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R E S E A R C H A N D A N A L Y SI S

Operational Eco-efficiency

Comparing Firms’ Environmental

Investments in Different Domains of

Operation

Roland W. Scholz and Arnim Wiek

Summary

Eco-efficiency has been established as a crucial concept for

corporate environmental management. Most approaches deal

with eco-efficiency on the level of the company or the prod-

uct. However, given that companies have special budgets ear-

marked for environmental operations or investments, the

question arises as to which operation within which domainis the most eco-efficient. This article presents an approach to

supporting these decisions by calculating eco-efficiency on the

operational level. The procedure is demonstrated using a case

study of the Swiss National Railway Company. Investments and

operations in the domains of energy production, landscape

and nature conservation, noise protection, and contaminated

soil remediation are assessed and compared. Decision-makers

seeking an eco-efficient corporate investment policy will find,

in this concept, a guideline for prioritizing various domains of operation as well as the operations within a domain.

Keywords

corporate investment policy

environmental operations

environmental decision support tool

environmental assessment

industrial ecology

traffic impact compensation

Address correspondence to:

Professor Roland W. Scholz

Swiss Federal Institute of Technology

ZurichInstitute for Human-Environment

Systems

Natural and Social Science Interface

ETH Zentrum HAD

8092 Zurich, Switzerland

<[email protected]>

<www.nssi.ethz.ch/index>

© 2005 by the Massachusetts Institute of Technology and Yale University

Volume 9, Number 4

http://mitpress.mit.edu/jie Journal of Industrial Ecology 155

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R E S E A R C H A N D A N A L Y S I S

Introduction

The concept of eco-efficiency has been dis-

cussed in the environmental management dis-

course for more than a decade (Schaltegger andBurritt 2000, 49ff).On theinstitutional level, the

World Business Council of Sustainable Devel-

opment (WBCSD) has strongly promoted eco-

efficiency as a concept for businesses to pursue

“ways of reducing their impact on the environ-

ment while continuing to grow and develop”

(WBCSD 2000; cf. Verfaillie and Bidwell 2000;

DeSimone et al. 1997).

The guiding principle of eco-efficiency ap-proaches is to optimize the ecological-economic

ratio of desired output and necessary inputs

(Schaltegger and Burrit 2000, 49ff.). Thus, eco-

efficiency is considered to be an additional eco-

nomic success criterion, like productivity, cash

flow rate, or cost-effectiveness rate.

However, there are two distinctions to con-

sider, with which it has not always been easy

to cope. The first concerns the distinction be-tween effectiveness and efficiency. Effectiveness

can be defined as a target-related output value,

whereas efficiency defines a relation between

input and output. This implies, as Hukkinen

(2003, 15) points out, that high eco-efficiency

does not ensure appropriate eco-effectiveness.

A second, related confusion pertains to the re-

lationship between eco-efficiency and sustain-

ability. In various articles, eco-efficiency is con-sidered to be a key to sustainability (Tyteca

1998; DeSimone and Popoff 1997, 1-22; Laws

et al. 2004). Yet, on the contrary, high eco-

efficiency is neither necessary nor sufficient for

the attainment of sustainability (Figge and Hahn

2004; Jalas 2002; Sharma and Ruud 2003).

Thus, to implement comprehensive environmen-

tal or sustainability management, eco-efficiency

needs to be linked to a set of complementaryindicators.

From the very beginning, eco-efficiency has

focused on the micro level, that is, on prod-

ucts, production processes, and companies. Thus,

it is compatible with the major concepts of in-

dustrial ecology, such as environmental product

design, integrated product policy, dematerializa-

tion of processes, and life-cycle assessment (Lifset

2001). Within this focus, management sciences

differentiate between eco-efficiency on the com-

pany, product, and functional levels (Schaltegger

and Burritt 2000, 50).

On the company level, the economic perfor-

mance of a firm is related to the totality of envi-ronmental impacts, which aims at benchmarking

among companies (Verfaillie and Bidwell 2000).

On the product level, the prices and environ-

mental impacts of various products are combined

to inform consumers which of products similar in

price and function is most eco-efficient (WBCSD

2000). Eco-efficiency calculations on the func-

tional level refer to the concept of functional

units, for example, a serving of food, a trans-portation service, or a tourism service. Functional

units can be provided by different agents with

different eco-efficiency values. One prominent

approach to determining the environmental im-

pacts of functional units is taken from life-cycle

assessment (Heijungs et al. 1992).

In this article, however, we introduce the op-

erational level of eco-efficiency. If we assume

that large companies have special budgets ear-marked for environmental operations or invest-

ments, the question arises as to which operation

within which domain is the most eco-efficient.

