Environment Cost Management CHAPTER Environment Cost Management

After studying this chapter, you should be able to: Objectives 1. Discuss the importance of measuring environment costs. 2. Explain how environmental costs are assigned to products and processes. 3. Describe the life-cycle cost assessment model. 4. Compare and contrast activity- and strategic-based environmental control. After studying this chapter, you should be able to:

The Benefits of Ecoefficiency Ecoefficiency essentially maintains that organizations can produce more useful goods and services while simultaneously reducing negative environmental impacts, resource consumption, and costs.

Incentives and causes for increased efficiency: 1) Customers are demanding products that are environmental friendly

Incentives and causes for increased efficiency: 1) Customers are demanding products that are environmental friendly 2) Employees prefer to work for environmentally respective firms

Causes and Incentives for Ecoefficiency

Cost Reduction and Competitive Advantage Customer Demand For Cleaner Products Cost Reduction and Competitive Advantage Better Employees and Greater Productivity ECOEFFICENCY Innovations and New Opportunities Lower Cost of Capital and Lower Insurance Significant Special Benefits Leading to Improved Image

Environmental Quality Cost Model Environmental costs are costs that are incurred because poor environmental quality exists or may exist. Environmental costs can be classified in four categories: prevention costs, detection costs, internal failure costs, and external failure costs.

Classification of Environmental Costs by Activity Prevention Activities Evaluating and selecting suppliers Evaluating and selecting pollution control equipment Designing processes Designing products Carrying out environmental studies Auditing environmental risks Developing environmental management systems Recycling products Obtaining ISO 14001 certification

Classification of Environmental Costs by Activity Auditing environmental activities Inspecting products and processes Developing environmental performance measures Testing for contamination Verifying supplier environmental performance Measuring contamination levels Detection Activities

Classification of Environmental Costs by Activity Operating pollution control equipment Treating and disposing of toxic waste Maintaining pollution equipment Licensing facilities for producing contaminants Recycle scrap Internal Failure Activities

Classification of Environmental Costs by Activity External Failure Activities Cleaning up a polluted lake Cleaning up oil spills Cleaning up contaminated soil Settling personal injury claims (environmentally related) Restoring land to natural state Losing sales due to poor environmental reputation Using materials and energy inefficiently Receiving medical care due to polluted air (S) Losing employment because of contamination (S)

Environmental Cost Report For the Year Ended December 31, 2004 Numade Corporation Environmental Cost Report For the Year Ended December 31, 2004 Percentage of Environmental Costs Operating Costs Prevention costs: Training employees $ 60,000 Designing products 180,000 Selecting equipment 40,000 $280,000 1.40 % Detection costs: Inspecting processes $240,000 Developing measures 80,000 320,000 1.60 Continued

Percentage of Environmental Costs Operating Costs Internal failure costs: Operating pollution equipment $400,000 Maintaining pollution equipment 200,000 $ 600,000 3.00% External failure costs: Cleaning up lake $900,000 Restoring land 500,000 Incurring property damage claim 400,000 1,800,000 9.00 Totals $3,000,000 15.00%

Environmental Financial Statement For the Year Ended December 31, 2004 Numade Corporation Environmental Financial Statement For the Year Ended December 31, 2004 Environmental benefits: Cost reductions, contaminants $ 300,000 Cost reductions, hazardous waste disposal 400,000 Recycling income 200,000 Energy conservation cost savings 100,000 Packaging cost reductions 150,000 Total environmental benefits $1,150,000 Continued

Environmental Financial Statement For the Year Ended December 31, 2004 Numade Corporation Environmental Financial Statement For the Year Ended December 31, 2004 Environmental costs: Prevention costs $ 280,000 Detection costs 320,000 Internal failure costs 600,000 External failure costs 100,000 Packaging cost reductions 1,800,000 Total environmental costs $1,150,000

Environment Product Costs The environmental costs of processes that produce, market, and deliver products and the environmental postpurchase costs caused by the use and disposal of the products are examples of environmental product costs.

Full environmental costing is the assignment of all environmental costs, both private and societal, to products.

Full private costing is the assignment of only private cost to individual products. Private costing is probably a good starting point for many firms. Private costs can be assigned using data created inside the firm.

