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Pollution Prevention Planning Handbook

V – Appendix C: Assessing the Costs and Benefits of Pollution Prevention Options

Strategies for Improving Environmental Performance and the Bottom Line Through Pollution Prevention

The degree to which an enterprise minimizes or avoids environmental risk and maximizes potential environmental opportunities can have important implications for its profitability. Surveys have indicated that some customers are making the environment an important part of their purchasing decisions, and that competitors in some fields are promoting the "greenness" of their products and services in their marketing strategies. Environmental performance is becoming an important factor in some supply chains, such as in automobile manufacturing. Businesses are recognizing that pollution and waste represent inefficiencies and lost profits in their production processes. Attention to environmental opportunities and obligations affects not only a business’s cash flow but also the marketability and value of its assets.

As a result of factors like these, an increasing number of companies are recognizing the competitive advantage to be gained in "valuing" environmental performance, as opposed to viewing it as a cost of doing business. One approach4 to doing this consists of:

  1. identifying the strategic business value of environmental performance;
  2. measuring results that matter in financial terms; and
  3. communicating environmentally linked financial performance.

4 This approach is described further in Uncovering Value: Integrating Environmental and Financial Performance. Program on Energy, the Environment, and the Economy. The Aspen Institute. Washington, D.C., 1998.

Table C1: Links Between a Company’s Environmental Strategies and Investor Interests
 Franchise ProtectionProcess ChangesProduct ChangesNew Market Development
Business ValueRight to operateCost and liability reductionMarket share and pricing power through customer loyalty and reputationNew Markets
Financial Impact

Reduces earnings

Reduces risk

Increases margins

Often uses less capital

Increases return on equity

Reduces risk

Increases competitive advantage

Increases sales

Increases competitive advantage

Source: Adapted from D. Reed, "Green Shareholder Value, Hype or Hit?" Sustainable Enterprise Perspectives, World Resources Institute, 1998.

  1. Identifying the strategic business value of environmental performance requires direct communication between an organization’s financial/business side and its technical/environmental side to ensure an in-depth understanding of the relevance of environmental considerations to core business strategies. These linkages can include:
  • protecting the business franchise: Ford, GM and Daimler-Chrysler require all of their "Tier 1" suppliers to have an environmental management system (EMS) that is certified under ISO 14001. Suppliers without an EMS may lose important customers.
  • changing processes to improve efficiency: Millar Western developed an effluent-free process for its new pulp mill in Meadow Lake, Saskatchewan. For approximately the same cost as traditional treatment processes, the new mill has eliminated the discharge of liquid effluents into the environment, uses 40% less fresh water than traditional kraft mills and has production yields 60% to 100% greater than traditional kraft mills.
  • developing new products: Volvo increased its market share in one truck segment by 35% over a three-year period by differentiating its trucks on their environmental features (fuel efficiency and low emissions). This boosted the company’s operating income from 30% to 56% during the same time period.
  • building and entering new markets: Green Mountain Energy Resources, a power marketer in the United States, is able to charge a premium for electricity generated from renewable sources. As a result of consumer preference for "cleaner" power, it has become the largest marketer of residential power across the United States.

Table C1 provides a way of examining how environmental performance can be linked with business strategy to reveal potential bottom-line benefits.

  1. Measuring results that matter in financial terms involves knowing how the company is currently valued by investors and what measures are used, how the environmental aspects of its strategies affect those measures and how to collect data that are meaningful in demonstrating that connection. Many companies pursue environmental strategies that involve process change, leading to cost efficiencies and increased earnings. Accurate and complete information about the costs and savings associated with those changes is essential to sound and fair evaluation of these strategies over time.
  2. Communicating environmentally linked financial performance requires expressing measurements and results in terms that are understood, relevant to and used by the target audience – whether managers or investors. Communication of measurement information must be:
  • shared and understood internally by all managers (i.e., a common language);
  • expressed in terms of business functions and goals as well as being financially relevant; and
  • credible, consistent and comparable (over time and between companies).

Tools for Assessing the Profitability of Pollution Prevention Options

Analytical tools that can be used in evaluating pollution prevention options include:

  • conventional cost accounting (CCA);
  • total cost accounting (TCA);
  • full cost accounting (FCA); and
  • life cycle assessment (LCA).

