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 burden
created by material, energy, inventory and
other 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



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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


Pollution control equipment costs



Onsite and offsite
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 environmental 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
Profitability Analysis
CP
Costs incurred
Benefits obtained
• 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
Net Present Value

Takes into account time value of money

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PV: Present Value
FV: Future Value = Net Savings – (Investments + Operational Costs)
i: Rate of interest in the market
n: No. of years
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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