“Domains of operation” are distinct action fields

that are differentiated from the decision maker’s

or the firm’s perspective. Examples of domains

are noise protection or energy saving measures.

This article presents an approach to supporting

these decisions by calculating eco-efficiency onthe operational level. In a long-term business

perspective, the compensation and internaliza-

tion of external costs have to be integrated into

these decisions (Coase 1960). This perspective

ultimately aims at a coherent and efficient en-

vironmental operation management (Angell and

Klassen 1999).

The challenge in terms of scientific feasibil-

ity is to develop a tool that allows one to com-

pare operations differing in reference, extent, and

function and to accurately assess and deal with

uncertainties. From the viewpoint of practical

feasibility, companies face the challenge of mak-

ing good investment decisions that meet envi-

ronmental criteria based on appropriate data on

environmental and economic utilities.

After introducing the conceptual and

methodological bases, we demonstrate the

156 Journal of Industrial Ecology

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procedure of calculating operational eco-

efficiency using a case study of the Swiss National

Railway Company, which dealt with energy pro-

duction and savings, landscape and nature con-

servation, noise protection, and contaminatedsoil remediation.

The Concept of OperationalEco-efficiency

In calculating operational eco-efficiency, we

focus on an environmental operation or invest-

ment, Ak , such as the construction of a noise

protection wall or the remediation of a contami-nated site. We define the environmental utility of

this operation, u1( Ak ), as the sum of (1) the ben-

efits gained from environmental improvements

(positive utility value) and (2) the environmen-

tal costs of the negative side effects caused by

the operation (negative utility value). One could

assume that an environmental operation, by def-

inition, provides environmental improvements.

However, environmental operations also gener-ate unintended environmental damages, which

potentially could negate the benefits (this is

sometimes called the rebound effect) (Berkhout

et al. 2000; Dyllick and Hockerts 2002).1 We as-

sess the environmental utility on the macro level

(externalities).

Let k = 1, . . . , K denote the number of dif-

ferent operations; then the environmental utility,

u1( Ak ), is:

u1( Ak ) = u11( Ak ) + u2

1( Ak ) (1)

where Ak = an environmental operation, ac-

tion alternative or investment (k = 1, . . . , K ),

u11( Ak ) = the direct environmental benefits

from operation Ak (positive utility value), andu2

1( Ak ) = the indirect environmental costs of

operation Ak (negative utility value).

The economic utility of an environmental op-

eration or investment, u2( Ak ), is primarily de-

termined by the economic costs. In accounting,

there are degrees of freedom with respect to the

time-span of write-off, the allocation of mainte-

nance costs, and whether the processed products

have different lifetimes. With respect to oper-

ational eco-efficiency and the applications pre-

sented in the case study, the assessment of the

economic costs include investment costs, write-

offs, and operational cost for the lifetime of each

operation (Scholz et al. 2001). It is obvious that

for a comprehensive application in an enterprise,

the annual costs per alternative operation have

to be calculated and that, finally, the choice of alternatives is constrained by the total annual

amount of money available for environmental

investments in a given period of time.

From a theoretical viewpoint, indirect eco-

nomic benefits that might result from the en-

vironmental operation could also be taken into

account. For instance, noise protection walls

alongside railway tracks might stabilize embank-

ments, thereby reducing the maintenance costs.Moreover, in a comprehensive approach, the op-

portunity cost of the invested capital should be

taken into account. However, we use a simplified

approach focusing on the direct economic costs,

which are assessed on the micro level, that is, the

company level. The equation for the economic

utility, u 2( Ak ), is

u2( Ak ) = u

1

2( Ak ) (2)where u1

2( Ak ) = company’s costs of operation

Ak .

Consequently, we define operational eco-

efficiency as the relationship between the en-

vironmental utility and the economic utility of

environmental operations, which is to a cer-

tain extent compatible with the definition pro-

posed by Schaltegger and Burritt (2000, 49ff)

and Fet (2003). We calculate operational eco-

efficiency as a “difference”; that is, the operation

under consideration is examined in comparison

to the business-as-usual alternative. Thereby, we

restrict the calculation to increments, that is, in-

tended improvements of the status quo. This pro-

cedure is compatible with incremental budget-

ing or investment appraisal methods (Dayananda

et al. 2002). The equation for calculating opera-tional eco-efficiency is

ee( Ak ) = ee( A0, Ak ) =u1( A0, Ak )

u1

2( A0, Ak )

=u1( Ak ) − u1( A0)u1

2( Ak ) − u12( A0)

(3)

This equation cannot be applied to the com-

parison between the business-as-usual and an al-

ternative having identical costs (division by 0),

Scholz and Wiek , Operational Eco-efficiency 157

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and also the sign of the numerator and denomi-

nator is important and leads to different constel-

lations.

