Beth Beloff Dicksen Tanzil and Matthew Retoske

BRIDGES to Sustainability

Societal costs constitute an important element of the costs of environmental impacts from industrial activities, although they often fall outside the private calculation of costs and benefits to a company. Most of these costs, such as health and property damages due to pollution, usually belong in the category of societal costs (or external costs) borne by society at large. In this chapter, we look at the nature of the societal cost element of Total Cost Assessment (TCA), how it is a cogent indicator of future internal corporate costs, and how it can be estimated.

6.2.4.1 Evolution of Costs. From a sustainability perspective, the TCA methodology should account for both internal corporate costs and societal costs. In the conventional business model (Fig. 6.12a), a company invests on a project when the projected revenues are greater than the projected costs to the company. However, to reflect environmental stewardship and social responsibility, a truly sustainable company should make considerations beyond the conventional business model

(a) Conventional business model

Business Revenues

(a) Conventional business model

Business Revenues

Business Costs

Invest when business revenues > business costs

(b) Sustainability model

Societal Costs

Business Costs

(b) Sustainability model

Societal

Benefits +

Business Revenues

Societal Costs

Business Costs

Figure 6.12. To reflect environmental stewardship and social responsibility, a truly sustainable company should make considerations beyond the conventional business model and take into account the societal (external) costs and benefits. (©BRIDGES to Sustainability, 2002.)

Societal

Benefits +

Business Revenues

Invest when business revenues > business costs and total benefits > total costs

Figure 6.12. To reflect environmental stewardship and social responsibility, a truly sustainable company should make considerations beyond the conventional business model and take into account the societal (external) costs and benefits. (©BRIDGES to Sustainability, 2002.)

and take into account the societal (external) costs and benefits. In this sustainability model (Fig. 6.12b), a company would weigh total costs and benefits, which include societal costs and benefits, in its investment decisions.

While the external costs do not affect a company's bottom line at the time of impact, they eventually manifest themselves in the internal company costs, as illustrated in Figure 6.13. Previous work on the external costs of "harmless" odors by BRIDGES to Sustainability (Beloff et al., 2000) provides a perfect example on how a seemingly "harmless" external intangible effect can translate into substantial internal company costs in the forms of fines, capital and operating costs for abatement equipment, as well as other more intangible costs associated with loss of goodwill and reputation, job productivity declines due to lowered employee morale, and so on. Similarly, societal benefits - both negative costs and positive value-add - can also be conceptually viewed as providing a flowback to the company creating the benefits for the community. This is further addressed in Section 6.2.2.

The study also found that internal company costs of odors rose markedly when a certain critical mass of affected population is exceeded, in this case at approximately 30 to 50 households affected, as shown in Figure 6.14. It should make intuitive sense that, when there are enough people in a community who are experiencing the direct effects and related costs from a company's environmental impacts, they will find one another, perhaps even be identified by NGOs, organize, consider actions that are within their control, and act. This, in turn, can lead to a disproportionate level of costs to the company as it attempts to respond to the challenges created. For these reasons, societal costs become a cogent indicator for management of future internal

Organization

Figure 6.13. Evolution of costs. External or societal costs eventually manifest themselves in the internal company costs (Beloff et al., 2000).

Organization

Figure 6.13. Evolution of costs. External or societal costs eventually manifest themselves in the internal company costs (Beloff et al., 2000).

Cost of Odors

$900,000 $800,000 $700,000 g $600,000 ^ $500,000 § $400,000

Internal Society

10 100 1000 Number of Affected Homes

Affected = Real Estate Value + Medical, legal and/or air conditioning + investigational costs

Figure 6.14. The internalization of external costs rises rapidly once a critical mass is exceeded (in this case, approximately 30 to 50 households) (Beloff et al., 2000).

company costs, as they represent societal concerns that are likely to be translated into real business impacts to the company.

6.2.4.2 Societal Costs: Global, Regional, and Local. Industrial activities may result in environmental impacts of different scales: including global, regional, and local. Global warming and stratospheric ozone depletion are examples of global impacts. Impacts and damages in this category, such as natural calamities due to global climate change attributed to greenhouse gases, can be experienced thousands of miles from the source. Regional and local impacts, in contrast, are experienced only within certain regional or local boundaries. Air and water acidification, eutro-phication, and urban air pollution problems are examples of impacts in this category.

Tying the societal costs of global impacts to a company's environmental performance requires one to examine the impacts at the global level. Assessment that is limited to regional or local boundaries may result in skewed, if not inaccurate, estimates. The societal costs of regional and local environmental impacts, on the other hand, can vary considerably with region or location and should be assessed only within their corresponding regional or local boundaries. Regional and local variables such as local population, ambient pollution level, climate, topography, and available pathways affect the extent of the environmental damages and their associated costs to the society.

