Product Design for the Environment: A Life Cycle Approach - Chapter 6 pdf

135 Chapter 6 Integrated Economic–Environmental Analysis of the Life Cycle Life Cycle Cost Analysis (LCCA), the methodology for estimating all the costs associated with a product over its entire life cycle, is perfectly suited to the “cradle to grave” approach that must characterize environmental prod- uct design. Precisely because of this life cycle approach, with an appropri- ately oriented Life Cycle Cost Analysis it is possible to quantify all the environmental costs resulting from the product–system. Some essential differences between the economic and environmental analysis of the life cycle have, however, led to a traditional separation in the study of the two aspects. In the specifi c context of design, this separation can be held respon- sible for the absence of a clear vision of the relationships between economic and environmental performances resulting from different design alterna- tives. This lack of vision has resulted in the limited relevance so far given to Life Cycle Assessment (LCA) in decision making. The subjects of this chapter are the suitability and possibility of extending the scope of Life Cycle Cost Analysis to cover environmental aspects in prod- uct development, and the most important issues arising in attempts to estab- lish an integrated economic–environmental approach to life cycle analysis. Particular emphasis will be given to the possibility of a direct integration of Life Cycle Cost Analysis with Life Cycle Assessment, and to how this inte- gration is incorporated in the domain of Life Cycle Management. 6.1 Life Cycle Cost Analysis and Environmental Aspects Environmental issues are generally perceived as constraints, impeding the development and planning of industrial activities. Life Cycle Cost Analysis (LCCA) can assume a particularly important role in relation to this problem, since it acts as a primary link between environmental demands and the produc- tion strategies of manufacturing companies (Hunkeler and Rebitzer, 2003). In this role, LCCA becomes an operational instrument used to implement one of the basic strategies for achieving sustainable development, that of integrating 2722_C006_r02.indd 1352722_C006_r02.indd 135 11/30/2005 1:48:50 PM11/30/2005 1:48:50 PM © 2006 by Taylor & Francis Group, LLC economic and environmental considerations into the decision-making process (WCED, 1987). One of the fundamental questions in this context is how to use the instru- ments of economic analysis more effectively so as to extend their scope to (Section 5.1) it was noted that an effective approach to the integrated economic-environmental analysis of a product’s life cycle requires the adop- tion of the product–system concept, wherein the product is considered inte- gral with its life cycle and within the environmental, social, and technological economic analysis of products that also takes environmental performance into account are evident: • The analysis of costs, such as those of environmental impacts, must be extended to cover the entire life cycle, from conception and design to retirement and disposal. • Such an analysis also requires the problematic evaluation of the envi- ronmental costs incurred by all the actors affected by the life cycle, including society as a whole. Furthermore, it should be noted that not all the environmental aspects of an activity are as explicitly linked to factors of economic cost as they are, for example, in the case of an effi cient management of resources, where both environmental and economic benefi ts accrue from a reduction in the consumption of energy and materials. A quite different treatment is required for other environmental aspects, such as the generation of waste and emission of pollutants. While the relevant costs can be associated with these examples, it is not unequivocally certain how these costs should be paid, or by whom. These environmental costs are usually “externalized” (i.e., transferred to various segments of the commu- nity under the form of costs of damage to human health and to the well-being of the ecosystem). Alternatively, they can be “internalized” (i.e., assimilated by manufacturers, who invest in measures to avoid damage to the environment or to redress damage caused, thus translating environmental costs into economic costs of product life cycle management). Only effective governmental policies can adequately administer the problem in an eco-effi cient way, reducing exter- nal environmental costs through legal constrictions, taxation, and economic incentives, and by favoring internalization. The full integration of environmental aspects into cost analysis, therefore, requires: • Overcoming the distinction between the different actors involved in a product’s life cycle (producer, consumer, society), which creates ambiguity in how environmental costs are perceived 136 Product Design for the Environment 2722_C006_r02.indd 1362722_C006_r02.indd 136 11/30/2005 1:48:50 PM11/30/2005 1:48:50 PM © 2006 by Taylor & Francis Group, LLC include the environmental aspects of activities. In this regard, in Chapter 5 context in which this life cycle develops (Chapter 2). The implications for an Integrated Economic–Environmental Analysis of the Life Cycle 137 • Introducing a system of eco-costs, understood as a set of costs deter- ring damage to the environment, and of direct and indirect costs of the environmental impacts caused by a product over its entire life cycle With these premises, LCCA becomes the assessment of all costs associated with the life cycle of a product “that are directly covered by the any one or more of the actors in the product life cycle (supplier, producer, user/consumer, end-of-life actors), with complimentary inclusion of externalities that are anticipated to be internalized in the decision-relevant future” (Rebitzer and Hunkeler, 2003). 