Figure C: Relationshiops Between Forms of Accounting

Figure C: Relationships Between Forms of Accounting. See text below.

  • conventional cost accounting (CCA);
    • Direct and indirect costs;
    • "Recognized contingent costs";
  • total cost accounting (TCA);
    • Direct and indirect costs;
    • "Recognized contingent costs";
    • A broader range of direct, indirect, contingent, and less quantifiable costs;
  • full cost accounting (FCA);
    • Direct and indirect costs;
    • "Recognized contingent costs";
    • A broader range of direct, indirect, contingent, and less quantifiable costs;
    • External costs borne by society.

Source: Modified from: Total Cost Assessment Guidelines, 1997, B.C. Ministry of Environment, Lands and Parks.

In different ways and with varying levels of usefulness, these tools can be used to identify, assess and allocate the environmental costs of each pollution prevention option being considered. These tools represent only a sample of the environmental managerial accounting tools that are being developed and implemented in a number of jurisdictions worldwide and that are available to an enterprise for use in assessing options. Figure C1 demonstrates the relationships between forms of cost accounting.

Conventional cost accounting (CCA) focuses primarily on determining financial costs based on categories of direct and indirect costs associated with a particular activity (product, service, process). Using this form of accounting, many of the environmental costs associated with permitting, insurance premiums, legal fees, utilities costs, etc., are attributed to overhead accounts, which may then be arbitrarily allocated to products, processes or services (e.g., on a square foot or product volume basis) or may not even be allocated at all. As a consequence, managers and executives are often unaware of the extent of these costs and have little or no incentive to reduce them. These costing methods can also distort the real cost picture for products or product lines and result in sub-optimal decisions from both an environmental and a financial perspective.

Total cost accounting (TCA) is a financial tool used to provide a more complete assessment of the true profitability of business investments and operations. It has been used to evaluate alternative capital investments, operational expenditures and procurement decisions. Particularly when used in conjunction with activity-based costing, TCA enhances decision making by improving the underlying cost information on which decisions are based. Relative to conventional cost accounting and project evaluation approaches, TCA:

  • takes into account a wider range of direct and indirect costs and savings;
  • uses longer time horizons that reflect the full economic or commercial life of the project;
  • uses financial indicators that incorporate the time value of money;
  • reveals hidden costs, by relating them to the activities that cause them; and
  • considers uncertain or less quantifiable costs.

It is important to note that TCA is not a new method of cost accounting but rather an existing tool for thinking about costs and project evaluation in a different, more comprehensive way. In most cases it is the best tool for identifying and assessing the costs of pollution prevention options.

Full cost accounting (FCA) attempts to identify and quantify the external costs associated with the activities of a given enterprise that are currently being borne by society (damage to health, land, buildings, crops, vegetation, water bodies etc.). Companies do not normally include an assessment of external costs in the information collected to assist in choosing among pollution prevention options, partly because they are not currently held legally accountable and liable for most such impacts but mainly because of the difficulty of measuring such costs. Very few companies have the resources and expertise to carry out FCA, and there is no widely accepted methodology for doing so in a practical manner. Nonetheless, with the growing acceptance worldwide of the "polluter pays" principle, companies are becoming alerted to the increasing demand by society to "internalize" these traditionally external costs.

Life cycle assessment (LCA) is a method for systematically identifying, quantifying and assessing inputs and outputs (i.e., sources of environmental impact) throughout a product’s life cycle, from raw material acquisition and processing, through its manufacture, use, reuse and maintenance, to its final disposal or recycling. Although LCA is heavily relied on by some large companies, such as Alcan and Volvo, in many cases it is only feasible to undertake the first step in LCA, identifying and inventorying environmental impacts over the life cycle of a product. Where LCA is integrated in quantitative terms with accounting information, however, it can be a very powerful tool for identifying opportunities to reduce environmental impacts in the most cost-effective manner, or even for identifying potential cost savings. For example, Procter and Gamble used LCA to determine that the energy needed to warm water when using household cleaners accounted for more than half of the total energy associated with the product (including manufacturing, transportation and disposal). With this information, the company focused on developing "cold water" or "no rinse" liquid cleaners, thereby expanding market share and increasing profits while decreasing adverse environmental impacts.