6.2.4.3 Data Sources. A societal or external (Type V) cost database was included in the original TCAce™ (AIChE, 1999). This database contains some literature estimates on the societal costs of pollutant discharges to air, water, and land, and on the economic values of natural habitats. While covering a wide range of impacts, the database is far from comprehensive. For example, for the damage costs of air emissions in the United States, the database is based solely on estimates from Minnesota Public Utility Commission. These cost estimates, although rigorous and valid, were established only for one U.S. Midwestern state and may not be representative of the cost of industrial air pollution elsewhere in the United States. As pointed out in the TCAce™ manual (CWRT, 1999), many of the other reported societal cost estimates are also location-specific and do not represent general U.S. or global estimates. Furthermore, except for the damage costs of air emission, many of the reported costs are not tied to process flows (such as pound of emission) and therefore difficult to use in the design and optimization framework.

Chalmers University's "Environmental Priority Strategy in Product Development" (EPS) (Steen, 1999) is perhaps currently the most comprehensive external damage cost database, especially for use in design and optimization. It includes databases on the willingness-to-pay economic costs of pollution per unit weight of emission and of depletion per unit weight of resource use. The costs of human health, agricultural, forestry, and resource damages are incorporated into their estimates. However, these costs are estimated only in the "average sense" for OECD countries (developed economies in North America, Europe, and the Pacific Rim). Costs in each specific country, region, or locality are likely to differ, and will be higher in particular in industry- and/or population-intensive urban areas.

Societal or external cost data are also available elsewhere in the literature. The Environmental Valuation Resource Inventory (EVRI; available at http://www. evri.ec.gc.ca/evri/) includes a large database of studies of the economic valuation of ecosystems and ecosystem damages. Studies in this database provide primarily "raw data" on the economic values of the damages. Considerable work is necessary to tie the cost of damages to design-related variables such as rates of emissions and resource use. A large amount of literature is also available on the economic costs of global warming and urban air pollution. An overview of the costs of these two impacts is presented as examples in the following sections.

6.2.4.4 Example: Costs of Global Warming. Global warming is an example of a global environmental impact. Economic damages due to climate change in one region may be attributed to CO2 and other greenhouse gas emissions halfway around the world. The facts that the effects of global warming are uncertain and exist mostly as a future liability add to the complexity of estimating the societal costs of global warming.

One challenge in understanding the future liabilities associated with climate change is that scenarios can be divided into two separate yet interrelated categories. The first is greenhouse gas emissions scenarios, and the second is climate change impact scenarios. Because of the indirect nature of atmospheric carbon pollution, it is important to understand the complex relationship of the two and the limitations of defining that relationship.

Greenhouse Gas Emission Scenario. In determining greenhouse gas emission scenarios, there are four factors that need to be considered: population growth rate, growth rate of per capita GDP, energy intensity of economies, and the carbon intensity of energy. The most common method for estimating future CO2 emissions levels and the one used by the Intergovernmental Panel on Climate Change (IPCC) is the Kaya Method, based on the work of Professor Yoichi Kaya of Keio University.

Kaya's approach incorporates several demographic factors to estimate the growth rate of CO2 emissions. It assumes a continuing decrease in both energy intensity of GDP and carbon intensity of energy. The baseline global growth rate of emissions can be assumed to be 3.4 percent if past trends and future predictions hold true. With these assumptions, IPCC's fifteen- (2015) and fifty- (2050) year scenarios demonstrate that even with a decrease in energy intensity of GDP and carbon intensity of energy, emissions will increase at a steady rate.

Climate Change Impact Scenario. The potential effects of global climate change cover a large range of impacts and cost considerations, which are summarized in Table 6.10. Currently, direct internal climate-related costs are not allocated to carbon emissions. For instance, damage due to an extreme weather event or increased insurance premiums would not be identified with greenhouse gas emissions. There is some justification for not doing this - greenhouse gases dispersed in the atmosphere are not like local pollutants where an impact can be tied directly to the pollution. One may fall into an epistemological game of trying to determine cause and effect that is irreconcilable given the nature of greenhouse gas emissions. It is a practical impossibility to allocate damages or costs from one particular event to the greenhouse gas emissions from one location.

Economic studies on the societal costs of climate change present a wide range of dollar amounts per ton of carbon equivalent. Designers and decision-makers should therefore consider a number of scenarios when determining the future costs associated with greenhouse gases. It is a practical impossibility to know the full extent to which these costs are associated with anthropogenic climate change, but given the solid scientific foundation established by the IPCC, one can establish reasonable ranges of potential costs.

One option is to base decisions on the four impact scenarios shown in Table 6.11. These scenarios are based on research primarily from the IPCC, and were developed by BRIDGES to Sustainability (2002) to assist decision-makers when considering

TABLE 6.10. Societal Climate Cost Considerations

Agricultural Human health Food production Drought Flood

Population displacement Diminished food security Fresh water availability Infectious diseases Desertification Infrastructure stress Loss of biodiversity Sea level rise

Heat stress

Coral

Mangrove

Coastal

Tundra

Wetlands

Forests

Glacial retreat Threats to fisheries Soil salinization Coastal erosion Tropical cyclones Thermal water pollution

TABLE 6.11. BRIDGES' Guestimates of the Per-Ton Cost of CO2 Based on IPCC Impact Scenarios

Impact Scenario

Description

Carbon Cost

Estimate (2000 US$)

