freie universitÄt berlin, environmental policy …

FREIE UNIVERSITÄT BERLIN, ENVIRONMENTAL POLICY RESEARCH CENTRE [FFU]

and JAPANESE-GERMAN CENTER BERLIN [JDZB]

Symposium Indicators for Evaluating Sustainable Development ―

The Ecological Dimension from Monday, November 1 to Tuesday, November 2, 2004

at the JDZB, Saargemünder Str. 2, 14195 Berlin

Eco-Efficiency Indicators

Prof. ISHIKAWA Masanobu (Graduate School of Economics, Kobe University)

Email: [email protected]

Indicators for Evaluating Sustainable Development ― The Ecological Dimension, Syposium at the Japanese-German Centre Berlin (JDZB), 1 - 2 November 2004


Masanobu ISHIKAWA, Graduate School of Economics, Kobe University

Introduction

The article is intended to provide a fundamental basis for discussion on Eco-Efficiency indicators (E/E) by

experts from a wide range of fields such as LCA, environmental economics, environmental management,

and environmental accountings etc. In order to cover the wide area that is relevant to the eco-efficiency

concept, we start by recalling the fundamentals of the free market mechanism and discuss the failure of

market as a major cause of sustainability problems.

The question is what shall we do for our market economy? Let’s start recalling the free market mechanism.

Market as a decision-making tool

The most important feature of the market mechanism is that it can achieve the global optimum without global

information, but rather with local information of decision makers, price and preferences. Amazingly, the

overall consequence of these distributed decisions has proved to be ‘efficient’ by the elegant economic

theory if there are no externalities.

Although we know the free market system is the best one available, we have many goods we do not trade in

the market. There is simply no market for public goods such as national security, public hygiene, basic

scientific research or externalities such as clean air, biodiversity etc. We decide how much we spend for

these goods not based on market price but by means of the political decision-making process. Among these

goods that have no market, those goods that relate to environmental externalities are our topics.

Decision outside of the market

Because these goods have no market price, we cannot expect Pareto improvement by the decision that is

taken. In addition, we have to accept a more complicated decision-making process that tolerates much

higher costs than just having a look at the price tag, such as discussing, negotiating, collecting information,

making judgments, or industry’s spending a large amount of money for lobbying.

The emerging global environmental problems raise a serious question of whether our current system is

capable of guiding us to becoming a sustainable society. The problem is that these processes should adjust

the interests of the stakeholders through political processes, which are in some cases opaque and might

even come up with irrational results. This is why we need such tools as LCA, MIPS etc. These tools provide

the decision-maker with additional information to make a more ‘sustainable’ decision.

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The problems of our concern include:

1. Opaqueness of the decision-making process

2. Decision-making process that is not well-informed

3. Inconsistency of policies

4. Inefficiency

Opaqueness of the decision-making process is mainly relevant for collective decisions of society. A decision-

making process that is not-well informed is relevant not only for collective decisions but also individual

decisions such as choice of products. The question of inconsistency comes from the failure of policy to deal

with trade-offs between environmental impacts. The efficiency question comes from the lack of appropriate

tools for allocating resources to individual problems. A typical question is how much preferential payment is

appropriate for green procurement?

Eco-Efficiency

This past spring (2-3 April 2004), we held an Eco-Efficiency International Conference in Leiden, The

Netherlands. During the conference, 100 papers were presented on E/E. The major findings of the

conference are that we have various E/Es, various practical applications in which E/E is shown to be useful,

and a couple of ideas that we can make use of to develop more useful E/E.

We also discussed the concepts of E/E as regards possible pitfalls. For example, E/E might give wrong

direction due to the non-linearity of the real world, or various definitions of E/E that are based on different

models of environmental impacts might produce inconsistent guiding information.

Environmental impact evaluation / assessment

Let us classify variation of E/E. In this contribution, we restrict ourselves to focus on the environmental

quality part of the E/E, because the variations are broader than that of the economy part. Classification

according to the difference of economy part will be dealt with in a future work.

The environmental impact assessment in E/E means that the process of information aggregation goes from

inventory data to impacts, to end points and finally ends up as a single score. The aggregation of inventory

data to impacts can be done, at least theoretically, by objective procedures. Some impacts are quantitatively

evaluated from inventory data based on agreed scientific knowledge. However, we still lack a concrete,

established scientific base for other impacts.

The dilemma of the impact assessment is that the more rigorous the process, the more opaque the process

is to the general public, or even the more controversial it is among experts.

Although the uncertainty and credibility depends widely on impacts, it is clear that the impact assessment

process is necessary to deal with inconsistency questions.

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Efficiency questions and impact assessment

To answer efficiency questions, such as decision of preferential payment of green procurement, there is a

way to avoid impact assessment. For example, the maximum abatement cost method (MAC) has been

proposed by Oka et al. (2005), or DtT approaches also exist. The trick is to use existing regulations or

targets as socially accepted ones. Thus, these types of tools cannot be used for consistency questions,

because the tools implicitly assume there is no inconsistency.

Maximum Abatement Cost method (MAC)

Maximum Abatement cost indicates the measures with the highest cost within the average cost for a group

that cannot be disaggregated for the measures being undertaken by society to address reduction of a

specified environmental burden. (Oka et al. 2005)

Despite the restriction of applications, MAC has distinctive advantages over tools that contain impact

assessment. It is simple, transparent, low cost, and suitable for business application.