Basic Steps for Assessing the Costs and Benefits of Pollution Prevention Options

In theory, both full cost accounting and life cycle assessment thinking, at least in qualitative terms, should be a feature in all pollution prevention planning activities. In practice, however, it is not always appropriate (from the company’s perspective) to incorporate FCA or to go beyond a qualitative LCA approach. This section therefore focuses on total cost accounting. It provides an overview of the four basic steps involved in assessing the financial aspects and viability of prevention options relative to the status quo, using a TCA approach.

Step 1: Define the decision options. Identify the business objectives and the available technical options that meet these objectives.

Step 2: Identify and understand the costs associated with each option, in order to be able to compile a complete and accurate picture of the real costs associated with all of the available options, including the status quo. To assist with this task, a preliminary assessment can be conducted in order to exclude costs that are the same for each option. Table C2 provides a checklist for identifying some of the possible costs and sources of data for identifying those costs, categorized under the following headings:

  • Direct costs – raw material input, labour, etc.
  • Indirect costs – up-front costs associated with siting and design requirements; operating costs such as training, monitoring, compliance and disposal costs, including those resulting from poor production quality; back-end costs associated with decommissioning, site clean-up or other remediation efforts.
  • Contingent costs – fines for future regulatory infractions, compensation for future environmental damage and costs associated with future lost days due to production-related employee absence.
  • Less tangible or quantifiable costs – arising from changes in corporate image, employee morale, customer relations and relations with regulators.
  • External costs – costs borne by society as a result of the production, use and disposal of a given product or service.

Step 3: Tabulate and summarize the costs identified for each option (including the status quo). These costs can then be used for further financial analysis if necessary, such as determining and comparing the financial performance of each option using capital budgeting and discounted cash-flow techniques. Sometimes it may be necessary to use activity-based costing techniques to assign identified costs correctly to the appropriate products and processes. The costs of different options compared to the status quo can be displayed, revealing potential savings from each option, all other considerations being equal.

Step 4: Incorporate the cost information into the business decision making process. The above financial evaluation should be weighed with business and technical considerations to decide which pollution prevention option(s)to adopt. In conducting this analysis, it is important to identify and distinguish one-time implementation costs and continuing costs related to production and service delivery. This will be particularly relevant, for example, if a multi-year cash-flow analysis is carried out for each option and for the status quo. An example using these four steps has been provided.

Table C2: Checklist of Possible Potential Costs and Sources of Data for Identifying Them
Type of CostInternal SourceExternal Source

Direct Costs

  • Capital costs e.g., equipment purchases, spare parts and insurance; materials for installation; utility systems and connections
  • Operating costs e.g., materials purchase, transport and storage; labour, including inspections; utilities
  • Costs associated with changes in revenue generation e.g., increase or decrease in product sales due to changes in manufacturing throughput/production
  • purchasing
  • individual facilities
  • sponsoring business unit
  • accounting
  • project management
  • proposals/bids
  • price lists

Indirect Costs

  • Capital costs e.g., fees relating to permits including labour, supervision and materials; site preparation, including demolition and salvage; installation and construction, including design and procurements costs; training; working capital; contingency
  • Operating costs e.g., marketing and public relations; management of non-product outputs, including emergency planning, reuse, hauling and disposal, tracking/info system, storage; regulatory compliance including training, reporting, fees/taxes, site closure and reclamation; insurance
  • Costs associated with changes in revenue generation e.g., by-product sales
  • sponsoring business, unit or department
  • related business units
  • individual facilities
  • environmental staff
  • accounting
  • legal department
  • project management
  • case/benchmarking studies within the same industry
  • case/benchmarking studies in different industries with similar issues
  • research institutions

Contingent Costs

  • Future liability costs e.g., fines, penalties, legal proceedings, personal injury claims, property damage claims, natural resource damages and site remediation
  • Production losses e.g., from accidents or clean-up
  • environmental staff
  • legal department
  • systems operations
  • case/benchmarking studies
  • databases of failure information
  • original equipment manufacturer failure rates
  • regulators

Less Tangible or Quantifiable Costs

  • Strategic issues leading to an increase or decrease in market share e.g., corporate image, customer satisfaction and relations; product quality or certification; employee and community relations; employee and community health and safety
  • Strategic issues leading to new revenue streams e.g., flexibility to market new products; innovation
  • Strategic issues leading to more efficient operations e.g., investor relations; credit ratings; employee relations; employee health and safety; relations with regulators, lenders and insurers; reliability or production capability; innovation
  • all business units
  • corporate comptroller
  • environmental staff
  • legal department
  • case/benchmarking studies of companies that have a track record of decisions in the face of high "image" costs
  • industry associations
  • studies of stock market reaction to environmental incidents

External Costs

  • Current societal costs associated with production, use and disposal of product and service
  • environmental staff
  • occupational health and safety/personnel
  • Workers Compensation Boards
  • government databases
  • hospital and other healthrelated organizations' studies
  • reported losses by other sectors of society

Source: Adapted from Total Cost Assessment Guidelines, Draft, June 1997.