Standard

Technological surge

Carbon constrained

End of hydrocarbons

Small carbon costs incrementally increasing, $25

limited legislation, CO2 increases of 1-4% annually, impacts low-moderate New technologies accelerate reductions in $10

energy and carbon intensity, adaptive capacity high, impacts low, decrease in per capita CO2 emissions Increasing internalization of costs to arrest $95

emissions, higher energy prices, energy efficiency mandated, sequestration mandated, impacts moderate-severe Serious impacts drive austerity in energy use $275+

and carbon emissions, heavy internalization of cost, high carbon tax, severe losses from climate change impacts the societal costs of greenhouse gas emissions. The quoted costs are best guess estimates for the future based on the literature estimates. The chosen dollar amounts are a reflection of where data points "bunch" in a variety of different greenhouse gas emissions cost studies depending on assumptions and scale of those studies. These figures are offered here not as precise estimates, but to illustrate the possible range in order-of-magnitude.

6.2.4.5 Example: Costs of Regional and Urban Air Pollution. Industrial air pollution results in regional problems, such as acidification, as well as local environmental problems, especially in densely populated, industrialized urban areas. Numerous studies have been performed to estimate the societal costs of regional and urban air pollution, most of them focusing on the costs of damages to human health. The works invariably entail complex procedures, comprised of multiple steps. The procedures determine the marginal costs of air pollution typically through the following steps:

1. Relating the effect of a reduction or increase in pollutant emission to the regional/local air quality level;

2. Relating the effect of the change in regional/local air quality level to the magnitudes of health damages and/or other impacts;

3. Estimating the economic value of the damages; and

4. Normalizing the economic value of damages per unit mass of reduction/ increase in pollutant emission.

Large uncertainties are involved in each of the above steps. Consequently, they result mostly in order-of-magnitude estimates of societal costs.

The step of economic valuation (Step 3) usually uses the willingness-to-pay (WTP) approach, which measures how much the society values a noneconomic resource or how much the society is willing to pay to avoid damages. The WTP may be estimated using carefully developed questionnaires (contingent valuation) or through direct estimates of the monetary costs of the damages, for example, how much people pay to alleviate a case of headache or to extend life through medical procedures.

Another approach used in economic valuation is the hedonic pricing method. By this approach, economic valuation is obtained through estimating the direct effect of environmental impacts on market prices, usually housing prices. The hedonic pricing method is often used to estimate the economic value of more intangible damages due to air pollution, such as reduced visibility and aesthetics.

Figure 6.15 shows some of the external damage cost estimates forNOx. The costs are shown based on the reported best estimates, or the geometric average of lower and upper bound estimates when no best estimates were reported in the original publications. The magnitudes of the estimates differ by over three orders of magnitudes. With such a large range, these estimates are occasionally criticized as unreliable. However, the variations can be understood in terms of local variables. In general, the estimates are higher in densely populated urban areas such as Los Angeles, and lower in more rural and less populated areas such as rural Minnesota.

120,000

c 100,000-o

Figure 6.15. Damage cost estimates per ton of NOx emission. Best estimates or geometric average of upper and lower bound estimates, inflated to 2001$ based on Consumer Price Index.

Sources: (Pace) Ottinger et al., 1990; (CEC) California Energy Commission, 1993; (S&K) Small and Kazimi, 1995; (MnPUC) Minnesota Public Utility Commission, 1997; (M&D) McCubbin and Delucchi, 1999.

Figure 6.15. Damage cost estimates per ton of NOx emission. Best estimates or geometric average of upper and lower bound estimates, inflated to 2001$ based on Consumer Price Index.

Sources: (Pace) Ottinger et al., 1990; (CEC) California Energy Commission, 1993; (S&K) Small and Kazimi, 1995; (MnPUC) Minnesota Public Utility Commission, 1997; (M&D) McCubbin and Delucchi, 1999.

Differences in assumptions, however, also contribute to some discrepancies. Quite expectedly, the overall U.S. estimates tend to fall in the middle range, less than the high estimates for the highly populated and highly polluted urban areas but greater than the rural estimates.

Empirical correlations may be developed to relate the costs calculated from different studies to key regional or local variables. Wang and Santini (1995) reviewed five studies and 15 sets of cost data to relate the estimated per-ton costs of NOx (as well as VOC, CO, PM10, and SOx) emissions to regional ambient air quality measurements and the size of affected population. Figure 6.16 compares the direct estimate of the costs of NOx emission from various studies with the estimates from a correlation modified from that of Wang and Santini (1995), incorporating results from more studies. Generally, the various NOx cost estimates correlate well with ambient ozone level and the size of the population in the affected metropolitan area or air quality region, although there are a few outliers, most likely due to differences in assumptions and methodology.

6.2.4.6 Weighting Environmental Impacts. As mentioned previously in Section 6.1, societal costs, either alone or in combination with other types of environmental costs, may be used as weighting factors to "value" different environmental impacts. For illustration, Table 6.12 compares damage cost estimates for different air pollutants from different studies. The monetary figures listed are based on those reported

n Original estimates □ Best fit

0 0

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