With respect to possible unintended side or

rebound effects of environmental operations, wedifferentiate between two constellations of eco-

efficiency. The first and regular constellation re-

sults in a positive eco-efficiency value; that is, if

theoperation leads to environmental benefits and

economic costs. The second constellation results

in a null or a negative eco-efficiency value; that

is, the operation creates no environmental gains

or leads to environmental costs (rebound effect),

although still having economic costs. Operationsbelonging to the second constellation of eco-

efficiency are evaluated indeed, but are omitted

from further consideration and elaboration be-

cause of the “intention-to-improve” in conduct-

ing environmental operations. This cutoff condi-

tion is formulated in the following equation:

u11( Ak ) + u2

1( Ak ) > 0 (4)

Quantifying the Components of Operational Eco-efficiency

Table 1 lists the methods of environmental

assessment and valuation that were applied in

the operational eco-efficiency study of the Swiss

Table 1 Overview of the methodologies and methods of environmental assessment and valuation applied

in the four domains of operation in the study of the Swiss National Railway Company

Environmental valuation

(A) Valuation of (B) Valuation

Environmental assessment environmental utilities of effects

using valuation factors

LCA: Expert panels:

Domains of Eco- Construction of environ- Monetizing Willingness Hedonicoperation Indicator 95 mental utility functions damages to pay pricing

Energy production X Xand saving

Landscape X Xand natureconservation

Noise protection X X XContaminated soil X X

remediation

National Railway Company (Scholz et al. 2001)

presented in this article.

Environmental Assessment Model and

Methods

A matrix algebraic model served to represent

the assessment chain from operations to envi-

ronmental utilities (figure 1). The model referred

to the structure of specific environmental assess-

ment methods, such as environmental impact as-

sessment (EIA) and life-cycle assessment (LCA)

(Goedkoop and Spriensma 1999). However, it

also assisted in representing different assessmentmethods in a common framework.

The model begins with the allocation of the

impacts from operation, Ak , to a set of impact

categories (inventories). If there is an appropriate

transfer matrix, that is, (substance) flow matrix, F, that assigns the consequences of Ak to a set of

L impact categories, then one obtains a K × L-

dimensional matrix of environmental impacts,

I. The other steps can be modeled analogously:from impacts to effects when defining a second

transfer matrix, that is, pressure matrix, P; from

effects to damages/improvements when defin-

ing a third transfer matrix, H; and finally, from

damages/improvements to utilities when defin-

ing a fourth transfer matrix, that is, utility valu-

ation matrix, V. The last of these matrices is an


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Figure 1 Assessment chain from operations to utilities with transfer matrices (Goedkoop and Spriensma

1999).

Mx1-dimensional matrix, if a one-dimensional

utility score is targeted, or an MxR-dimensional

matrix, if a multidimensional utility score is tar-

geted for each alternative.

First, for standardized operations, such as

the construction of a noise protection wall,

Eco-Indicator 95/99 (Goedkoop 1995; Goed-

koop and Spriensma 1999) was used as a rep-

resentative method of LCA. The functionalunit to be assessed was the environmental op-

eration. The chemical compounds (e.g., chlo-

rofluorocarbons [CFCs] and polycyclic aromatic

hydrocarbons) and materials used or caused

by the operation were inventoried (impacts,I). The environmental consequences of the

inventoried elements were allocated to ef-

fects, E, on various environmental systems

(e.g., greenhouse effect, eutrophication). The ef-fects were then assigned to the caused dam-

ages/improvements, D (such as resource deple-

tion/restoration, health impairment/healing, and

ecosystem impairment/remediation). The dam-

ages/improvements were assessed with respect to

a set of targets derived from scientific surveys.

According to a distance-to-target approach, the

damages were weighted and aggregated to yield

an overall utility value (U).Second, expert panels were used to assess envi-

ronmental operations that required site-specific,

local knowledge and could not be related to

the standardized unit processes available in LCA

databases. Examples for such environmental op-

erations include nature conservation and land-

scape change (Oliver 2002). The experts assessed

these operations according to the procedural

framework (shown in figure 1). As a prerequi-

site they determined damage/improvement cat-

egories with respect to vegetation, soil func-

tions, landscape quality maintenance, and so

forth. Second, they quantified the effects for

each damage/improvement category using utility

scores. Third, based on a multicriterion assess-

ment procedure, the experts weighted the dam-

age/improvement categories. Finally, the scores

were aggregated to yield a composite utility score.

Environmental Valuation Methods

The environmental valuation methods ap-

plied in this study are differentiated into two

approaches (table 1). One group of methods

(A) monetizes environmental utility scores us-

ing valuation factors; the factors were determined

using damage valuation or contingent valuationmethods. The other group (B) monetizes effects

using the hedonic pricing method (Garrod and

Willis 1999).

