ECONOMIC EVALUATION OF POLLUTION PREVENTION PROJECTS CHAPTER 11 ECONOMIC EVALUATION OF POLLUTION PREVENTION PROJECTS

To discuss in this chapter: To discuss in this chapter: *Total Cost Assessment of Pollution Control and Preventing Strategies: - Evaluating Hidden Costs - Evaluating future liabilities - Less tangible costs

The economic evaluation of engineering projects typically involves estimation of: * Equipment * Installation * Raw materials * Energy * Maintenance costs Disposal and pollution control costs are often factored into these calculations in determining economic rates of return, but other regulatory and social costs are not. >>>> It’s important to consider them in the economic analysis of pollution prevention projects too.

Also corporate image and relationships with workers and communities can suffer if environmental performance is substandard. Now, companies are giving more consideration to all significant sources of environmental costs. Costs properly accounted >>> superior environmental performance If costs are properly accounted for: business management practices that foster good economic performance will also foster superior environmental performance

Total cost assessment of pollution control and prevention strategies: Types and magnitudes of costs are categorized : Tier 0. Usual Costs Tier 1. Hidden costs Tier 2. Liability costs Tier 3. Less tangible costs Tier 4. Key Financial Measures Catogories recommended in the Total Cost Assessment Methodology developed by the American Institute of Chemical Engineers’ Center for Waste Reduction Technologies (AIChE CWRT, 2000) The types and magnitudes of costs associated with emissions and waste generation are described and categorized. Five categories, or tiers, of costs will be considered, following the framework recommended. The tiers are mentioned above. Total cost assessment of waste management alternatives are described, and the hidden costs, future liabilities, and less tangible costs associated with waste generation are discussed.

The most important tiers to discuss for economic evaluating in pollution prevention projects are: Tier 1. Hidden costs Tier 2. Liability costs Tier 3. Less tangible costs because they are the types of costs that normally are due to generation and emission of waste directly

Tier 0. Usual Costs Costs normally captured by engineering economic evaluations: - Process equipment - Process materials - Direct labor - Materials - Suplies - Utilities - Structures Tier 0 costs are the “usual” costs that are included in a conventional analysis of a project. So they don’t are important to study for the pollution prevention costs.

Tier 1. Hidden environmental costs Administrative and regulatory environmental costs not normally assigned to individual projects: - Monitoring of waste (off-site waste management charges, waste treatment, inspection hazardous waste storage, sampling, etc) - Paperwork (reporting on PP plans, filling out hazardous waste manifests, etc) - Permit requirement (filling for permits, etc) Tier 1 include permitting, reporting, monitoring, manifesting, and insurance costs and are often referred to as “hidden” costs because they are ussualy treated as overhead costs and they are not directly charged to a project. Waste disposal costs are sometimes treated as overhead costs as well.

Tier 1. Hidden costs In example, in a evaluation of the hidden costs associated with a replacement of an environmentally hazardous material with a more benign: Costs that can be evaluated (associated with the generation and emissions): * Waste taxes * Fees * Monitoring & analysis of waste This is an example for the hidden costs could be accounted in the pollution prevent stage. Can be evaluated costs in one and other material, and it’s desirable to subtitute it and low the hidden costs.

Tier 2. Future Liabilities Less tangible set of costs: Tier 2. Future Liabilities Less tangible set of costs: * Compliance obligations * Remediation obligations * Fines and penalties * Obligations to compensate private parties for personal injury, property damage, and economic loss * Punitive damages * Natural resource damages These are costs of future liabilities. Such liabilities can take the form of either penalties and fines or personal injury and property damage settlements. Fines and penalties are due to regulatory noncompliance.

Tier 2. Future Liabilities >>> These are very difficult to evaluate in a project due: * It is impossible to know, with certainty, whether a particular waste stream will result in liability and when the liability will ocurr. * Cost estimation can be based on experiencies with other plants failures in average (of the same matter). The difficulty is the uncertainty of the costs. It is impossible to predict at the time when a project is evaluated whether and when the waste streams associated with it will generate liability under the legislation (i.e. Superfund). Both liability costs and the time at which these liabilities ocurr can dramatically impact a project’s economic viability.

Tier 2. Future Liabilities Tier 2. Future Liabilities * Due the uncertaity associated with estimates of future liabilities these are evaluated qualitatively instead of quantitatively in three distinct parameters: - The probability that an event will ocurr - The costs associated with the event - When the event will ocurr In estimating the probability of a fine or penalty, it should be recognized that not all process units are equally likely to be fined The level of responsabilty for cost estimates that might be inaccurate by orders of magnitude drives publicity traded companies to either avoid quantitative evaluation of liability costs or to exercise extrem caution in estimating potential liability. For events that will ocurr in future years such costs of complying with anticipated future regulations, knowledge of when the event will ocurr is critical to determining the present value of expected costs.

Tier 2. Future Liabilities Tier 2. Future Liabilities * Factors influencing the probability of a fine or penalty include: - The extend that spill control measures will be in place - The history and reputation of the plant or company - The local culture and visibility of the operation to non-governmental organizations Source: (AIChECWRT, 2000) Even the best run manufacturing facilities have ocassional violations of environmental statutes. These might be violations due to inadecuate reporting or notification (paperwork violations), or violations due to process upsets. Most companies keep historical records of these violations, and these can be used to estimate the probability of future fines and penalties.

Tier 2. Future Liabilities Example: If the goal is to estimate the expected value of a civil fine or penalty, the likelihood that a fine will be assesed and the likely magnitude of that fine must be calculated: If the probability of a fine being assesed is 0.1 (1 chance in 10) per year and the likely magnitude of the fine is $10,000, the expected annual cost due to fines would be $1000. The level of responsabilty for cost estimates that might be inaccurate by orders of magnitude drives publicity traded companies to either avoid quantitative evaluation of liability costs or to exercise extrem caution in estimating potential liability. For events that will ocurr in future years such costs of complying with anticipated future regulations, knowledge of when the event will ocurr is critical to determining the present value of expected costs.

Tier 3. Less Tangible Costs These are coss and benefits, internal to a company, associated with improved environmental performance: * Consumer responses * Employee relations * Corporate image Such factors are even more difficult to quantitatively evaluate than tier 1 and 2 due the three factors mentioned in Tier 2.

Tier 3. Less Tangible Costs Intangible cost categories and how they affect: * Staff : productivity, morale, turnover, union negotiating time Poor environmental performance due workplace conditions, illness, lower productivity *Market Share: negative enmironmental incidents to loss in market share * License to operate, are costs associated with issues such as delays in receiving permits

Tier 3. Less Tangible Costs Intangible cost categories and how they affect: * Investor relationships: costs are reflected in stock price * Lender relationships: costs are reflected in bond ratings * Community and regulator relationships: that are related to licence to operate

The expenditures are not ditributed uniformly among industry sectors The expenditures are not ditributed uniformly among industry sectors. * Petroleum refining * Chemical manufacturing - They spend much higher fractions of their net sales and capital expenditures on pollution abatement than other industrial sectors. >>>>> Therefore, minimizing costs by prevening wastes and emissions will be far more strategic an issue than in other sectors