In Sharjah ௵(+971)558539980 *_௵abortion pills now available.
Quantification of environmental friendliness
1. Moneycation
Published by Moneycation™
Newsletter: July 1, 2014
Volume 2, Issue 4
Quantification of environmental friendliness
Securitization of environmentally friendly emissions
reductions and regulatory requirements set by the U.S. federal
government have made the quantification of corporate social responsibility practical for businesses
and the broader economy. Since overly aggressive or inflexible policies aimed at reducing
greenhouse emissions have a cost in terms of the job market, corporate profitability and industrial
production, being able to measure how progressive steps toward a greener earth influence these
things is necessary.
Due to many micro and macro-economic variables, the ever-changing nature of commerce and
environmental events, accurately predicting financial impact is complex and controversial.
Nevertheless, metrics and financial models established by governmental agencies and not-for-
profit organizations do reveal numerical estimates of environmentally protective decisions. This
newsletter details some of those methods and the issues surrounding them.
Financial cost of green friendly business
Measuring the cost of green-friendly business is sometimes influenced by the angle or perspective
one looks at the circumstance with. To illustrate, the U.S. Environmental Protection Agency states
the Clean Air Act is a good investment for Americans because “total air pollution abatement
spending” only costs industry less than 1% of total revenue to implement. Moreover,
environmental technology and services is an industry in and of itself that creates jobs and revenue
according to the EPA:
“In 2008, the United States’ environmental technologies and services industry supported 1.7
million jobs. The industry generated approximately $300 billion in revenues and exported
goods and services worth $44 billion- larger than exports of sectors such as plastics and
rubber products. Environmental technology exports help the U.S. balance of trade,
generating a $10.9 billion surplus in 2008.”
In contrast to the EPA's view of the benefits eco-friendly policy is a business perspective on the
matter. Furthermore, the Washington Post reports environmental regulation's economic advantages
are offset by the costs to industries that carry out the policy. More specifically, the expense of green
friendly regulation amounted to approximately $216 billion for a single year per the following
excerpt:
2. “For the anti-red-tape crowd, there’s this: The federal government imposed an estimated
$216 billion in regulatory costs on the economy last year, nearly double its previous record,
the conservative American Action Forum think tank calculates in a new report. That figure
represents a mixture of lifetime costs – how much one regulation will affect the economy over
time – and annualized costs, because agencies estimate regulatory costs differently.”
So what is the net benefit? This is an important question to ask because a positive net benefit i.e.
total economic worth after costs are factored in, is beneficial to industries and the economy overall.
If the EPA's 2008 figure of $300 billion in environmentally related revenue is accurate, then the net
benefit is roughly $84 billion since the total cost of $216 billion estimated by the Washington Post
is lower. In this sense, even though some businesses may experience lower net incomes resulting
from environmental policy, the advantage to Americans' health and the economy are worthwhile.
The benefits of environmental policy are further illustrated in the following chart that is based on
the Environmental Protection Agency's 2013 regulatory benefits versus costs data.
Source: White House
If the Office of Management and Budget is correct in their data gathering and analysis, then the
costs of environmental regulation becomes an ever decreasing proportion of rising financial
benefit. In other words, the maximum financial benefit for environmental policy is $637.5 billion
at a maximum cost of $37 billion or 5.8% of total benefit. However, the minimum cost is 26.8% of
the minimum benefit. Thus, the cost to benefit ranges from 5.8%-26.8%, which is a net gain no
matter how its looked at.
Unfortunately, the matter is not so simple and politics is involved. Since the OMB is closely tied to
the White House, there has been doubt about the accuracy of the OMB's EPA cost-benefit analysis
reports, and not just by one or two businesses, but the Small Business Administration itself.
According to Inside Washington Publishers, the SBA and independent think tanks believe the
OMB is overly optimistic in their assessment.
“An SBA official argued at the event that OMB should outsource the work to private think
tanks, such as the Mercatus Institute, to ensure that the information is accurate. And the
3. agencies should be forced to pay for these reviews out of their budget, the source added.
Without such steps agencies are not accountable and have no incentive to provide an
accurate assessment of the costs and benefits of their rules, the source says.”
Since the above complaints were issued, the OMB has remained the publisher of EPA cost-benefit
analysis. So, if they don't outsource their analysis, what other objective organizational or
institutional analysis regarding the value of environmental regulation is there?