6.1.1 Scenario of LCCA Extended to Environmental Aspects With the introduction of the environmental question, LCCA fully assimilates the “life cycle thinking” approach. LCCA thus represents a clear evolution from the fi rst limited vision of the economic life of a product, wherein the cost of the product’s life cycle is the sum of the economic resources expended on it from conception and manufacture until the end of its useful life (Woodward, 1997). The new, more complete, perspective extends the concept of life cycle and includes within it the potential, already noted, of cost esti- mating as an instrument for the effi cient use of limited resources. LCCA then becomes “a systematic analytical process for evaluating various designs or alternative courses of actions with the objective of choosing the best to employ scarce resources” (Kumaran et al., 2001). The ultimate objective of the product’s LCCA is “to provide a framework for fi nding the total cost of design/development, production, use and disposal of the product with an intention of reducing the total cost” (Kumaran et al., 2001). This view also introduces a further evolution in the perception of life cycle: product itself as it passes through the main phases of its complete life cycle (design and development, production and distribution, use, retirement and disposal). It should be emphasized, however, that although LCCA incorpo- rates this perception of the life cycle (which lies outside the jurisdiction of the main actors involved) necessary for a full understanding of the economic fl ows associated with environmental phenomena, it still remains an instru- ment for decision making. In its practical application, therefore, LCCA always takes the viewpoint of one actor—the decision maker. With these premises, it is possible to construct the reference scenario of the different typologies of cost fl ows (Rebitzer and Hunkeler, 2003). Here, 2722_C006_r02.indd 1372722_C006_r02.indd 137 11/30/2005 1:48:50 PM11/30/2005 1:48:50 PM © 2006 by Taylor & Francis Group, LLC that it is no longer variable according to whether it is considered from the view- and Figure 5.2). Instead, it is considered from a single viewpoint, that of the LCCA proposed in Figure 6.1, showing the actors and systems involved and point of the producer or the consumer (as discussed in Chapter 5, Section 5.2.1 138 Product Design for the Environment economic fl ows represent the costs and revenues internal to the economic system, and externality fl ows indicate environmental cost fl ows between the product’s life cycle and the social and natural system. Referring to the scenario in Figure 6.1, some aspects should be noted: • Economic fl ows are understood as internal costs (i.e., attributable to a precise economic actor, and, therefore, quantifi able in monetary fl ows of cost or revenue). Externality fl ows are understood as exter- nal costs, quantifying the monetary effects of impacts on the envi- ronment and society, and are not directly ascribable to economic actors. • Each phase of the life cycle traversed by the product involves one or more actors. In particular, the fi rst two phases (design and develop- ment, production and distribution) involve the producer; use involves both producer and the user; and retirement involves an actor to be defi ned (end-of-life actor) who may be the producer and/ or the user. • Each actor interacts with the two systems (economic and natural) through the cost fl ows internal and external to the economic system. • The fi eld of application of LCCA is limited to the economic system; therefore, to take account of external costs they must be internalized within this system and translated into monetary fl ows. FIGURE 6.1 Scenario of environmental LCCA: Systems, actors, cost fl ows. 2722_C006_r02.indd 1382722_C006_r02.indd 138 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC Integrated Economic–Environmental Analysis of the Life Cycle 139 Table 6.1 shows the main life cycle costs, subdivided into the four principal categories introduced in Section 5.2.3 (each corresponding to a involved (producer, user, society), as suggested by various authors (Alting, 1993; Asiedu and Gu, 1998; Perera et al., 1999). The costs befalling society are represented by the externalities of the economic system. They are due to the impacts of activities on the environment and on human health, and they can be monetized using some evaluation methods included in the approach known as “damage cost approach,” which consists of quantify- ing the loss suffered by the damaged actor (Gale and Stokoe, 2001). 