Environmental damage valuation that mon-

etizes damage, replacement, and substitute

costs (Johanson 1990) has been applied in

LCA-related valuation studies (Hellweg et al.

2003, 11ff.). We used a valuation factor

based on a macroeconomic valuation approach

(Frischknecht 2000, 87; Frischknecht 1998,

125ff.). The approach assessed overall environ-

mental damages in Europe using Eco-Indicator-

95 and conducted a survey on the related total

external costs. On this basis, a valuation factor

per Eco-Indicator point was determined.

The willingness-to-pay method (Carson

2000) was applied to nature and conservation

operations, which had been assessed by expert


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panels. As these services are at present not traded

in the marketplace, the contingent valuation ap-

proach was applied to calculate their subjective

and hypothetical economic values. This valua-

tion method is called “contingent,” because peo-ple are asked to state their willingness-to-pay con-

tingent on a hypothetical environmental service.

The assessed utility score of the Swiss Landscape

Conservation Strategy (SLCS) (BUWAL 1999),

the total area of Switzerland, and willingness-to-

pay data from Swiss inhabitants related to SLCS

served as references for the valuation of these

operations.

The hedonic pricing method (Brookshireet al. 1982; Palmquist 1999) was applied to

noise protection, as the effects of these opera-

tions are valuable with respect to market price

changes (Theebe 2004; Wilhelmsson 2000). In

this method, we estimated the financial impacts

of noise protection by comparing the remediated

state of the location with a similar location whose

market price was known.

Data Sources and Calculations

All calculations were based on published stud-

ies and a few original surveys, which are doc-

umented in a report by Scholz and colleagues

(2001). We used data for the reference years

1999/2000. Analyses and calculations were per-

formed by a team of 15 scientists and 50 advanced

master’s students of environmental sciences. Ex-

perts from the Swiss National Railway Company

accompanied the entire project and checked all

results in a transdisciplinary discourse.

The Case Study of the SwissNational Railway Company(SBB)

The Company

The SBB is the Swiss national railway com-

pany and operates all major intercity connections

and most trains in the urban agglomerations as

well. Another 40 railway companies, all of which

are owned by communal and/or cantonal pub-

lic entities, operate trains in Switzerland. They

all cooperate closely with the SBB, which in the

year 2003 had a market share of 87% in passenger

transport (on a passenger-km basis) and of 90%

in cargo transport (on a tonne-km basis).

In 2000, the SBB was a joint stock company

owned by the Swiss Confederation, with about

30,000 employees and a turnover (revenue) of 4.4 billion Swiss francs.2 The daily transport vol-

umes were 750,000 people and 140,000 tonnes

of goods.3 This corresponds to approximately

12,000 million person-kilometers/year (p km/yr)

and 10,000 million tonne-kilometers/year (tonne

km/yr).4 The SBB owned 3,000 km out of a

total of 5,000 km of Swiss railway tracks. Envi-

ronmental issues were managed by the Railway

Environmental Center (BahnUmwelt-Zentrum)of the SBB, a small specialist team, which reports

directly to the CEO.

Selecting the Domains of Environmental

Operations

The aim of the transdisciplinary case study

(Scholz et al. 2001) was to develop a tool that al-

lowed priority setting among environmental in-vestments in specific domains, such as noise pro-

tection, but also between different domains that

had previously not been compared. The follow-

ing domains of operation were selected according

to the priority setting of the SBB (Hubner and

Kuppelwieser 1997):

Energy Production and Saving

This domain covered a broad range of opera-tions such as types of engines and methods of en-

ergy production and energy transformation. The

most critical issue in this domain was the own-

ership of the hydroelectric power stations, which

was intensely discussed because of the high price

of hydroelectric power compared to cheaper en-

ergy available on the market.

Landscape and Nature Conservation

The investigation was guided by the assump-

tion that railways might have a high impact in

terms of landscape fragmentation, habitat segre-

gation, and corridor effects, which should become

the subject of environmental operations.

Noise protection

Noise has always been a subject of major im-

portance, and legal compliance has been placed


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at the top of the agenda of most transportation

companies (Leth 2003).

Contaminated soil remediation

For historical reasons, the SBB was the realestate owner with the greatest number of con-

taminated sites in Switzerland. At the time of

the study, there was much uncertainty regard-

ing the way in which soil remediation operations

would provide return on investments to both the

company and the Swiss environment.

The following applications are restricted to

selected operations from the first three domains

of operation in order to reasonably point out thespectrum of starting positions, applied methods,

and generated results.