Defining objectivity gets complicated, but The Brookings Institution published a report called “A
Better Approach to Environmental Regulation: Getting the Costs and Benefits Right”, which also
evaluates the advantages and disadvantages of environmental regulations. Not surprisingly, its key
points corroborate the SBA's logical objections to the OMB's approach.
One of the counter points provided by The Brookings Institution publication is that judicial review
of ambiguous language within regulations does not always allow for cost-benefit analysis to be a
determining factor of whether or not a particular regulation should or should not be carried out.
Once a court gets its hands on or reviews any regulation, the costs become somewhat irrelevant.
That is not the only problem detailed by the report; the means by which environmental mandates
are carried out are also flawed in the sense that they do not allow more cost effective or non-
technological solutions to environmental issues. Some of the publication's objections to the OMB
evaluation are summarized in the list below.
• Lack of controlled research such as via clinical trials
• Flawed approach i.e. predictive evaluation of outcomes
• Limitation of cost-benefit applicability via judiciary review
• Inadequate use of present-value calculations
• Problems with verifying causality
• Insufficient statistical significance of results
The SBA and The Brookings Institution are supported by another think tank, specifically The Cato
Institute. In a journal article titled “Do Environmental Regulations Increase Economic Efficiency?”
the inadequacy of governmental metrics is addressed. To avoid putting words in their mouth, the
authors of this published material state the following:
“But too often in the policy arena “logic is for losers.” Logic—theory, that is—is not
enough. We believe that economists need to be more thorough and more carefully empirical
on this question. They should be more persistent in combating the idea that stricter
environmental regulation will normally pay for itself by shocking firms into innovating with
better technologies, thus benefiting everyone.”
It should now be clear that there is a divide between governmental research on the financial and
economic advantages of environmental policy and the reality within industry, and the accuracy
of scientific evaluation and the validity of quantitative assessments. Competing research is the
next logical place to find alternative, yet hopefully objective and accurate data pertaining to the
financial impacts of environmental regulation.
4. General equilibrium analysis
Implementing models supplied by general equilibrium economics helps measure and guide the
economic outcome of environmental policy and large scale commercial decisions. This type of
analytical approach seeks to optimize multiple markets by achieving wide scale price equilibrium.
In other words, by attaining the optimal price and output for many industries' products and services
and when either a decline or rise in supply yields a lower profit, then general equilibrium and
therefore efficient market pricing is achieved. According to Lawrence H. Goulder of the National
Bureau of Economic Research, the advantages of general equilibrium economics are as follows:
“General equilibrium analysis yields dramatically different results from what one would
obtain from partial equilibrium, or sector-specific, analysis. In realistic, "second-best"
economies with pre-existing discretionary taxes, such as income and sales taxes, the
differences are striking. In some cases, policies that appear to improve efficiency in a partial
equilibrium analysis emerge as reducing efficiency when researchers account for second-
best, general equilibrium interactions.”
Although this bird's-eye view approach is ideal, it is also easier said than done because of the
existing structure of the economy. For example, according to the NBER, a tax system must already
be inefficient to benefit from efficiency gains brought about by environmentally friendly taxes.
This means that environmental policies must evaluate the financial impact of each rule on
production, operating costs, revenue, competitiveness and labor supply among other factors. Some
key elements pertaining to general equilibrium are the following per the NBER.
• Double dividend
• Tax interaction effect
• Revenue-recycling
• Cost distribution
• Marginal excess burden
These terms refer to the economic advantages and costs associated with specific environmentally
friendly policies such as a carbon tax. In the U.S., the trend has been away from a direct tax and
toward state implemented programs that take regional economics in to account. This is partially
due to the notion that income taxes are a more optimal form of governmental revenue generation,
and therefore, the replacement of income tax or addition of environmental taxes would be more
likely to have a lower overall benefit or double-dividend effect than other approaches.
The social cost of carbon
A key measurement with which factors such as double dividend, revenue-recycling and the cost
of environmental policy are evaluated and quantified is “the social cost of carbon”. This cost is an
estimate of the impact of increasing carbon emissions. The U.S. Government's definition of this
social expense is defined as follows:
“The SCC is an estimate of the monetized damages associated with an incremental increase
in carbon emissions in a given year. It is intended to include (but is not limited to) changes in
net agricultural productivity, human health, property damages from increased flood risk, and
5. the value of ecosystem services due to climate change.”
The government model used to evaluate this cost is determined using environmental effects on
space heating requirements, agricultural production, methane emissions and economic impacts of a
rise in sea level. The table below illustrates the estimates of the social cost of carbon using
“discount rates”. The discount rate is the amount by which costs compound in the future; the
higher this value is, the less initial carbon cost is incurred. Ideally, the carbon cost discount rate
will be lower because the total costs over time will be reduced despite a higher upfront expense.