6.2 Environmental Costs and Environmental Accounting From the strictly environmental perspective, LCCA becomes a procedure for the inventory and analysis of the economic implications of the environ- mental impact of a product over its entire life cycle (Frankl and Rubik, 1999). In this sense it assumes the dual role of an LCA in economic terms, and differs from conventional cost analyses in estimating the entire spectrum of all environmental costs, including hidden and external costs, ascribable to a product’s entire life cycle. As noted above, when applying cost analysis intended as a decision-making tool, the perspective adopted is always that of one actor, the decision maker. In the most common TABLE 6.1 Product life cycle costs and life cycle actors MAIN COST CATEGORIES/ LIFE CYCLE PHASES INTERNAL COSTS EXTERNAL COSTS PRODUCER USER SOCIETY RESEARCH AND DEVELOPMENT Market recognition Research Design and development PRODUCTION AND DISTRIBUTION Materials, energy, labor Facilities Processing Packaging Transport, storage Resource depletion Waste Pollution Health damages OPERATION AND SUPPORT Warranty Service Materials, energy Maintenance Breakdown Pollution Health damages RETIREMENT AND DISPOSAL Disassembly, reprocessing, recycling Disposal Recycling or dis- posal dues Waste Pollution Health damages 2722_C006_r02.indd 1392722_C006_r02.indd 139 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC phase of the life cycle shown in Figure 6.1) in relation to the three actors 140 Product Design for the Environment case, where the manufacturing company is considered the reference actor, the whole system of costs can be divided into two main categories (EPA, 1995): • Private costs (internal costs)—Consist of all the costs incurred by the producer, or by those who can be considered fi nancially responsible. • Societal costs (external costs or externalities)—Indicate all the costs related to the impact of the production system on the environment and society, for which the producer actor cannot be considered fi nan- cially responsible. Both these categories include environmental costs. To the external environmen- tal costs defi ned in the previous section, it is necessary to add those internal to the production system. These are the environmental costs belonging to the category of private costs, which in turn can be divided into (EPA, 1995): • Potentially hidden costs—Hidden costs generally refer to all the terms that may be overlooked in the cost analysis of an activity because they are indirect costs; various environmental costs may fall into this category. Hidden costs can, in turn, be divided into upfront costs (acquisition and preproduction costs), back-end costs (costs incurred after the end of useful life), regulatory costs (costs required to comply with environmental legislation), and voluntary costs (costs that go beyond strict compliance with environmental laws). This category can also include costs known as conventional costs (raw materials, supplies, equipment, etc.), given that reducing their use results in obvious environmental benefi ts, although these are not easily monetized. • Contingent costs (or liability costs)—Include environmental costs that cannot be planned for because they may be incurred as a result of unpredictable future events (accidental release of pollutants, infractions of future legislative restrictions, etc.). Because of their particular nature, these costs can be expressed in probabilistic terms. • Image and relationship costs—Include costs related to actions directed at infl uencing the perceptions of various actors, such as employees, consumers, communities, and controlling bodies regard- ing the environmental performance of the production activity. Such costs might include preparation and distribution of environmental reports, public relations events in the community, advertising, and so forth. Although the expenses attributable to this type of invest- ment are clearly defi nable, usually the benefi ts that may result 2722_C006_r02.indd 1402722_C006_r02.indd 140 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC Integrated Economic–Environmental Analysis of the Life Cycle 141 (improved company image) are not, and for this reason they are considered less-tangible costs. 