1. The MAC is a set of conversion factors from inventory data to money; the process is simple.

2. The MAC is stable over time as well as space compared to subjective weighting procedures. The

results of subjective weighting procedures such as CJ or CVM vary widely with e.g. economic

situations (e.g. GDP).

3. Because the data we need is the highest cost, resources needed to obtain the information are less

compared with evaluation of average cost.

4. Information expressed in a money unit is vital for business decisions.

Example of MAC

The followings are the examples of MRC in Japan. (Oka et al. 2005)

1. CO2: 7,000 (yen/ton)

2. NOx: 2,500 (1,000 yen/ton)

3. SOx: 43,000 (yen/ton)

4. SPM: 6,700 (1,000 yen/ton)

5. BTOD 1,600 (1,000 yen/ton)

6. TCE,PCE: 15,000 (million yen/ton)

7. Heavy metals 20,000 (1,000 yen/ton)

8. DXN: 19,000 (billion yen/ton)

9. CFC 24,000 (1,000 yen/ton)

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Indicators for Evaluating Sustainable Development ― The Ecological Dimension, Syposium at the Japanese-German Centre Berlin (JDZB), 1 - 2 November 2004 BTOD denotes aggregated nutrients. BTOD = 2*COD + (21*TN+319*TP)/2

1 Euro is approximately 130 to 140 yen (November 2004).

Concluding remarks

1. There are various Eco-Efficiency indicators for various applications.

2. Although a couple of applications show that the Eco-Efficiency indicators are useful, there is no

theoretical basis to assure the E/E indicators will lead to the global optimum. The E/E indicator is

useful, but we would be better off not fully dependent on it.

3. Although the impact assessment has some problems, it is essential for consistency questions.

4. Impact assessment can be avoided by MAC in the case of efficiency questions.

Literature

Oka, Toshihiro, Masanobu Ishikawa, Yoshifumi Fujii and Gjalt Huppes (2005), A Cost-Effectiveness

Approach for Green Activities with Multiple Environmental Effects: Maximum Abatement Cost Method,

Journal of Industrial Ecology, forthcoming, 2005

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1st November 2004 Masanobu Ishikawa 1


1st November 2004Indicators for Evaluating Sustainable Development –

The Ecological Dimension, jdzb, Berlin, Germany

Masanobu IshikawaGraduate School of Economics

Kobe University


Contents

IntroductionPolitical DecisionsTools and questionsEco-Efficiency and Impact AssessmentMarginal Reduction Cost methodConcluding remarks


Introduction

Why do we use a competitive/free market?Pareto improvementPrice as a signal of scarcity based not only on quantity but also on demandDistributed decisions

Minimum information demand


Public Decisions

Public goodsNational securityPublic hygieneLight house

ExternalitiesPollutant emissionNoiseAmenity

Political DecisionsExpenditure for public goods

Regulation


Problems in Public Decision

Proceduralnot transparentnot well-informed

Inconsistency of policiesdue to hidden trade-offs among environmental problems

Inefficiencydue to lack of quantified tools to solve trade-offs between environment and economy

��

��


Tools

Life Cycle information toolsLCA, MIPS, LCC etc.

Economic instrumentsEco tax, subsidy, emission permit trade etc.

Soft regulationsGreen procurement, Eco-label, Leading runner approach, Information disclosure


Questions:

Eco-tax: how much?Public green procurement: how much preferential payment is appropriate?How do we make use of material-based environmental data in management decision-making?etc.


Can E/E answer these questions?

Yes! to some extentWatch your step!


E/E common features

∆ economyE/E =

∆ environmental quality

E/E is defined as an incremental concept


Reasons We Should Watch Our Steps

No theory to assure E/E guides us to the global optimaVarious definitions of E/E

Various environmental quality indicesVarious economic indices


Two Tradeoffs: Aggregations

Tradeoffs: among environmental problemsVarious burdensVarious impactsSome end pointsSingle score: weighting

Tradeoffs: environment vs. economy

Subjective/Difficult

Impact Assessment


Impact Assessment (IA)

Consistency questions: necessary

Efficiency questions: without IA


Recipe: Tools and Questions

EFP*: Ecological Foot PrintFM**: Food Mile

Consistency and efficiencyquestion

Efficiency question

Aggregation IAMethod/base with withoutSubjective

non-monetary LCAmonetary CBA, LCA

Regulation LCA (DtT) LCA (DtT), MACtargets

Physical RA MIPS, EFP*, FM** etc.


Generally applicable E/E:Maximum Abatement Cost (MAC)

MAC is the highest cost being undertaken by society to reduce the specific environmental burden.MAC induced by public policy.

MAC can be applicable for green procurement and environmental management accounting.


MAC

Reduction / kg

Aba

tem

ent c

ost

( Yen

/kg

) Maximum Abatement Cost


MAC (1,000yen/ton, Japan)

CO2: 7.0NOx: 2,500SOx: 43SPM: 6,700BTOD: 1,600

TCE,PCE: 15,000,000Heavy Metals: 20,000DXN: 19,000,000,000CFC: 24,000

BTOD=2*COD+(21*TN+310TP)/2


Features of MAC

Good for efficiency questionsDirect monetary evaluation of inventoryIA evaluations are impliedRelatively stableLow evaluation costsAppropriate for business use:

Green procurementEnvironmental Management Accounting


Concluding remarks

Many E/Es have various applications.Better to focus on practical and operational method, keeping in mind that there is no theoretical verification.Impact Assessment can be avoided for efficiency questions.Impact Assessment is necessary for consistency questions.

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