Abatement Incentives and Environmental Accounting

1
Abatement Incentives and Environmental Accounting

• EEP 255
• November 11, 2003

2
Pollution Abatement Options

• End of Pipe Treatment or Waste Management
  (Transform W)
• Proper Disposal
• Treatment
• Recycling
• Pollution Prevention
• Waste Reduction (Reduce W)
• Good Housekeeping
• Material Substitution
• Process Modification
• Product Redesign
• End use efficiency improvement (Reduce Output (Q))

3
Treating Liquid Waste

• Physical treatment
• Filtration
• Evaporation ponds
• Sedimentation or settling tank
• centrifuge
• reverse osmosis
• flocculation
• Chemical treatment
• Oxidation/ Reduction, neutralization
• electrolysis (precipitates metals on electrodes)
• Biological treatment
• biological organisms consume organic wastes
• Thermal treatment
• recovery boiler in paper industry

4
Pollution Prevention
Goal to produce less waste

• Good Housekeeping
• Prevent spoilage of materials
• Prevent spills of materials
• Material Substitution
• Use less toxic material inputs
• Process Modification
• Continuous casting of steel
• Product Modification
• Redesign product so it requires less material
  inputs
• End use efficiency improvement

5
Why will a firm choose to abate rather than emit
W?What abatement method will the firm choose?
6
Profit Function with no emission regulation
Total Revenue from selling Q
Total Cost of producing Q
Profit from supplying Q
-
Profit (PQ Q) (PL L) (PM M) (PK K)
Underlying Production function Q Q(L,M,K)
7
Profit Function with emission regulation
Total Revenue from selling Q
Total Cost of producing Q
Profit from supplying Q
-
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Underlying Production function Q Q(L,M,K)
and Waste production function W(Q)
8
Profits With Emissions Regulation
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Capital Market
Output Market

• Labor Market

Materials market
Disposal costs Penalty and legal costs for being
caught in violation of the law Future compliance
costs Future liabilities and legal costs for
environmental damages remediation
9
Profits With Proper Waste Disposal
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Landfill cost of PW W plus cost of labor (PL
Lw), material (PM Mw), and capital (PK Kw)
needed to collect and transport W to landfill
10
Profits With Waste Treatment
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost of disposing W
Cost increase from adding L, M, K to treat W
11
Profits With Waste Recycling
Revenue from recycled M (PM M)
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost of disposing W
Cost increase from adding L, M, K to recycle W
12
Profits With Good Housekeeping
Cost savings from reduced M
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost savings from reduced W management
Cost increases from increasing L
13
Profits With Input Substitution
Cost increase from using more M substitutes
Cost decrease from using less M
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost savings from reduced W management
14
Profits With Process Modification
Cost savings from reduced M
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost savings from reduced W management
Cost increases from increasing K
15
Profits With Product Modification
Cost decrease from reduced M
Cost increases from new M requirements
Lost or gained revenue from redesigned Q
Profit (PQ Q) (PL L) (PM M) (PK
K) C(W)
Cost savings from reduced W management
Cost increases from changing K
Cost increases or decreases from changing L
16
Options to meet emission targets

• Install end of pipe pollution control equipment
  (capital cost operating cost)
• Use less polluting inputs/processes (operating
  costs)
• Pay emission taxes or disposal fees (operating
  cost)
• Reduce waste and recycle (cost revenue)
• Redesign Product (costrevenue)
• Combinations of the above
• The options imply cost and revenue flows over
  time( Hence discounted cash flow approach) and
  may have limits on how much abatement is possible

17
Environmental Accounting

• How to make these decisions systematically?
• And
• What information is needed to make these
  decisions?