Source: White House; US-PDGov
The actual social cost of carbon emissions depends on the model used to analyze emissions data.
Since there are many variables and assumptions involved with this type of measurement, the actual
social cost varies and this latter point has not gone unnoticed. For example, the Cost of Carbon
Project, a joint study produced by the Environmental Defense Fund, Institute for Policy Integrity
and the Natural Resources Defense Council claims the government number is too low because low
probability, but high impact events are not factored into the calculations along with events such as
forest fires and other unaccounted for environmental influences.
Manufacturing costs
The vast majority of manufacturers are projected to only accumulate costs of 0-1% of the value of
total shipments per the World Resources Institute. Although the data in the graphic below is
sourced from the U.S. Government and may be subject to some of the empirical biases previously
discussed, it does serve to demonstrate the relatively minimal impact environmental policy has
overall. In other words, time and time again, the long-term benefits require industry to bear the
brunt of policy action that spurs efficiency and industrial competitiveness in the same way that
pollution controls from the 20th
century have been implemented with positive effect.
6. Source: World Resources Institute/U.S. Climate Action, Kevin Kennedy, Creative Commons
Regulatory emissions requirements
In June, 2014, the Obama administration issued an ambitious carbon reduction program that aims
to lower U.S. Carbon emissions from power plants by 30% by 2030. A SCOTUS ruling shortly
after reduced EPA regulatory capacity from 86% of greenhouse gases to 83% per the Associated
Press. Furthermore, the EPA claims the total program cost could reach $8.8 billion depending on
how states implement the new set of rules. Since the U.S. is one of the world's largest carbon
emitters, this program should substantially affect global carbon output. It is also projected to save
money in pollution related healthcare complications. The graphs below demonstrates how U.S.
environmental policy has already begun to take effect on carbon dioxide emissions.
Impact of Federal Policy under the Clean Air Act
Source: U.S. Energy Information Administration; US-PDGov
7. Net Benefit of Environmental Policy on Total Carbon Emissions
Source: U.S. Energy Information Administration
Cap-and-trade
A widely implemented approach to environmental economics is cap-and-trade where carbon
emission limits are set by the state and extra emissions require the purchase of carbon credits. The
incentive with this system is that those entities that produce less carbon receive credits that can be
resold to companies that are not able or willing to meet the carbon quota. California is one state
that has implemented a cap-and-trade program. According to Forbes, the state has raised hundreds
of millions of dollars via cap-and-trade and regions such as the Northeast, which also implement
cap-and-trade, lowered their emissions by 40% between 2005-2012. Since this type of method
pressures industry to become more efficient, the net result becomes lower operating costs, higher
potential profit margin, additional state revenue and reduced air pollutants.
Carbon tax
One way states may choose to implement the federal carbon limitations is via a carbon tax. The
chart below demonstrates how a carbon tax would effect the energy producing market share and
therefore specific industries that produce the highest level of carbon such as coal. Furthermore, the
higher the potential carbon tax is, the greater the cost is to high carbon emitting energy sources.
This approach protects the environment, and a carbon tax of $26 per metric ton of carbon has the
potential to raise hundreds of billions of dollars in government revenue per a Center For Climate
and Energy Solutions report.
As illustrated in the graphic below, a direct carbon tax would substantially impact the biggest
offenders such as coal based energy producers in addition to effecting the job market of that sector.
However, flexible energy policy such as the Obama administration's plan to cut carbon emissions
under the Clean Air Act would not drastically undermine the coal industry according to Mario
Parker of Bloomberg-Businessweek. Moreover, coal is projected to still contribute to 31% of total
8. U.S. power production by 2030. This is because utility companies will still need enough power to
distribute and increases in efficiency will allow them to continue using coal as an energy source.
Effect of carbon tax on energy sourcing
Source: U.S. Energy Information Administration; US-PDGov
Eco-friendly markets
Regulatory compliance is not the only means by which corporations receive credit for lowering
their carbon emissions. According to the Carbon Trade Exchange, a voluntary method also exists.
“In the voluntary market, carbon credits are generated by projects that are accredited to
independent international standards such as the Verified Carbon Standard (VCS). These
credits are known as Verified Emission Reductions (VERs).”
The advantages of voluntary carbon credit programs are the opportunity to benefit financially via
Earth friendly corporate social responsibility. A positive result of the carbon credit market is carbon
offsetting, a way for companies to meet regulatory requirements or boost environmental image.
