Pollution Prevention Benefits Manual

Prepared by:
ICF Incorporated

Prepared for:
Office of Solid Waste/Office of Policy Planning and Evaluation, U.S. Environmental Protection Agency

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

The manual was designed to help industry incorporate environmental costs into decision-making. The objective was to help industry increase environmental protection and reduce compliance costs by using true costs of current materials and waste management and by evaluating financial paybacks of pollution prevention alternatives.

Development/publication date and updates:
October 1990

Public availability:
Available

Purpose and current use:
The manual was produced under the direction of Dr. Ron McHugh, Office of Policy Planning and Evaluation, U.S. EPA by ICF Incorporated. The manual is being distributed through the Pollution Prevention Information Clearinghouse. A recent study showed that out of 50 companies estimating environmental liabilities, 20% were using the P2 Benefits Manual method. The rest were using methods created inhouse.[1]

Cost information:
Free from the Pollution Prevention Information Clearinghouse (PPIC).

System requirements:
Consists of a manual and worksheets.

Summary of methodology

This method compares pollution prevention alternatives as compared to the current practice. The method sets up a hierarchy of costs. The costs in the hierarchy progress from obvious internal to not-so-obvious hidden costs. The manual stresses that companies need not address all the tiers in every analysis. Rather, companies should include just enough tiers to show the economic gain from choosing the P2 product or process. At each tier of the hierarchy, users complete worksheets that identify inputs and outputs to be estimated and provide formulas with suggested values based on user-specified situations.

The hierarchy of costs is as follows:

EXAMPLETier 0-Usual equipment, labor, materialscompliance, permittingTier 2-Liability penalties/fines, liabilities consumer response, employee relations
TIER
Tier 1-Hidden
Tier 3-Less Tangible

Although the costs in Tier 3 have been referred to as less tangible in the manual, we include them as hidden costs (since they are internal). However, in the calculation of liability costs events such as natural resource damage is taken into account. This can be classified as a social or external cost.

Life-cycle stages covered

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

The manual considers on-site waste generation and waste management on- and off-site. The second stage (manufacturing) is considered to calculate possible future liability costs, according to the manner of disposal and applicable regulations. Use/reuse does not include the use of a product once it leaves the company.

Type of costs considered

Conventional
Potentially hidden
Contingent
External ---

The manual considers conventional and hidden costs of inputs and outputs, liability costs of outputs, and the impact costs of consumer response, employee relations, etc.

Method of cost estimation

Costs in Tiers 0 and 1 are estimated users. The model provides cost equations to assist in calculating future liability costs. Each equation consists of several variables for which the manual provides suggested values. Liability equations incorporate user-identified values and are provided for the following:

To calculate less-tangible costs, the manual recommends users use their own judgments, and provides methods of making percent adjustments to expenses and operating revenues. However, users must decide the number of tiers they want to include in their analysis.

Generation of financial indicators

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

The report guides users in preparing incremental annualized cash flows and calculating after-tax total annualized savings, NPV, and the IRR. It suggests generating these figures after calculating each tier of costs, which can be very useful for users. The worksheet allows users to calculate NPVs using four different discount rates, one of which is user-specified.

Attributes

The model considers that consumer acceptance and employee/union relations change when wastes are reduced. Further, the tiered approach provides a progression of detail for users that may aid in comparing previous costing methods. The appendix provides an example case of a hypothetical firm. The section on hidden regulatory costs is discussed in detail with brief descriptions of specific requirements in the regulatory cost protocols of six acts (RCRA, CERCLA, Superfund, CAA, CWA, OSHA).

Although the manual does not go into detail on the Tier 0 facility analysis and cost development, it refers readers to another manual prepared by EPA, Waste Minimization Opportunity Assessment Manual (EPA/625/7-88/003), that covers the subject in detail.

Limitations

The manual discusses only certain aspects of calculating liability costs. The assumptions behind formulating the given equations and references for additional information are not provided. Users are expected to use assumptions and equations that suit their particular cases. However, the manual makes an important point that liability cost calculations should not be left out only because they are difficult to calculate. The section on hidden regulatory costs under the six acts is now outdated and will need to be updated by users to reflect changes in regulations since 1989. Calculations can become cumbersome without a software system. However, some simplifying tables are provided. The manual does not discuss the pros and cons of using one financial indicator as a decisive factor over the other.

Basis for evaluation:
The information provided here is based on a profile of the tool presented in Weitz et al. (1994). Subsequent reviews were done by incorporating updated product information from a copy of the manual (Volume I, October 1989), and through telephone communications with the U.S. EPA in April, 1995.

Contact information:
Holly Elwood
USEPA, Office of Pollution Prevention and Toxics
401 M. Street, SW
Washington, DC 20460
202-260-4362

Report number: EPA230-R-89-100
Pollution Prevention Information Clearinghouse
202-260-1023

Joseph Karam/James Faulstich/James Dickson
ICF Technology, Inc.
Fairfax, Virginia 22031-1207
703-934-3000

  1. Information taken from the forthcoming document "Environmental Cost Accounting for Capital Budgeting: A Benchmark Survey of Management Accountants," 1995, being prepared by the Tellus Institute for EPA, OPPT.

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