"In order to receive funding, it is essential that pollution prevention projects successfully compete in the company's capital funding sequence or before the bank's loan committee."
American Institute for Pollution Prevention
Before pollution prevention projects are evaluated for economic feasibility, the full cost of waste generation must be determined. This full cost is necessary to develop the economics of pollution prevention techniques/technologies, including calculating the cost savings and payback periods. Methods for true cost determination and economic analysis are presented in this chapter. A cost accounting system for all wastes generated in the facility will also be described.
The full cost of waste generation includes more than just treatment or disposal costs; it includes all the costs incurred by producing and handling waste. All of the expenditures associated with the waste, both direct and indirect, should be identified. These include, but are not limited to, the following: purchasing, storage and inventory, and in-process use of materials; air and water emissions, solid waste collection, waste storage, on-site treatment or recycling; waste disposal; waste transportation; lost raw materials; labor costs; and capital depreciation. Often, wasted raw material costs are three fourths of the full cost of generating waste. Waste disposal costs are typically less than half the total costs (Selman and Czarnecki, 1988). Many pollution prevention options will not appear to be justified if only half, or less, of the likely savings are considered. Some examples of waste associated costs to consider are presented in Table 4.
| RAW MATERIAL AND HAZARDOUS SUBSTANCE USE | |
|---|---|
| Purchasing | Taxes on hazardous and other products Safety training MSDS filing Safety equipment Extra insurance premiums Labor |
| Storage and Inventory | Special storage facilities Safety equipment Storage area inspection and monitoring Storage container labeling Safety training Emergency response planning Spill containment equipment Lost product from spills, evaporation, etc. Labor SARA Title III (TRI) reporting |
| In-Process Use | Safety training Safety equipment Containment facilities and equipment Clean-up supplies Labor |
| Lost Raw Materials | Labor for handling Equipment for clean-up Reporting |
| WASTE GENERATION | |
| Air and Water Emissions | Air emission permits and controls TRI measurements/estimates TRI reporting TRI fees Worker health monitoring Sewer discharge fees NPDES permits Water quality monitoring Sampling training Pretreatment equipment Pretreatment system operation |
| Solid Waste Collection | Safety training Safety equipment Collection supplies Container labels Container labeling Recordkeeping Truck maintenance (for in-house fleet) |
| Waste Storage | Storage permits Special storage facilities Spill containment equipment Emergency response planning Safety training Storage area inspection and monitoring |
| On-Site Treatment or Recycling | Capital and operating costs Depreciation Utilities Operator training Safety equipment Emergency response planning Permits Inspection and monitoring Insurance |
| Disposal | Sewer fees Container manifesting Disposal vendor fees Preparation for transportation Transportation Insurance and liability Disposal site monitoring |
(adapted from Pollution Prevention Planning, Washington State Department of Ecology, January, 1992)
Once the full costs of the waste streams are determined, an economic analysis of each specific pollution prevention project can be conducted. This analysis will provide management information on the costs and benefits associated with the techniques/technologies so they can decide whether it is economically feasible to proceed with implementation. Certain benefits, such as reduced long-term liability, reduced worker exposure to toxic chemicals, and improved community relations, will be difficult to quantify.
There are essentially two steps in an economic analysis after the true costs of waste generation have been determined: calculate the initial cost of implementing the pollution prevention strategy, and determine the annual cost savings and payback period (if applicable) for the project. In some cases, the total capital and operating costs (including the waste handling costs) for the existing process and the "new" process must be considered if they are substantially different. For example, some pollution prevention options involve increased use of utilities which must be taken into account.
The initial cost of the implemented technique/technology should include capital requirements for new equipment, start-up costs, training costs for new equipment or procedures, and any costs for regulatory compliance. The full cost for waste generation should also be calculated for the new option using the procedure described previously in this chapter. The strategy in question may have only limited initial costs associated with it, such as capital and start-up expenditures, since it may be as simple as a raw material substitution or making a minor process modification. In these cases, the annual waste cost savings may be the principle factor considered. However, there may be costs associated with implementation of the pollution prevention project such as process down-time or upsets.
A good general reference for cost considerations in pollution prevention is the American Institute for Pollution Prevention's 1993 document, A Primer for Financial Analysis of Pollution Prevention Projects. An additional source to consult for in-depth coverage, worksheets, and resources on pollution prevention is U.S. EPA's Facility Pollution Prevention Guide.
Once the total initial cost for implementing the pollution prevention strategy is determined, the cost savings should be determined. To calculate this, the following equation may be used:
Cost savings = (Existing full cost of waste) minus (Projected full costs of waste after implementation)
For options which do not involve capital investments or other initial expenditures, waste handling cost savings may be the primary consideration for economic feasibility. For most pollution prevention options, some projected costs will be reduced if the existing full costs for waste generation are identified.
For strategies that involve initial expenditures, such as capital investments and startup costs, each company will have its own criteria of feasibility to consider. It will usually be necessary to calculate the economics of a project by methods specifically determined and approved by the company.
A quick test for initial feasibility is the payback period. Additional methods of determining long-term costs include net present value, internal rate of return, and profitability index. Further information on applying these methods can be found in U.S. EPA's Total Cost Assessment: Accelerating Industrial Pollution Prevention through Innovative Project Financial Analysis (1992). The payback period is defined as the amount of time (generally expressed in years) it takes to recover the initial investment through annual cost savings. The following equation can be used as a simple calculation of the payback period. Note that this equation does not account for depreciation, interest, etc. A very thorough and in-depth examination of full cost accounting can be found in Appendix F of U.S. EPA's Facility Pollution Prevention Guide.
Simplified Payback Period = (initial investment (capital + start-up + other costs)) divided by (annual full waste handling cost savings)
In options where there is a substantial difference in the total operating costs of the existing process and the "new" process (e.g., use of utilities increases significantly), the total annual operating cost savings (including waste handling cost savings) should be used in place of the annual true waste handling when calculating the payback period.
A cost allocation system is an important element of a pollution prevention program. A cost allocation system charges each department or process for the total waste management costs for the wastes they generate. The charges should cover the full cost of the waste as explained previously in this chapter. This cost allocation system should lower the total overhead cost because most companies charge waste disposal costs to overhead (i.e., the environmental department). It will also provide incentives for employees associated with the departments/processes that are charged for the waste handling to reduce their waste generation and subsequently their costs.
By calculating the full cost of waste generation, the parameters for determining the economic feasibility of pollution prevention strategies (annual cost savings and payback period) can be developed. These will be used in the following chapter to evaluate the pollution prevention options and to decide which option could be implemented first. Establishing a cost allocation system will provide employees, including management, with a better awareness of the costs associated with waste generation in their department/process.