Although this is a niche market that is considerably smaller than other financial markets, the
potential benefits to companies, people and the environment are worthwhile.
In 2012, the Forest Trends Association reports that $523 million was voluntarily spent on 101
million metric tons of greenhouse gases. Of the total volume of reductions, 28.7 million tons in
marketable emissions reductions were realized by the United States. This demonstrates the
potential to securitize environmentally friendly commerce.
9. Industrial impacts of green friendly business models
Businesses that voluntarily implement environmental controls while still maintaining profit
margins set an example for other businesses in their industry. Furthermore, operational oversight
methodologies such as Lean Sigma Six and environmental accounting methods via free tools such
as the Northeast Waste Management Officials Association's Energy and Materials Flows and Cost
Tracker assist in accomplishing the objective of eco-profit. According to NEWMO, the free cost
tracker is beneficial in the following way:
“EMFACT™ is a software tool designed to be used within companies for systematically
tracking materials and energy use; releases, discharges, and wastes; and associated costs in
ways that can create value for their business. The tool can provide a comprehensive picture
of resource use and its relation to production and planning that can help improve both
business and environmental performance.”
More sustainable and eco-friendly models have already begun taking shape in the auto
manufacturing and utility sectors in addition to others that have been subject to stricter
environmental standards. One such example is the International Data Corporation's Environmental
Excellence Maturity Model. Use of this and other methods has resulted in more efficient operations
and has allowed profitability to occur alongside cost reducing technology and pollution lowering
manufacturing techniques.
Automotive
The automotive industry has embraced more sustainable vehicle assembly and recycling
techniques in part because of emissions regulations, but also because of rising fuel costs that affect
demand for automobiles. By improving fuel efficiency, the auto manufacturers benefit themselves
by increasing demand for their products.
The chart below shows how auto manufacturers have changed their ways over the last four decades
and improved fuel economy by over 80%. Furthermore, the impact of lower vehicle carbon
emissions is substantial because automobiles account for 51% of household carbon emissions per
the U.S. Department of Energy.
Source: NIEHS
10. Manufacturing costs are sometimes passed on to consumers. Depending on the vehicle model, the
financial benefits in terms of fuel savings vary substantially. The difference in fuel efficiency
among automobiles is illustrated by the New York Times. Moreover, according to the newspaper's
research, the 2012 Volkswagen Jetta TDI only cost $226 more than its less efficient counterpart; its
extra cost is offset by 1.1 years worth of fuel efficient driving. However, the Ford Fiesta is at the
other end of the spectrum because its SFE model costs $613 more than its less fuel efficient model;
It also takes 26.8 years to pay off the difference in gas savings.
Since the average use of a vehicle is closer to 11 years, the price of being green friendly may never
benefit the buyers of some eco-vehicles. By passing production expenses on to consumers,
automobile manufacturers avoid the cost of regulations that require higher fuel efficiency.
Additionally, manufacturing fuel efficient automobiles does not seem to heavily impact sales since
a peak around 16 million vehicles will be sold in 2014 according to the Associated Press.
Utilities
There is no doubt that utility companies are impacted by environmental policy. Whether it pertains
to water supply and distribution or electricity, numerous rules and policies that have already been
implemented demonstrate the impact on business operations. For example, according to the North
American Reliability Corporation, utility businesses such as power suppliers incur an upfront cost
when installing replacement equipment that meets regulatory requirements.
When existing equipment goes offline for the transition to cleaner and/or more efficient
technology, utilities run the risk of losing profit margin due to the need to provide an alternative
and possibly more expensive power supply to their clients. Regulatory compacts or reimbursement
agreements that are carried out help utilities pay for such extra costs according to The Regulatory
Assistance Project. A few factors or obstacles that NARC claims utility companies must take in to
account and that make the implementation of environmental policy more complex are listed below.
• Reliability standards
• Capacity reduction
• Planning reserve margin
• Compliance requirements
• Bulk system power reliability
One specific sector that does not seem to gain from environmental policy is the coal industry. The
economic costs associated with coal reduction rules are those that directly impact coal mining
operations, coal distributors and coal based energy companies. Even though improvements in
efficiency will allow utility providers to continue using coal, the growth in the use of coal as an
energy source will likely decline. Fox Business has reported that this has already impacted firms
such as Peabody Energy (BTU) that's year-over-year share value has declined 17%. Even so, there
are more winners than losers under environmental rules. A few such benefactors of the new rules
include a host of alternative energy equipment manufacturers and utility providers.