Assessing the Eco-efficiency of

Environmental Operations

Landscape and Nature Conservation

The SBB’s operations in the domain of land-

scape and nature conservation, ALNk , were sup-

posed to compensate for the environmental

impacts of infrastructure, such as tracks and

railway embankments. The alternative opera-

tions (table 2) were examined in comparison

to the business-as-usual alternative (“null-

alternative”), ALN0 . The layout of table 2 illus-

trates the structure of the comparison.

Table 2 The three operations in the domain of landscape and nature conservation (Hitzke et al. 2001,

209f.; Egger et al. 1999)

No. Term Operation Compensation Location (CH)

0 ALN0 Business as usual — Hersiwil/Islerenholzli/

Wilderswil-Zweilutschinen

1 ALN1 Elongation of the tunnel

to reduce disturbancesof the sensitive habitaton the surface

Impacts of tunnelbuilding

Hersiwil

2 ALN2 Construction of a

crossover for gameanimals

Impacts of building abypass railway

Islerenholzli

3 ALN3 Reafforestation, hedge

planting, and extensionof nature protectionareas

Impacts of doubletrack extension

Wilderswil-Zweilutschinen

Note: CH = Switzerland.

Table 3 displays the results of the eco-

efficiency calculations in the domain of land-

scape and nature conservation.

The environmental utility scores of the oper-

ations in this domain, u1( ALN

k ), were obtainedby an expert panel for each operation (Scholz

et al. 2001). For the valuation of the utility

scores, a willingness-to-pay of 30 SFr per per-

son and month was assumed for nature and land-

scape conservation, based on research by Egger

and colleagues (1999). This resulted in 360 SFr

per person year, or 2.5 billion SFr for a Swiss

population of 7 million. To calculate a valua-

tion factor, the willingness to pay was combinedwith a general reference amount of environmen-

tal utility points. This amount represents the

environmental benefits that would result if the

Swiss Landscape Conservation Strategy (SLCS)

covering Switzerland (41,300 km2) were realized.

Thus, a valuation factor of 25,000 SFr per km2,

utility point, and year was obtained. Combining

(i) this valuation factor with (ii) the utility score

and with (iii) the size of the area affected by theoperation yields the monetized utility score.

The economic utility score of these environ-

mental operations, u2( ALNk ), reflects the accumu-

lated costs for materials, machines, labor, energy,

and so forth.

The calculated results show that all operations

would have generated environmental benefits,


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Table 3 Eco-efficiency calculations for three operations in the domain of landscape and nature conservation

Environmental utility Economic utilityLandscape Size of the

and nature affected area Utility Monetized utility Monetized utility Eco-

conservation Location (km2) score score in 1,000 SFr. score in 1,000 SFr. efficiency

1 Hersiwil 1.94 0.51 24.8 773.0 0.032 Islerenholzli 18.0 0.31 170.0 235.0 0.723 Wilderswil- 0.9 0.87 19.5 27.4 0.71

Zweilutschinen

but would have broadly differed with respect to

the investments required. The most expensive

operation in terms of economic costs proved tobe operation 1 ( ALN

1 : elongation), a fact that is

traced to the high costs of underground construc-

tion engineering. Due to its relatively small en-

vironmental utility, leading to an eco-efficiency

value of only ee = 0.03, operation 1 is ranked

in last position. In contrast, operation 3 ( ALN3 :

nature care measures) would have had the small-

est economic costs. However, it would have gen-

erated only a relatively small monetized envi-

ronmental benefit. Thus, the eco-efficiency of

operation 3 (ee = 0.71) is of roughly the same

magnitude as that of operation 2 (ee = 0.72),

whose economic costs and associated environ-

mental benefits would have been much higher.

Energy Production

For the alternative operations in the energy

domain, two subdomains were chosen in the casestudy, production and transformation of energy,

AEPk , and transportation vehicles, AEV

k . We focus

here on the alternatives of energy production and

transformation, AEPk , and summarize the other

results in the last section.

Alternatives in energy production had been

controversially discussed over many years with

respect to their strategic importance for the SBB.

The SBB requires 16.7-Hz rail current to run

its trains. In 2000, approximately 90% of the

required 16.7-Hz rail current was produced in

the hydroelectric power stations owned by the

SBB; the rest was imported as 50-Hz current and

transformed to 16.7-Hz rail current with a loss

of approximately 8%. The costs of the home-

made current (0.07 SFr/kWh) seemed extraordi-

narily high when compared to the costs of the

European mix provided via the Union for the

Coordination of Production and Transmission of

Electricity (UCPTE): 0.03 SFr/kWh. Thus, sell-

ing the hydroelectric power plants had become areasonable alternative to discuss.