18
Evaluating Abatement Options

• Measure baseline waste generation
• Measure baseline (current) costs
• Identify options for abatement
• Measure costs and benefits of each option
• Discount costs and benefits to present value
• Evaluate risk (uncertainty)
• Compare options and baseline
• Conduct sensitivity analysis

19
Measure Baseline Waste Generation

• Describe production process
• Locate waste sources
• Identify types of waste for each source
• Measure waste generation per source
• USE MASS BALANCE PRINCIPLES TO ESTIMATE HIDDEN
  EMISSIONS

20
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)

21
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)

22
Types of environmental costs

• Conventional costs
• Hidden costs
• Contingent costs (probabilistic costs)
• Intangible (image, relationship) costs
• Societal costs (currently external costs may
  become internal costs in the future)

23
Abatement Targets

• Abatement targets may be externally determined
  and fixed e.g. EPAs emission standards. The
  decision then is to find the least cost
  alternative to meet the standard
• Abatement targets may be flexible you may choose
  your own abatement level, but may pay taxes/fees,
  buy permits
• Voluntary limits you freely choose your own
  target, costs and benefits through the product
  market
• Profit maximizing choices in 23

24
Identify Abatement Options

• Waste management (disposal, treatment, recycling)
• Waste reduction (product redesign, good
  housekeeping, input substitution, process
  redesign)
• End use efficiency improvement (can you increase
  product price or gain market share as a result?)

25
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,
  recovered product, increased product price/sales)

26
Options to meet emission targets

• Install end of pipe pollution control equipment
  (capital cost operating cost)
• Use less polluting inputs/processes (operating
  costs)
• Pay emission taxes or disposal fees (operating
  cost)
• Reduce waste and recycle (cost revenue)
• Combinations of the above
• The options imply cost and revenue flows over
  time( Hence discounted cash flow approach) and
  may have limits on how much abatement is possible

27
Discounting and NPV

• A dollar received one year later is not the same
  as a dollar received today. Why?
• Inflation
• Return on investment (interest/profit)
• Time preference
• Present value of C received after n years C/
  1rn
• Where r is the discount rate
• Choose r to reflect next best opportunity forgone
  (e.g., rate of return earned in next best
  investment

28
Compare Options

• Change in costs from baseline

29
Sensitivity Analysis

• What if analysis!!
• Cost changes (capital, input, waste disposal)
• Discount rate assumptions
• Risk assumption
• Regulatory requirements/standards
• Tax treatment

30
An Example

• Following diagram shows the current mass flow
  diagram for a cleaning process.
• The cost of solvent is 3.50/lb
• The cost of disposing dirty solvent is 2.50/lb

31
Measure Baseline Waste Generation
Fugitive emissions
50 lbs
4,000 lbs
3,960 lb
CLEANING PROCESS
Clean solvent
Dirty Solvent
Dirty Parts 10000 lb
Cleaned parts 9990 lb
32
Measure Baseline Costs

• Input solvent
• 3.50/lb 4,000 14,000 per year
• Waste disposal
• 2.50/lb 3,960 9,900 per year
• Total operating 23,900 per year

33
Identify Options

• 1. Recycle solvent
• 2. Switch to non-hazardous solvent (citrus based)

34
Measure Waste Generation for Option 1
Fugitive emissions
50 lbs
Clean parts 9990 lbs
CLEANING PROCESS
4,000 lbs
3,960 lbs
New solvent
RECYCLE
3,660 lbs
300 lbs
Dirty Parts 10000 lbs
Waste disposal
35
Measure Costs Option 1

• Investment Expense (86,500)
• 60,500 Tanks, pumps, mixers
• 20,000 Installation (design, piping, labor)
• 6,000 Other expenses
• Operating Expense
• 240 Utilities
• 5,000 Operations labor
• 3,325 Maintenance
• 1,190 New solvent (340 lbs _at_ 3.50 per lb)
• 750 Waste disposal (300 lb _at_ 2.50 per lb)
• Total operating expenses 10,505

8,565
36
Measure Benefits of Option 1

• No change in production of output, so no revenue
  change for output
• No revenue from recycled solvent because it is
  used rather than sold.

37
Calculating NPV

• Assumptions
• 10 year equipment life, no salvage value
• Discount rate of 15