As technology, energy harvesting techniques and economies of scale improve in the renewable
energy industry, the cost of acquiring power from this sector declines. The graph below illustrates
how wind power has been forecast to follow a continuing downward trend in terms of cost, which
11. in turn increases the benefits of energy policy that promotes it. Utility providers that are able to
capitalize on this trend should not necessarily be brought down by their transition away from coal.
Multiple Forecasting Model Results for Wind Power Costs
Sources: National Renewable Energy Laboratory and Lawrence Berkeley National Laboratory, US-PD
The second graph on this page indicates how much eco-friendly energy is projected to grow as an
industry. Moreover, investment in various kinds of renewable energy is forecasted to reach $254.5
billion dollars by 2017. Numerous reports and research studies highlight the expansion of green
energy market share as a percent of total energy supply and demonstrate the dual benefit of
renewable energy in terms of industry growth and environmental safety.
Data sourced from Clean Edge; US-PD
12. Conclusion
As long as economic, demographic and cultural demands increasingly place a premium on material
standard of living, natural resources and the environment will be effected. Quantifying anything as
large as global industrial profitability and effectiveness of macro-economic environmental
regulation requires an accurate perception of many systemic moving parts. However, a progressive
step-by-step approach has proven profitable and useful for governments, businesses and the
environment. This is evident in numerous ways. Economies of scale have consistently reduced the
cost of renewable energy and this trend is forecasted to continue. Implementation of carbon credit
programs and their corresponding marketplace have proven successful from a commercial and
environmental standpoint. Industries that have embraced environmentally responsible policies
either voluntarily or by legal requirement have demonstrated the adaptability of commercial
enterprise, and financial and economic models continue to be developed to measure the benefits,
costs and net value of green friendly policies.
The awareness of, and need for quantitative measurements such as the social cost of carbon and the
usefulness of earth friendly accounting systems such as EMFACT have been a key aspect of policy
planning and business financial management. Demand for these models, metrics and systems are
likely to continue alongside the socio-economic recognition of the importance of environmental
sustainability and calls to action for its wider implementation in society. How well numerical,
statistical and empirical study of various green-friendly financial models pan out will depend in
part on the quality of the research, and also on the willingness to take valid quantitative data
seriously and pro-actively.
Sources:
1. "U.S. Environmental Protection Agency”; Laws & Regulations
2. "Small Business Administration”; Environmental Regulations
4. “Forest Trends Association and Bloomberg New Energy Finance”; Maneuvering the Mosaic: State of the Voluntary
Carbon Markets 2013; Molly Peters-Stanley and Daphne Yin; June 20, 2013
5. “CarbonTradeXchange”; What is Carbon Credit?
6. “New York Times”; Government Awaits Obama's Move on Carbon to Gauge U.S. Climate Efforts; Coral
Davenport; May 26, 2014
7. “U.S. Energy Information Administration”; Extending current energy policies would reduce U.S. energy use.
Carbon dioxide emissions
8, “U.S. Department of Energy”; 2013 Global Carbon Project
9. “U.S. Environmental Protection Agency”; Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel
Economy Trends: 1975-2012
10. “National Institutes of Environmental Health Sciences”; EHP-Air Pollution from Industrial Swine Operations and
Blood Pressure of Neighboring Residents; Steve Wing, Rachel Avery Horton and Kathryn M. Rose; January 1, 2013
11. “International Monetary Fund”; Going Green; Finance & Development; June 2012
12. “New York Times”; The Cost of Higher Fuel Economy; April 4, 2012
13. "Journal of Accountancy”; The Dollars and Cents of Green Accounting; Andrew Meyerson; May 2005
14. “Environmental Protection Agency”; Benefits and Costs of The Clean Air Act;
15. “White House/OMB”; 2011 Report to Congress on the Benefits and Costs of Federal Regulations; 2011
16. “White House/OMB”' 2013 Draft Report to Congress on the Benefits and Costs of Federal Regulations; 2014
17. “Climate Progress”; The Economic Benefits of EPA Regulations Massively Outweigh The Costs; Jeff Spross; May
3, 2013
18. “Inside Washington Publishers”; OMB Faces Backlash For Backing EPA's Cost-Benefit Studies; May 30, 2005
19. “The Brookings Institute”; The Hamilton Project: A Better Approach to Environmental Regulation: Getting The
Costs and Benefits Right; Ted Gayer; May 2011