Example of Assessing the Costs and Benefits of Pollution Prevention Options Using a Total Cost Accounting Approach

The enterprise: small circuit-board manufacturer, making 100,000 square feet of product per year; 30 employees, 1 responsible for environmental management

Strategic business goal related to the environment: to reduce the use and generation of hazardous materials and "non-product" outputs by 50%, while improving customer satisfaction

P2 planning exercise: identified an opportunity to reduce the use of a hazardous/toxic substance in the workplace

Existing process: circuit–board panels undergo a number of plating and rinsing processes; panels are carried on stainless steel racks, which must be rinsed with the hazardous/toxic substance after each plating run

P2 option: copper-splined, plastic-coated racks eliminate the need for rinsing and support a more even distribution of electrical current, resulting in a more accurate and consistent plating process, leading to improved customer satisfaction

TCA Step 1: Define the decision options – are there compelling reasons for considering alternative options to the status quo, financial or otherwise?

  • beyond financial performance, the P2 option would address the strategic business goal stated above

TCA Step 2: Understand and identify costs – what would change as a result of this option?

  • examples of direct financial considerations: cost savings in purchasing, storage, handling and recycling the hazardous/toxic substance currently used as a rinsing agent; productivity improvements (no longer need to strip racks after plating runs)
  • indirect cost considerations directly attributable to the option: reduction in environmental reporting/tracking; health and safety training and equipment; savings in purchasing and inventory management; reductions in energy and water use
  • contingent cost considerations: removal of the hazardous/toxic substance from the workplace; reduction in future liabilities such as fines, penalties and personal injury claims; improved employee and community relations; employee health and safety
  • less quantifiable costs: customer satisfaction and potential for improved market share over and above financial benefits associated with reduced product defects

TCA Step 3: Summarize and compare the financial implications of the plastic-coated rack investment relative to the status quo.

  • state assumptions such as expected days of operation per year; useful life of rack; inflation rates; discount rate; corporate income tax rate, etc.
  • calculate costs and benefits using a number of scenarios that increase and decrease each of the rates stated in the assumptions, both individually and simultaneously

TCA Step 4: Integrate financial cost and benefit information with other business and technical considerations to decide whether to implement the plastic-coated rack option.

References and Resources

For more information on pollution prevention and pollution prevention planning:

Canadian Pollution Prevention Information Clearinghouse:

Canadian Centre for Pollution Prevention:

Canadian Environmental Protection Act, 1999:

Your Environment Canada Regional Office.

For a general overview on accounting for environmental costs and benefits:

Introductory Guide to Environmental Accounting. Environment Canada, Ottawa, 1999

Other sources of assistance in environmental cost accounting:

The Green Ledgers publication of the World Resources Institute in Washington, D.C., provides practical steps for integrating environmental accounting practices into existing business systems

The Canadian Institute of Chartered Accountants (CICA) has published studies in environmental performance reporting, waste management guidelines and full cost accounting:

The Society of Management Accountants of Canada (SMAC) has published guides on business strategy, performance measurement and accounting for environmental costs:

For more information on life cycle assessment:

Environmental Life Cycle Management: A Guide to Better Business Decisions. Environment Canada, 1997 (For an overview of the Guide, see

Various free LCA software tools available on the Internet, including:

  • The U.S. National Institute of Standards and Technology’s LCA decision-support software for buildings called Buildings for Environmental and Economic Sustainability:
  • Carnegie Mellon University Green Design Initiative’s Economic Input-Output Lifecycle Assessment (EIOLCA) software:
  • In the fall of 2000, the U.S. Environmental Protection Agency will open LCAccess, a free, web-based searchable directory of life cycle inventory data:

The ISO 14040 series of guidance documents.

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