Four alternative operations were assessed in

the case study: business as usual, AEP0 , selling the

hydroelectric power stations, AEP1 , expanding

the hydroelectric power stations, AEP2 , and eco-

energy production, AEP3 . The calculations were

based partly on data from all SBB hydroelectric

power stations, and partly on extrapolated data

from a study of a specific hydroelectric power sta-tion owned by the SBB in Ritom, Switzerland.

The following detailed calculation is restricted

to the business-as-usual alternative, AEP0 (“null-

alternative”), versus the alternative of selling the

hydroelectric power stations, AEP1 .

The calculation of eco-efficiency required the

determination of the level of demand for cur-

rent. The business-as-usual option comprised a

high percentage of self-produced 16.7-Hz rail

current and a small percentage of imported 50-

Hz current. The calculation was further differ-

entiated by import-export balances due to an-

nual spillovers and shortages (Hitzke et al. 2001,

212ff.). The energy mix after the hydroelectric

power stations were sold, that is, for operation

AEP1 , showed the opposite balance because the re-

quired current would have to be totally imported

by the SBB (see table 4, columns “Amount”).

The environmental utilities, u1( AEPk ), were

assessed using Eco-Indicator 95 and were mon-

etized using a valuation factor calculated by

Frischknecht (2000, 1998). The calculation re-

sulted in a difference of 21.4 million 10−9 Eco-Indicator 95 points per year between the utilities

u1( AEP0 ) and u1( AEP

1 ). With the valuation factor

of 5.6 SFr per 10−9 Eco-Indicator 95 points, sell-

ing the hydroelectric power stations would incur


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Table 5 Eco-efficiency calculations for four operations in the domain of noise protection

Environmental utility Economic utility

Noise Monetized environ- Monetized Overall monetized Monetized

protection mental benefits environmental environmental utility utility score

walls in 1,000 SFr. costs in 1,000 SFr. in 1,000 SFr. in 1,000 SFr. Eco-efficiency

Operation 1 0.0 0.0 0.0 1.8 0.0Operation 2 60.2 1.9 58.3 78.0 0.75Operation 3 55.2 1.2 54.0 42.0 1.29Operation 4 49.9 1.7 48.2 78.0 0.62

hedonic pricing method permitted the valuation

of the denoted changes of floor size per noiseclass.

In this calculation, both the direct environ-

mental benefit from a noise protection opera-

tion, u11( A NP

k ), and the indirect environmental

costs resulting from an operation, u 21( A NP

k ), were

assessed explicitly. The latter costs reflect the

environmental impacts of fuel and of construc-

tion parts made out of concrete, steel, and other

energy-intensive materials.The economic utility score of these en-

vironmental operations, u2( A NPk ), reflects the

accumulated costs for materials, machines, labor,

energy, and so forth.

The calculated results show that all operations

would have generated environmental benefits,

with the exception of operation 1. Referring to

the guideline that the operations under consid-

eration were supposed to create environmental

gains, the cutoff condition (The Concept of Oper-

ational Eco-efficiency above) excluded this option.

The eco-efficiency values for operations 2 and 4

differ not because of economic utilities, which

are the same, but because of different monetized

environmental utilities. Operation 3 is ranked in

first position with an eco-efficiency value higher

than 1 because it would have generated more en-vironmental benefits than economic costs.

Summary

Apart from the eco-efficiency calculations for

three of the four domains of operation, which

served as illustrative examples, additional calcu-

lations were performed during the SBB case study

(Scholz et al. 2001). The results are summarized

in table 6 and visualized in an eco-efficiency port-

folio in figure 2 (Ilinitch and Schaltegger 1995).From an overall assessment point of view,

operations in the domain of noise protection

were the most eco-efficient due to their large

environmental benefits. The eco-efficiency of

contaminated soil remediation was also high

(best single placements), given that groundwater

sheds were endangered (operations 4 and 5).

The energy sector received the lowest rank when

compared to the remaining domains. In the caseof rail coaches, it would not have been beneficial

to exchange the current coaches because of

environmental reasons.

Discussion

The proposed procedure for calculating op-

erational eco-efficiency combines environmen-

tal assessment and valuation. Relying on thetools of life-cycle assessment (LCA) and envi-

ronmental impact assessment (EIA), the matrix

algebraic framework could be used to provide

a representational tool for exhibiting the chain

from actions through impacts, effects, and dam-

ages/improvements to environmental utilities in

a flexible and transparent manner. The valua-

tion refers to these environmental utilities from

a macroeconomic viewpoint, but additionally in-

tegrates damages that are caused by the environ-

mental operations themselves. Analogously, the

approach is expandable by taking into account

indirect economic benefits that could result from

an environmental operation, such as image gains.

