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Monetary Weighting of Lca Results to Integrate a Two- Stage Management System in the Decision Process

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Monetary Weighting of Lca Results to Integrate a Two- Stage Management System in the Decision Process // Proceedings 2nd LCA Conference, 6-7 November 2012, Lille France // MONETARY WEIGHTING OF LCA RESULTS TO INTEGRATE A TWO- STAGE MANAGEMENT SYSTEM IN THE DECISION PROCESS Valentin Fougerit (1), Patrice Auclair1 (1) and Solène Bonhoure (1) (1) Effet de Levier, Paris, France Abstract The Principles for Responsible Investment (PRI), published in partnership with the United Nations’ institutions, show a growing awareness to integrate Environmental, Social and corporate Governance (ESG) in the decision process for investments. Indeed, a recent UNPRI report (2010) has demonstrated the importance for investors and companies to progressively take their externalities into consideration, thus strengthening their economic situation. The Life Cycle Analysis (LCA) appears to be a consistent tool to cover most of the ESG issues and to potentially be extended to a wider range of themes such as social and economic consequences. By using a set of monetary weighting factors derived from the marginal costs at the economic optimum, the method provides financial estimates of strategic orientations which could also fit environmental labelling and eco-design purposes. However, since those costs are not always available, we compare the marginal damage costs and the marginal abatement costs to define the category of the underlying risk for the company and to effectively quantify it. The identification of forecasted costs and marketing opportunities can then lead to reinforce the company’s management. Since decision-makers are also driven by cost reduction, we aim at combining the above approach with a short-term management strategy based on the legislative regulations and their hidden costs for the companies. Therefore, every environmental theme from the ReCiPe method (Goedkoop et al., 2009) is assigned an internalization rate according to the level of constraints. A review of the current environmental objectives in France provides a basis for its definition. Keywords: LCA ; monetization ; economic optimum ; internalization ; corporate strategy 1. INTRODUCTION Companies are supporting an increasing pressure regarding environmental concerns. On one hand, they have to cope with the entire legislative framework defined by the declined of European policies within a national set of measures. On the other hand, consumers’ expectations of products and services’ environmental footprint is increasing and gaining strength through the environmental- friendly labelling. The developments of LCA methods designed to cover the main preoccupations with regard to the three safeguards subjects (humans, ecosystems, and resources), lead to the availability of a consistent tool to monitor the sustainability of a system. Based on the ReCiPe method (Goedkoop et al., 2009), this article aims at providing a new procedure to monetize impacts designed to integrate into the decision process both short-term cost reduction and long-term strategic perspectives. Marginal cost at the economic optimum will be used to minimize the burden relying on the entire economic sphere. 2. MONETIZATION AS A WEIGHTING METHOD Weighting has always been a controversial step in the LCA process as it reflects personal values in the social, ethical and political fields (Huppes and Van Oers, 2011). Nevertheless, we believe it provides the non-specialists with a useful reading guide for the LCA results since non comparable indicators are aggregated under a single score. The currency appears to be a logical unit that can be integrated by decision-makers in their global understanding and decision process. In order to obtain an objective set of weighting factors, we define a theoretical framework thereafter. // Proceedings 2nd LCA Conference, 6-7 November 2012, Lille France // 2.1 Selecting the valuation method to reach the economic optimum Within the monetization methods, a classification can be made (Huppes and van Oers, 2011). Several attempts have used the eco-taxes (Finnveden et al., 2006), the damage costs induced by the current situation evaluated by the willingness-to-pay (Markandya et al., 2004) or the budget constraint (Weidema, 2009), and shadow prices brought about by environmental policies (De Bruyn et al., 2010). These methods rely to some extent on decisions made by public authorities and bring judgements, and thus subjectivity to the valuation: the cost of pollution inferred is dependent on the defined level of constraints. The sustainable level of pollution can appear to be an objective milestone to define a cost of pollution. However, except for companies looking for a high standard for their environmental footprint, the implied costs are not well-accepted