6.2.1 Environmental Accounting The study of the wider system of environmental costs described above is the subject of Environmental Accounting, a term understood as “the defi nition, assessment and allocation of environmental costs and expenditures for the purpose of cost and resource management, compliance reporting, and capi- tal budgeting, planning, and operational decision making” (Gale and Stokoe, 2001). However, environmental accounting assumes different connotations according to the context in which it is used: • In the context of fi nancial accounting, the components of internal costs associated with environmental aspects are emphasized and analyzed. In this case environmental accounting is used, for example, in drawing up reports informing an external audience (investors, creditors, clients) of the company’s condition and performance. • In the context of management accounting, it is used as an aid to the company’s internal decision-making processes (capital investment choices, performance evaluation, product and process design deci- sions), and takes into consideration a broader spectrum of environ- mental costs, also including externalities. With regard to the latter context, which includes product design and develop- ment, reference may be made to the term Environmental Cost Accounting, understood as “the addition of environmental cost information into existing cost accounting procedures and / or recognizing embedded environmental costs and allocating them to appropriate products or processes” (EPA, 1995). 6.2.2 Typologies of Environmental Accounting While sharing the same conceptual premises, different typologies of environ- mental accounting have recently been introduced into company practice. They differ principally in the depth of the cost analysis. The term Total Cost Assessment (or Total Cost Accounting—TCA) describes a method of cost accounting oriented toward the long-term, including in the analysis the entire range of private costs (both conventional and environ- mental) and paying particular attention to the hidden, less-tangible, and liability costs associated with an activity or product (Gale and Stokoe, 2001). TCA is frequently used to make investment choices directed at improving the environmental performance of production activities (cleaner production 2722_C006_r02.indd 1412722_C006_r02.indd 141 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC 142 Product Design for the Environment and pollution prevention investments) that can be correctly evaluated only through an analysis characterized by a particularly extended time frame. Full Cost Accounting (FCA) extends the analysis fi eld of TCA to also include external costs (societal costs). It consists of the identifi cation, evalua- tion, and allocation of the entire system of costs (conventional and environ- mental) of the life cycle of a product or activity, irrespective of the direct responsibilities of the actors involved. The related term Full Cost Environmental Accounting (FCEA) is sometimes used to specify that the evaluation of external costs focuses on the environmental aspect, ignoring any externalities consisting of other types of societal costs. 6.3 Integration between LCCA and LCA The appropriateness of integrating cost analysis and environmental impact evaluations, by virtue of the shared life cycle approach, has been emphasized since the beginning of the methodological development of LCA (Henn and Fava, 1994). It has also been noted how this integration is necessary in order to achieve the real environmental effectiveness of systems. Only by investi- gating the relationships between the economic and environmental perfor- mances of a product’s life cycle, and stressing the importance of reconciling these two, can environmental analysis be elevated to the level of a strategic decision-making tool for design and for all other company operations. A fi rst approach in this regard can consist of simply adding cost data to a traditional LCA, and this is sometimes what is intended by the term Life Cycle Cost Assessment (which originated with the precise aim of emphasizing economic aspects in an LCA). It has been defi ned as “a systematic process for evaluating the life cycle costs of a product, product line, process, system, or facility by identifying environmental consequences and assigning monetary value to those consequences” (EPA, 1995). A much more complete approach is one that refers to the concept of LCCA the costs associated with the entire life cycle of a product, process, or activity, including costs deriving from its environmental impact. This concept, which retraces the SETAC defi nition of LCA, does not limit the economic analysis to the realm of environmental costs alone, as happens in the case of Life Cycle Cost Assessment. Instead, it extends the analysis to cover the entire system of costs associable with the life cycle. The observation of some similarities between LCA and LCCA could be misleading, making their integration seem simple or even intrinsic to their very nature: • Their “life cycle thinking” approach, refl ected in the names of both the analysis instruments 2722_C006_r02.indd 1422722_C006_r02.indd 142 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC as described in Section 6.1, involving the identifi cation and evaluation of all Integrated Economic–Environmental Analysis of the Life Cycle 143 • Their system-based approach, manifested in LCA by the distribution of physical fl ows (resources, polluting substances, waste) in the context of the system of elementary activities, and in LCCA by the breakdown of economic fl ows in a Cost Breakdown Structure (CBS), in some cases structured according to the product’s physical life • The opportuneness of operating both analyses, environmental and