially Hidden (or

Indirect) Costs

Opportunity Costs (or

Production-related costs)

Contingent (or Future) Costs

Intangible (or Less Real)

Costs

Direct Costs Storage,handling, and disposal of residuals

Onsite and offsite Pollution control equipment costs

Capital costs Operation and maintenance

Required Permits Applications

and fees

Potentially Hidden Costs

Waste packaging and shipping

Insurance Premiums

Monitoring, recordkeeping, and

reporting

Facility audits

Qualifying contractors

Potentially Hidden Costs (Cont’d.)

Training and meetings

Environmental data management

Equipment and product labeling

Legal support

Lost Opportunity Costs Operational shutdowns

Loss of operating flexibility

Loss of raw materials

Unrealized product revenue

Unrealized new product ideas

May be more significant than other costs

Contingent Costs Future compliance

costs Future liability

costs Future remediation

costs

Unexpected shutdown costs

Property damage Personal injury

damage Natural resource

damage

Intangible Costs Corporate image

Working conditions

Employee morale

Relationship with

customers and suppliers

Relationship with investors

& shareholders

Relationship with

regulators

Cost Data Gathering

Identify and define environ-

mental categories and activities

relevant to your operations

Initially focus on tangible costs

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

Traditional Cost Accounting System

Modified Cost Accounting System

Costs incurredBenefits obtained

Profitability Analysis

CP

• Simple payback;• Net Present Value;

• Internal Rate of Return

Profitability Analysis

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

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

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.

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

Thank You Very Much!

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