153 8 Conclusions David Hunkeler, Kerstin Lichtenvort, and Gerald Rebitzer 8.1 THREE TYPES OF LIFE CYCLE COSTING A survey, carried out at the outset of the deliberations of the SETAC-Europe Working Group on Life Cycle Costing, identied 3 types of life cycle costing. The principal dif- ferences in these methods were in their goal, scope, and system boundary, as well as in how functionality and discounting were carried out. The analysis of the 33 cases revealed that 1 type of life cycle costing represented the typical practice. “Conventional LCC” as it is termed herein, has its roots in public and military procurement and was later broad- ened in scope when adopted by corporations. A 2nd type of costing was strongly linked to environmental assessment and intended as a pillar of sustainability, and it is referred to as “environmental LCC.” A 3rd type of costing, linked to cost–benet analysis and encompassing social aspects, is given the nomenclature “societal LCC.” This book is focused on and hence titled Environmental Life Cycle Costing as this type of LCC presents a new life cycle costing methodology that is consistent with LCA and suitable as a pillar of sustainability, going beyond the well-known conventional LCC and factoring out disputable presumptions on the internalization of externalities required for societal LCC. 8.1.1 CONVENTIONAL LCC Conventional LCC is, to a large extent, the historic and current practice in many gov- ernments, public organizations, as well as rms, and is based on a purely economic evaluation, considering various stages in the life cycle. Generally it is a quasi-dynamic method and includes costs associated with a product that are borne directly by a given actor, and it is usually presented from the perspective of a producer or consumer. External costs are neglected. In this sense, conventional LCC is less comprehensive in scope than systematic environmental analyses such as LCA and involves discounted costs of the results. The lowest discounting rate to be applied would be the market interest rate corrected for ination, and the upper range is the internal rate used by organizations for their intended return on investment. This choice is left to the decision maker in analogy to managerial accounting. One should note that some external costs are already internalized (e.g., waste management in many regions of the world), while others are internalized as unforeseen costs and some may remain as external costs (e.g., caused by resource depletion, toxic releases, or social impacts). Frequently, the reference ow for conventional LCC is 1 unit of product (e.g., an automobile). The unit is convenient for calculation, though it may not be the most appropriate for a sustain- ability assessment. © 2008 by the Society of Environmental Toxicology and Chemistry (SETAC) 154 Environmental Life Cycle Costing In comparison to LCA, conventional LCC is easier to perform since data are more readily available. They are less abstract because the calculated life cycle costs are expressed in monetary units, in comparison to gures of an impact assessment. This renders the result easier to understand. In some aspects of conventional LCC application, and LCC in general, the comparison of the results of alternatives and the identication of hotspots provides the most signicant input to decision making. 8.1.2 ENVIRONMENTAL LCC Environmental LCC is an assessment of all costs associated with the life cycle of a product that are directly covered by any 1 or more of the actors in the product life cycle (e.g., supplier, producer, user or consumer, or EoL actor). The complementary inclusion of externalities that are anticipated to be internalized in the decision-rel- evant future as well as an LCA with equivalent system boundaries and functional units are required. Environmental LCC is performed on the same basis as with LCA, with both being steady-state in nature. Environmental LCC goes beyond conventional LCC by internalizing all real and anticipated money ows associated with the life cycle in a systematic way. It also requires a complementary LCA as well as a social assessment if the goal is to have a complete threefold sustainability assessment. Environmental LCC may use market costs (including transfer payments), alternative costs, or both. Environmen- tal LCC is, therefore, LCA driven; thus, it uses primarily methods and concepts developed for LCA. 8.1.3 SOCIETAL LCC Societal LCC uses an expanded system boundary, relative to the other types of LCC, and involves a larger set of costs, including damage costs that will, or could be, rel- evant in the long term. However, the monetized environmental effects of the inves- tigated product should not be complemented by an LCA, as this procedure would lead to double counting. This quite comprehensive LCC applies a social rate of time preference type of discounting. This goes in the direction of the Brundtland Com- mission’s requirements (1987), with approximate value below 0.1% per year, and with the precise value depending on the dominant environmental or other impacts and benets. As was the case for conventional LCC, the method is quasi-dynamic. In a societal LCC, externalities are included to a greater extent. Using a mixture of internal and external costing requires a precise specication of the cost bearers for which internal costing is applied, as double counting or missing costs may eas- ily occur. Explicit and careful analysis is required of those that are specied as cost bearers and whose cost is specied, invisibly, as external cost. It may be useful to differentiate between short-term and long-term perspectives. The probability of identifying scenario-dependent differences clearly increases as the time frame of the analysis expands. Furthermore, in the long term, complex estimates, the choice of system boundaries, and discounting rates usually have a dramatic inuence on the results. © 2008 by the Society of Environmental Toxicology and Chemistry (SETAC) Conclusions 155 8.2 TEMPORAL ASPECTS AND DISCOUNTING OF LCC RESULTS Conventional LCC applies market-based prices and discount rates (typically 4% to 15%) leading to a relevant time horizon of several decades at the most. Societal LCC uses alternative costs and social time preferences for discounting (a maximum of 0.1% and, in some cases, 1 to 2 orders of magnitude lower). This implies a time horizon of several thousand years. Strictly speaking, discounting is inconsistent with environmental LCC. Despite this, it is expected that most practitioners will apply it. One author (Hunkeler) believes that environmental LCC will use a higher discount rate in the short term with a Brundtland-like rate (Brundtland Commission 1987) following the economic life cycle of the product. 