economic, in the preliminary phases of product development, in that both the environmental impacts and costs of the life cycle are strongly conditioned by the fi rst design choices In contrast to these affi nities, LCA and LCCA are divided not only by the different characteristics of the subjects under analysis (physical fl ows in the fi rst, monetary fl ows in the second), but also by important conceptual prem- ises that can hinder their integration (Norris, 2000): • Aim of analysis—The aim of LCA is to evaluate the environmental performance of products and alternative choices guaranteeing the same functions, from the perspective of benefi t for the whole of soci- ety. The aim of LCCA is to evaluate the economic effectiveness of investments and alternative choices from the perspective of the actor making the decisions. • Extension and typology of life cycle model—LCA examines the entire system of processes and activities connected with the prod- uct’s physical life cycle. LCCA considers the set of activities resulting in costs or revenues for the decision maker. This results in a differ- ence not only in the extension of the life cycle (which in the case of LCA can also include activities and physical fl ows not associated with direct economic consequences for the decision maker) but also in the typology of the model describing the life cycle, because not all the monetary fl ows can be directly attributed to the physical fl ows considered in LCA. • Infl uence of the time variable—The life cycle model for LCA does not usually take account of the temporal distribution of resources, wastes, and emissions. Instead, in the analyses for LCCA the time variable assumes a determining role in the evaluation of monetary fl ows; LCCA requires a clear defi nition of the duration of the time span, beyond which these fl ows are ignored. The traditional separation between environmental and economic analyses of the life cycle is the direct consequence of these fundamental differences. In the specifi c context of design, this separation can be held responsible for the lack of a clear vision of the relationships between environmental and 2722_C006_r02.indd 1432722_C006_r02.indd 143 11/30/2005 1:48:51 PM11/30/2005 1:48:51 PM © 2006 by Taylor & Francis Group, LLC cycle, as shown in Figure 5.4 of the previous chapter 144 Product Design for the Environment economic performances involved in different design alternatives, and for the consequent limited relevance given to LCA in decision making until today. These considerations clearly emphasize the importance of an integrated approach that manages to combine the two analyses, environmental and economic. Such an approach, requiring the development of a model able to handle the different aspects of the two analysis techniques (e.g., manage variables not strictly dependent on physical fl ows, and introducing the temporal dimension), would allow evaluations of particular importance to decision making (Norris, 2000), such as: • Identifi cation of design variables whose modifi cation has major effects on the combined environmental-economic performance • Evaluation of the economic effects resulting from choices directed at improving the environmental performance, and vice versa In recent years, various important studies have been conducted with exactly one of the quantitative methods for LCA (Eco-indicator 95 method, reported tal profi le of a product, and evaluating the correspondence between these two different arrangements, such as that regarding Economic Input–Output LCA and such as those regarding Activity-based LCA (Emblemsvag and Bras, 1997), introduced in Chapter 4, Section 4.4.3. More recently, other approaches have been proposed. One of these begins with traditional models for LCA and seeks an evolution directed at also meeting the particular exigencies of LCCA (Norris, 2000). In some cases, this evolution involves broadening the fi eld and the depth of analysis of the model, including the entire system of material and monetary fl ows ascribable to all the economic actors involved in the life cycle of the product under examination (Murayama et al., 2001). Another approach uses the methodology of Environmental Cost Accounting or of Total Cost Accounting (Section 6.2) as a basis for the integration of the two aspects, environmental and economic, in product development (Beaver, 2000; Norris, 2000; Shapiro, 2001; Tomita, 2001). Also signifi cant, from the perspective of Life Cycle Design, is the need expressed in recent years to further extend the capacity to analyze design alternatives. One clear example is the attempt to integrate instruments for the environmental and economic evaluation of design choices in the context of customer-oriented design tools, such as Quality Function Deployment (QFD) (Zhang et al., 1999). This is aimed at the evolution of new methodologies of product development or improvement, able to take into consideration envi- ronmental, economic, and quality requisites. Finally, as a confi rmation of the 2722_C006_r02.indd 1442722_C006_r02.indd 144 11/30/2005 1:48:52 PM11/30/2005 1:48:52 PM © 2006 by Taylor & Francis Group, LLC aspects (van Mier et al., 1996). The same period saw studies based on radically these objectives. One of the fi rst proposes applying, in parallel, an LCCA and or regarding Activity-based Costing presented in Chapter 5, Section 5.3.2, (Cobas et al., 1995; Hendrickson et al., 1998), discussed in Chapter 4, Section 4.4.3, in Chapter 4, Table 4.3), with the aim of obtaining an economic/environmen- [...]