ABC Environmental Costing Activities Cleanser A Cleanser B Evaluate and select suppliers $0.20 $ 0.05 Design processes (to reduce pollution) 0.10 0.10 Inspect processes (for pollution problems) 0.25 0.15 Capture and treat chlorofluorocarbons 0.05 1.00 Maintain environmental equipment 0.00 0.50 Toxic waste disposal 0.10 1.75 Excessive materials usage 0.08 0.25 Environmental cost per unit $0.78 $ 3.80 Other manufacturing costs (nonenvironmental) 9.02 16.20 Unit cost $9.80 $20.00 Units produced 100,000 100,000

Product stewardship is the practice of designing, manufacturing, maintaining, and recycling products to minimize adverse environmental impacts.

Life-cycle assessment identifies the environmental consequences of a product through its entire life cycle, and then searches for opportunities to obtain environmental improvements.

Life-cycle cost assessment assigns costs and benefits to the environmental consequences and improvements.

Product-Life Cycle Stages Raw Materials Controlled by Supplier Production Controlled by Manufacturer Packaging Product Use and Maintenance Recycling Disposal Controlled by Customer

Assessment Stages Inventory analysis Impact analysis Improvement analysis

Inventory Analysis Inventory analysis specifies the types and quantities of materials and energy inputs needed and the resulting environmental releases in the form of solid, liquid, and gaseous residues.

PAPER CUP POLYFORM CUP Materials usage per cup: Wood and bark (g) 33.0 0.0 Petroleum (g) 4.1 3.2 Finished weight (g) 10.0 11.5 Utilities per mg of material: Steam (kg) 9,000-12,000 5,000 Power (GJ) 3.5 0.4-0.6 Cooling water (m3) 50 154 Water effluent per mg of material: Volume (m3) 50-190 0.5-2.0 Suspended solids (kg) 35-60 trace BOD (kg) 30-50 0.07 Organochlorides (kg) 5-7 0 Metal salts (kg) 1-20 20

PAPER CUP POLYFORM CUP Air Emissions per mg of material: Chlorine (kg) 0.5 0 Sulfides (kg) 2.0 0 Particulates (kg) 5-15 0.1 Pentane (kg) 0 35-50 Recycle potential: Primary user Possible Easy After use Low High Ultimate disposal: Heat recovery (Mj/kg) 20 40 Mass to landfill (g) 10.1 11.5 Biodegradable Yes No

Contaminant-related resources 0.008 0.005 PAPER CUP POLYFORM CUP Material usage $0.010 $0.004 Utilities 0.012 0.003 Contaminant-related resources 0.008 0.005 Total private costs $0.030 $0.012 Recycling benefits (societal) -0.001 -0.004 Environmental cost per unit $0.029 $0.008

Impact Analysis Impact analysis assesses the environmental effects of competing designs and provides a relative ranking of those effects.

Improvement Analysis Improvement analysis has the objective of reducing the environmental impacts revealed by the inventory and impact steps.

Environmental Perspective Five core objectives for the environmental perspectives: Minimize the use of raw or virgin materials Minimize the use of hazardous materials Minimize energy requirements for production and use of the product Minimize the release of solid, liquid, and gaseous residues Maximize opportunities to recycle

NONVALUE-ADDED YEAR ENVIRONMENTAL ACTIVITY 2004 2003 Inspecting processes $ 200,000 $ 240,000 Operating pollution equipment 350,000 400,000 Maintaining pollution equipment 200,000 200,000 Cleaning up water pollution 700,000 900,000 Property damage claim 300,000 400,000 Totals $1,750,000 $2,140,000

Environmental Cost Trend Graph Environmental Costs/Sales 1 2 3 4 5 6 7 8 Periods

Bar Graph for Trend Analysis CFC Emissions 100 80 60 40 20 2001 2002 2003 2004 Pounds emitted

Hazardous Waste Pie Chart Treated 15.0% Incinerated 35.0% Recycled 5.0% Landfilled 25.0% Deep-well injected 20.0% Incinerated Treated Recycled Landfilled Deep-well injected

Chapter Twelve The End