Economic Analysis for Pollution Prevention

Prepared by:

Pollution Prevention Division Washington State Department of Ecology

Prepared for:

Washington State Department of Ecology

Application:

Financial analysis:
Environmental impact analysis:	---
Waste management/P2:
Environmental cost listing/database:	---
Cost estimation:	---
Alternative product/process comparison:	---

This method compares pollution prevention options with current operating practices.

Development/publication date and updates:

July 1992. A fact sheet on the same topic was published in 1995.

Public availability:

A 4-page fact sheet is available

Purpose and current use:

Information fact-sheet.

Cost information:

The fact sheet is available free of charge through the Washington State Department of Ecology.

System requirements:

Cost analysis spreadsheet formats, activities for analysis

Summary of methodology

The method recommends including only those differential costs that would change if the pollution prevention opportunity was implemented. The method also recommends a scoring system risk analysis with considerations based on risks such as property contamination, compliance violations, health effects, accidents, and long-term disposal liability. The updated fact sheet does not discuss this. "Total cost" is calculated as the usual cost of running an industrial process plus the environmental costs such as compliance and oversight or management. The updated version of the fact sheet requires users to enter estimates of compliance and oversight costs.

Life-cycle stages covered

Raw material acquisition	---
Manufacturing stage
Use/reuse/maintenance
Recycle/waste management

The method considers raw materials acquisition, processing/manufacturing, transportation/storage/packaging, and waste management. The raw material acquisition stage is not check-marked, as our definition of this stage is different from the implication in this case. This is covered to the extent that product/vendor research is done. The updated version does not include waste management costs in the sample spreadsheet.

Type of costs considered

Conventional
Potentially hidden
Contingent
External	---

The method estimates conventional and hidden costs of inputs and outputs, and liability costs of outputs. Typical costs and activities are listed as follows:

Method of cost estimation

Users estimated costs for activities. The following methods of estimation are recommended in the 1992 fact sheet:

1. Differential accounting: only the future cash flows that would change if the pollution prevention project was implemented are accounted for.
   
2. Inclusion of labor hours.
   
3. Extended time frame: a 5-year period is recommended for analysis.
   
4. Modified financial criteria: a lower rate of return, lower discount rate, or shorter payback period is recommended because of intangible benefits such as reduced risk, improved quality, fewer sick days, or better public image.
   

Generation of financial indicators

Net present value (NPV)
Payback period	---
Internal rate of return (IRR)	---
Benefits cost ratio	---
Other	---

Instructions and tables on how to calculate the NPV are provided.

Attributes

This method not only accounts for conventional costs, but also liability costs. Reduced risks are accounted for with a weighting system. The method in the 1992 fact sheet identifies risk factors, estimates their importance using a "risk score", and provides a way of using the results for decisions. High risks are weighted most heavily; unknown risks are given a "medium" score.

Limitations

External (social) costs are not included in the analysis. The sample spreadsheet calculates the NPV for a 5 year project. This time frame may be too small for some environmental projects.

Basis for evaluation:

The information provided here is based on a profile of the tool presented Weitz et al. (1994). Subsequent reviews were done by incorporating updated product information obtained from the Washington State Department of Ecology in May, 1995.

Contact information:

A 4-page fact sheet called "Cost Analysis for Pollution Prevention " is an update of the original paper and is available through the Washington State Department of Ecology. Ecology report - Publication # 95-400.

State of Washington,

Department of Ecology

PO Box 47775

Olympia, WA 98504

General number:

360-407-6730

Michael Johnson

360-407-6338

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