In this article we focused on investments aim-

ing at the maximization of environmental util-

ity or the reduction of environmental impacts,

given a certain investment budget. From the


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Table 6 Eco-efficiency of selected domains of operation in the SBB study

Overall environmental Overall economic utility Overall eco-efficiency

utility u1 in 1,000 SFr. |u2| in 1,000 SFr. ee = u1/|u2|

Energy productionOperation 1 −119,840 125,960 Negative

Energy performance (coaches)

Operation 1 1,528 195,200 0.008Operation 2 −564 760,000 Negative

Operation 3 1,996 261,200 0.008

Landscape and nature conservation

Operation 1 25 773 0.032Operation 2 171 235 0.728

Operation 3 20 27 0.741 Noise protection

Operation 1 0 2 0.000

Operation 2 58 78 0.744Operation 3 54 42 1.286

Operation 4 48 78 0.615

Contaminated soil remediation

Operation 1 1,492 16,000 0.093Operation 2 159 13,000 0.012

Operation 3 196 4,000 0.049Operation 4 51,610 13,000 3.970

Operation 5 5,480 4,000 1.370

Operation 6 1,255 24,000 0.052

Note: Best performances (ee > 1) and worst performances (ee negative or zero) are in bold type.

viewpoint of “conventional” investments, the sit-

uation would be different, aiming at the maxi-

mization of the economic utility per environmen-tal impact added (Schaltegger and Sturm 1990).

A general approach applicable to all types of in-

vestment should take into account the four pos-

sible constellations of eco-efficiency, that is, pos-

itive/negative environmental utility combined

with positive/negative economic utility, as well as

the different underlying management strategies.

With respect to the scientific feasibility of

the proposed approach, uncertainties are a criti-

cal issue. A first aspect of uncertainty relates to

the estimation of the data. Although the basic

data on environmental impacts (Hofstetter 1998)

and environmental external costs (Sundquist and

Soderholm 2002; Friedrich and Bickel 2001) are

subject to many assumptions and ambiguities

(Werner and Scholz 2002; Diamond and Haus-

man 1994), these uncertainties may nevertheless

be quantified. In the case study, data uncertain-

ties were calculated for the domain of landscape

and nature conservation (Hitzke et al. 2001, 219).

The analysis showed an approximate uncertaintyfactor of 2 for estimates of the components of eco-

efficiency. However, for comparisons of theutility

scores of different domains, this uncertainty fac-

tor is negligible. The reason is that the variance

among the scores of the domains is much larger

than the variance induced by the uncertainty

factor. Yet comparing scores of single operations

would require the calculation of data uncertainty

in detail.

The second aspect of uncertainty refers to

the issue of whether or not the relevant vari-

ables, that is, damages/improvements and causal

relations, have been appropriately modeled. One

critical issue with respect to the variables is the

neglect of opportunity costs. The implementa-

tion of noise protection measures takes years and

the amounts of money invested are considerable.

How opportunity costs of capital and discounting


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Figure 2 Eco-efficiency portfolio represented by the overall environmental utility and the overall

economic utility of selected domains of operation in the SBB study (Ilinitch and Schaltegger, 1995). The lines

circling the dots refer to the five domains of operation. Three operations (A NP2,1 and AEV

2 and AEP1 ) are

treated as special cases because of having an eco-efficiency value equal to or less than 0.

can be incorporated into an assessment of noise

protection measures has been shown by Lendersand Tietje (2002). In interpreting table 6 and

figure 2 this aspect has to be considered. An-

other critical issue might be the linearity of many

allocation and modeling assumptions. Yet, the

robustness of linear models has been repeatedly

demonstrated (Dawes et al. 1989; Kleindorfer

et al. 1993). Finally, when appraising the validity

of the results, one should have in mind the uncer-

tainties inherent in the comparison of fundamen-tally different environmental operations relying

on different methods of environmental valua-

tion. The equal treatment of different operations

reflects the situation of the corporate decision-

makers having a certain budget available for all

operations. The equal treatment of different val-

uation methods reflects the necessity of coping

with different situations for data collecting and

qualities of available data.

The third aspect of uncertainty refers to the

system borders and mainly concerns the relationbetween the monetized economic utility on the

company level and the monetized environmen-

tal utilities on the macro (e.g., national) level.

We suspect that 1 SFr that is invested on the

company level might be different from 1 SFr that

is accounted for on the GNP level as external

cost. The question is how adequate the “exchange

rates” among these currencies are. A possible an-

swer could be based on retrospective and prospec-tive research focusing on the “internalization of

external costs” (Tolmasquim et al. 2001) that an-

alyzes this transition from the macro to the micro

level.