within the business world. Moreover, even from a scientific point of view, this level is hard to predict (Vogtländer, 2001). Therefore, as a result, the most logical set of weighting factors is the one optimizing the social cost W (depending on the emission’s level E) given by: W (E) = Ctotal,damage (E) + Ctotal,abatement (E) (1) Both total costs in equation 1 depend on the emission’s level: the damages include the impacts on human health, ecosystems, crops and infrastructures while the abatement is a measure of the investments required to maintain the considered emission’s level. The weighting factor for each of the environmental themes is determined at the economic optimum, i.e. when the marginal abatement cost equals the marginal damage cost: dCtotal,damage (E) / dE = - dCtotal,abatement (E) / dE (2) Nonetheless, there are some difficulties accessing the marginal cost curves. Focusing on a particular emission’s level, the marginal damage cost is valuated according to the bottom-up approach (Arnold, 2007) which is generally based on the Impact Pathway Approach (IPA) developed in the NEEDS project. The indicators given by the IPA need to call for willingness-to-pay (WTP) studies to be valued (Potentially Disappeared Fraction in Kuik et al., 2008, Disability Adjusted Life Year in Markandya et al. 2004). Several studies of different situations are needed to build the entire curve. On the other hand, the Marginal Abatement Cost Curve (MACC) is usually obtained by listing the feasible measures to reduce the pollution. Both those data are not necessarily available at the country level. Hence, to overcome the absence of suitable curves, we propose a method depending on the context and the goals of the LCA study. 2.2 Abatement versus damage costs If the marginal cost at the economic optimum cannot be defined, there is a need to identify a new weighting factor and to compare it to the economic optimum situation. Since legislation is supposed to express population’s needs, we assume that the pollution control tools are aimed at getting close to the economic optimum. We have looked therefore at the shadow prices inferred by the French objectives at different time horizons (2012, 2020 and 2050). The difference between the two weighting factors obtained, i.e. the marginal damage and abatement costs, indicates the distance we are from the economic optimum (Figure 1). The excess of the marginal damage cost over the marginal abatement cost (situation n°2) creates a pressure for the company, coming from its stakeholders and the general public, that requires further analysis. Indeed, even if public authorities are lax with environmental regulations, there is a potential risk for growing public concern: such a situation could lead to a deterioration of the corporate image if not anticipated in the environmental strategy. Fiscal measures may also be implemented by public authorities to bridge the gap and cover the damages’ expenditures. When the marginal abatement cost is higher than the marginal damage cost (situation n°3), the national objectives are demanding and it is worth it for the company to strictly comply with the constraints occurring within its field of activity. In addition, the existence of a strong financial cost for the company in this environmental field might influence the company to develop a specific pollution management plan to limit the burden. // Proceedings 2nd LCA Conference, 6-7 November 2012, Lille France // Figure 1: Marginal cost at the economic optimum 3. APPLICATION IN A TWO-STAGE MANAGEMENT SYSTEM By combining LCA with a set of weighting factors as described above, we can reach a monetary representation of the cost of an activity on the three main categories (humans, ecosystems, and resources). Those indicators need to be integrated along with the financial and economic information to assist decision-makers. 3.1 Integrating environmental issues in the corporate strategy This method is a consistent tool which can assist in the eco-design process: it provides quantified indicators during the preliminary project assessment phase that can be directly compared to financial indicators. Marketing could also refer to those results as an indicator for the corporate image improvement. In addition, the set of weighting factors offers leaders the opportunity for an overall and quantitative environmental management. Indeed, comparison between the financial investment and the expected results can be implemented in the long-term strategic course. 3.2 Which internalization for the monetized impacts? While decisions are mostly driven by economic and regulatory arguments, the method leads to an estimate which is not always representative of the actual financial cost of the activity’s footprint. To provide the companies with an efficient tool designed to describe a picture of the direct costs induced in the different environmental themes
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