... operation and support, retirement and disposal costs (Chapter 5, Section 5.2.3) Finally, using an appropriate mathematical model, it is possible to correlate the total cost of the product to the various eco-costs of its life cycle Formulated in this way, the approach allows the identification of the best design alternatives, in both environmental and economic terms, and can help the designer reduce the total... one of the sine qua non strategies for sustainable development—to integrate economic and ecological considerations in decision-making processes In particular, the integration of Life Cycle Cost Analysis and Life Cycle Assessment is fully entitled to be considered part of the integrated life cycle approach known as Life Cycle Management Only when Life Cycle Management assimilates a complete integration... of a product through the adoption of environmental strategies applicable to its life cycle 6. 5 Summary The life cycle approach upon which Life Cycle Cost Analysis is based invests this instrument with a primary role in the context of Life Cycle Design, where it is a valuable technique for the identification of the most efficient strategies and interventions Of particular note is the role that Life Cycle. .. Bijma, 2000) The Virtual Eco-costs model, combined with the analysis of the value chain applied to the life cycle, becomes an integral part of the Eco-costs/Value Ratio (EVR) model, which can be used as a useful metric to evaluate the eco-efficiency of a product, a service, or the service -product system The second example of an eco-cost system is represented by a model for LCCA explicitly formulated for. .. Seuring, 2003) 6. 3.1 Integrated Economic–Environmental Approach in Life Cycle Management An integrated LCCA–LCA is fully qualified for inclusion within the scope of the approach to the integrated management of the life cycle known as Life Cycle Management (LCM), previously introduced in Chapter 3 Understood as a conceptual structure to place alongside preexisting management structures, LCM makes it possible... 109–110, 2003 Hunkeler, D et al., Life Cycle Management, SETAC Press, Pensacola, FL, 2004 Kumaran, D.S et al., Environmental life cycle cost analysis of products, Environmental Management and Health, 12(3), 260 –2 76, 2001 Murayama, T et al., Life cycle profitability analysis and LCA by simulating material and money flows, in Proceedings of IEEE International Symposium on Electronics and the Environment, Denver,... aims: that of interpreting the principles of sustainable development in company practice, making environmental sustainability accessible, quantifiable and operational (Rebitzer and Hunkeler, 2003) It could indeed be concluded that the idea of appropriately integrating cost analysis and environmental impact evaluation following the life cycle approach, which was first debated in the early 1990s, reaches... integration of Life Cycle Cost Analysis and Life Cycle Assessment is it possible to achieve one of its main aims, that of translating the principles of sustainable development into company practice to make environmental sustainability operational 6. 6 References Alting, L., Life- cycle design of products: A new opportunity for manufacturing enterprises, in Concurrent Engineering: Automation, Tools and Techniques,... 2004) 6. 4 Other Approaches to Economic–Environmental Analysis: Eco-Cost Models Although it is clear that the direct integration of LCCA and LCA can be considered the most complete approach to providing a valid aid to the © 20 06 by Taylor & Francis Group, LLC 2722_C0 06_ r02.indd 145 11/30/2005 1:48:52 PM 1 46 Product Design for the Environment designer or, more generally, to the decision maker who wants... Norris, G .A. , Integrating economic analysis into LCA, Environmental Quality Management, 10(3), 59 64 , 2000 Perera, H.S.C., Nagarur, N., and Tabucanon, M.T., Component part standardization: A way to reduce the life- cycle costs of products, International Journal of Production Economics, 60 61 , 109–1 16, 1999 Rebitzer, G and Hunkeler, D., Life cycle costing in LCM: Ambitions, opportunities, and limitations, . considered part of the integrated life cycle approach known as Life Cycle Management. Only when Life Cycle Management assimilates a complete integration of Life Cycle Cost Analysis and Life Cycle Assessment. that the idea of appropriately integrating cost analysis and environmental impact evaluation following the life cycle approach, which was fi rst debated in the early 1990s, reaches its full matura- tion. importance of reconciling these two, can environmental analysis be elevated to the level of a strategic decision-making tool for design and for all other company operations. A fi rst approach