A second issue of scientific feasibility concerns

the “evaluative reliability” of the approach and

refers to the introductory statement that high

eco-efficiency does not ensure appropriate eco-

effectiveness. Thus, in addition to application


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of the first cutoff condition (The Concept of

Operational Eco-efficiency above), which is justi-

fied by the “intention to improve,” a second cutoff

condition, that is, a target-related output value,

could be introduced following overall impactappraisals and threshold concepts. This would en-

sure that each operation achieved a certain quan-

tity of environmental improvement. An appro-

priate calculation of this cutoff condition would

have to take into account a variety of parameters,

such as total impact volume, buffer capacity and

resilience of affected eco-socio-systems, societal

preferences, and economic and political restric-

tions (Reijnders 1998).The presented approach supports the prior-

itizing of different environmental investments.

Moreover, it prepares decision-makers for the

need to adjust their strategies concerning the

internalization of external costs, something that

gradually takes place in all relevant domains of in-

vestment. However, from the viewpoint of prac-

tical feasibility, it remains to be seen just how

efficient an eco-efficiency assessment is for a com-pany. Limiting factors are the availability of data,

the access to computerized information, and the

size and organization of the company, as well as

the lack of motivation in many departments. Il-

lustrative eco-efficiency calculations, in particu-

lar for environmentally significant projects, pro-

vide reasonable decision support for attractive

and less attractive environmental investments.

At the very least, with respect to a set of ref-erence projects, the requirement of manageabil-

ity seems to be feasible, as the economic data

from accounting and financial controlling should

be available and usable (Schaltegger and Burritt

2000, 56f.). The presented assessment framework

allows user-friendly updating because it can be

supplemented by new (sub)categories of impacts,

effects, and damages while leaving the remaining

data unchanged. Matrix algebra matches spread-

sheet representations in standard accounting and

calculation computer programs. Thus, the expen-

diture during the usage phase depends mainly on

the number and complexity of investments to be

assessed and incorporated into a reference data

bank.

Finally, we reflect on the practical impacts

of the presented case study. The major practi-

cal impact was a change in decision-making with

respect to the sale of hydroelectric power sta-

tions. The comprehensive calculation, which re-

alistically took into account the low retail price,

the penalties for canceling long-term energy sup-

ply contracts, and the prospective dynamics of energy taxes and prices, led to an unambiguous

economic evaluation. But, interestingly enough,

the threat of the SBB losing its advantage in envi-

ronmental performance compared to road traffic

seems to be more critical (Mieg et al. 2001, 30).

Moreover, the study confirmed the SBB’s priority

setting on noise protection, on the necessity and

efficiency of soil remediation in cases of endan-

gered groundwater (but not necessarily in othercases), and on the value of landscape and nature

conservation operations. Finally, the calculations

showed that an exchange of rail coaches solely for

environmental reasons seems to be inappropriate.

Conclusions

This article presents a procedure for calculat-

ing eco-efficiency on the operational level. Theproposed definition incorporates direct and in-

direct (external) environmental costs and ben-

efits. A large-scale case study of the environ-

mental operations of the Swiss National Railway

Company (SBB) demonstrated that the proce-

dure is applicable to energy production and sav-

ings, landscape and nature conservation, noise

protection, and contaminated soil remediation.

The proposed procedure provides a concise guide-line to decision-makers for prioritizing domains

of operation, as well as operations within one

domain, in the search for an eco-efficient cor-

porate investment policy. The critical issues dis-

cussed, for example, coping with uncertainties

and data availability, point to the challenges of

implementing this tool in a scientifically accurate

and practically cost-efficient way.

Acknowledgments

The authors would like to thank two anony-

mous reviewers and the editors for helpful com-

ments. We would also like to thank our col-

leagues Daniel Lang, Claudia Binder, and Peter

de Haan from Swiss Federal Institute of Tech-

nology Zurich for technical support, and Peter

Loukopoulos for editorial support.


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Notes

1. Editor’s note: For a discussion of the role of the

rebound effect in industrial ecology, see the recent

article in this journal by Hertwich (2005).

2. One Swiss franc (SFr) ≈ 0.65 Euro ≈ 0.78 US$.3. One tonne (t)= 1 megagram (Mg)= 103 kilograms

(kg, SI) ≈ 1.102 short tons.

4. One kilometer (km) = 103 meters (m, SI) ≈

0.621 miles (mi).

5. One gigawatt-hour (GWh) = 106 kilowatt-hours

(kWh) = 3.6 terajoules (TJ).

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About the AuthorsRoland W. Scholz is a professor and Arnim Wiek

is a postdoctoral research fellow at the Natural and

Social Science Interface research group, in the Institute

for Human-Environment Systems, at the Swiss Federal

Institute of Technology, Zurich, Switzerland.

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