8.3 LEARNINGS FROM APPLIED LCC CARRIED OUT TO DATE The applied studies in this book have been chosen because they all demonstrate a certain amount of vigor in carrying out the life cycle costing, as well as the com- plementary environmental analysis and/or sensitivity study. The cases demonstrate the avoidance of several pitfalls that risk the invalidation of systemic studies. Spe- cically, the 7 real and 1 hypothetical case studies presented in Chapter 7 are high- lighted to illustrate the following points: Environmental LCC requires the use of the equivalent functional unit and r system boundaries in both the economic and environmental assessments (see Section 7.2 for the case study on wastewater treatment). The portfolio representation — where LCC is plotted against a given, usu-r ally dominant, impact — should be carried out using absolute measures (e.g., monetary units versus global warming potential, as expressed in kg CO 2 equivalents). Portfolio representations are normalized, per se, per functional unit. Double r normalization (e.g., per unit of GDP) can change even the ranking of alter- natives. Therefore, any normalization other than by the functional unit bears the risk that the study would not hold up to peer review requirements. The majority of environmental LCC is based on the LCA approach and on r standard LCA data packages and software. The most effective driver for LCC to be implemented within a rm is its r top management. While LCM as a policy, or target, is widely advocated, the correlation between the successful realization of LCC thinking and the ability of the CEO to instill its importance is signicant. In societal LCC, subsidies and, ultimately, tradable permits need to be r monetized. In societal LCC taxes can be, in selected cases, larger than the monetized r societal cost. Some would argue that a completely fair tax system would avoid the need for additional assessments on a given product category. In conventional LCC, which still dominates the literature, examples are r seen where maintenance can dominate the LCC. © 2008 by the Society of Environmental Toxicology and Chemistry (SETAC) 156 Environmental Life Cycle Costing The life cycle cost, as a ratio to the product selling price, can represent a r small premium (e.g., Section 7.1, which contains the case study on extra- virgin olive oil) or a very large effect (e.g., Section 7.3 on illumination, and Section 7.4 on a train carriage), depending on the durability and effect of the use phase. The factors studies varied from 2 to 1000 in the cases pre- sented in Chapter 7. In all types of LCC, the product perspective through the life cycle must be r considered. At the very least, a gate-to-grave costing is required (in LCC, the assumption on upstream costs is that the market system adequately rep- resents these). 8.4 STATE OF THE ART AND RULES OF THUMB IN CARRYING OUT LIFE CYCLE COSTING A survey was carried out to identify use patterns in LCC. The 33 respondents from various geographical regions, industrial branches, and investigation units demon- strated, in particular for environmental and conventional LCC, deciencies and strengths in the goal and scope denitions. Other questions that were unresolved relate to the tendency for those carrying out environmental LCC to rely, in the large majority, on cost estimation via prices, thereby neglecting parametric cost estimation techniques and other more advanced techniques, which are widely used for con- ventional LCC. Furthermore, while validation was often employed in conventional LCC, it seems less commonplace for environmental LCC. The following summary box provides some rules of thumb that we feel are guidelines for carrying out LCC. Rules of Thumb for Life Cycle Costing State clearly all assumptions.r Use a life cycle perspective (cradle-to-grave).r Ensure that the functional unit describes functionality.r Use real monetary ows, borne by some or more actors in the life cycle (for r environmental and conventional LCC). Be transparent in terms of which costs are internalized (for societal LCC).r Dene thresholds appropriately.r Discount the results (recommended for conventional and societal LCC).r Validate the studies.r Carry out a sensitivity analysis.r Use relative life cycle portfolio presentations of LCC versus the main environ-r mental impact. Benchmark against existing cases for similar products.r Do not double normalize.r Be concise in your discussion.r Critical review is required for public assertions.r © 2008 by the Society of Environmental Toxicology and Chemistry (SETAC) . maintenance can dominate the LCC. © 20 08 by the Society of Environmental Toxicology and Chemistry (SETAC) 156 Environmental Life Cycle Costing The life cycle cost, as a ratio to the product selling. “societal LCC.” This book is focused on and hence titled Environmental Life Cycle Costing as this type of LCC presents a new life cycle costing methodology that is consistent with LCA and suitable. the most appropriate for a sustain- ability assessment. © 20 08 by the Society of Environmental Toxicology and Chemistry (SETAC) 154 Environmental Life Cycle Costing In comparison to LCA, conventional