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Using input-output analysis for

corporate benchmarkingH. Scott Matthews and Lester B. LaveCarnegie Mellon University, Pittsburgh, Pennsylvania, USA

Keywords Input/output analysis, Benchmarking, Life cycle costing, Social audit, Accounting,Pricing

Abstract In recent years, cost-effective protection of the environment has become a moreimportant goal for many businesses. Companies have been striving to reduce the environmentalimpacts of their products and packaging, while not incurring costs that put them at a competitivedisadvantage. A key to accomplishing this goal is by benchmarking their performance against othercompanies. Benchmarking can be expensive, time consuming, or problematic because detailedbenchmarking requires detailed, specific data that are generally confidential. A screening level

benchmark can accomplish much of the goal quickly and cheaply. Focuses on a tool to make quick,screening level benchmarks of US industrial environmental performance and discusses how it canbe used to evaluate a plants environmental performance. Mentions other tools, notes itsrelationship to them, and discusses how it can be more broadly used. Finally, suggests ways thatthis type of benchmarking information can be used broadly within a firm for accounting anddecision-making purposes.

IntroductionCompanies in the USA and throughout the world face environmental activistsand voters who demand improved environmental performance. Myriadlegislation and regulations require companies to reduce their environmentaldischarges and clean up polluted sites. Faced with regulations, fines, consumerboycotts, bad publicity, and even shareholder and management pressure,companies have been trying to improve their environmental performance whilenot incurring costs that reduce their competitiveness.

In the past, companies focused on product quality and cost, giving littleattention to environmental discharges. Thus firms find that, initially, they canactually lower costs and pollution discharges at the same time. However, asthey push toward lower discharges costs increase. At some point, continuing tolower discharges could make the firm less competitive. What are reasonablegoals for a firm that is attempting to be a good environmental citizen? Oneanswer is that the firm should be performing better than its industry average

and improving its performance over time.In the absence of benchmarking their environmental performance againstcompetitors and comparable industries, firms have no idea how they compareto their competitors or to the industry best practice. In addition, without amanagement information system that enables them to trace the environmentalexpenditures and liability for current discharges back to individual productsand their choices among processes and materials, managers cannot makeinformed decisions because they lack the necessary information.

The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at

http://www.emeraldinsight.com/researchregister http://www.emeraldinsight.com/1463-5771.htm

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Benchmarking: An InternationalJournalVol. 10 No. 2, 2003pp. 152-167q MCB UP Limited1463-5771DOI 10.1108/14635770310469671

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In this paper we describe a tool that has been developed as a result of field-based work with private organizations. The tool is designed to providemanagers with the information required for making informed decisions. Theyare also designed to keep companies from incurring large future liabilities. Webegin with some examples of environmental issues that companies have faced:

. A plant making automobile supplies was hovering around zeroprofitability and its disposal costs for scrap seemed high. Ourinvestigation confirmed that they were producing a great deal of scrapin the plastic molding process. The result was high environmentaldisposal costs. More important was the excessive materials use and thefact that the plant generally had to work on weekends to fulfill its quotas.Although the plant had gone to activity based costing (where the costs ofproduction are explicitly connected with the activities that create them),the system was implemented so that it understated the effects of

producing and managing scrap plastic by 60-80 percent. The high volumeof scrap was an important indicator of fundamental problems in the plantthat dwarfed the cost of scrap disposal. Thus, managers were lookingelsewhere to find a solution to the profitability problem (Horney, 1998).

. A few years ago, McDonalds was faced with environmental protests overits use of disposable foamed polystyrene clamshell containers forselling hamburgers. While the containers were ideal for insulating andprotecting the food while providing portability, environmental groupsprotested that the containers were harmful to the environment. UnlessMcDonalds could find a substitute package that was acceptable to the

environmental groups and served customer needs, they faced a prolongedbattle that would be costly to their public image.. Since 1968 American automakers have been required to control the

tailpipe emissions of their vehicles. More recently, California, followed bystates in the Northeast, went beyond this evolutionary approach todemand zero emissions vehicles (ZEV). This regulation ruled out internalcombustion engines, requiring instead electric cars. Auto manufacturersfound that producing these vehicles was much more expensive thanconventional vehicles and customers found that the vehicles did not haveacceptable range. Regulators insisted that the technology would improvewith more R&D expenditures.

These examples show companies and government agencies facing pressuresfrom environmental groups, shareholders, and regulators who demandenvironmental quality and sustainability. In each case, the company wanted tobe a good environmental citizen and was willing to make at least modestsacrifices to do so (Lave and Matthews, 1996). In general, companies do nothave the information to respond to these pressures in a timely way that dealswith the issues cost-effectively.

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Setting realistic goalsA major problem facing a company is what goal to set for currentimprovements. Although initially firms can both save money and lowerenvironmental discharge, within a given technology, the costs start increasingas they attempt to ratchet down discharges. In many cases, the company canmake a large reduction in discharges, but only at significant cost. What goalshould they set?

Environmental demands seem to ask for zero discharges and even gettingclose is expensive. But this cannot be feasible while there is no assurance as towhich level of performance is acceptable. Good companies also have to be ableto sort through environmental demands to see which seem plausible but do notcontribute to environmental quality, and which are most important. Simplydoing what is demanded is likely to be expensive and never ending, and may inthe end be entirely wasteful. We suggest that a reasonable goal is to exhibit

better performance than the industry average and to improve continually overtime. Benchmarking provides a good sanity check. This requires benchmarkingagainst other companies in the same industry and comparable industries.

Solving these problems is less obvious than it might appear. Unfortunately,setting goals that have the intention of benefiting the environment have oftenturned out to be expensive, or even dysfunctional. For example, many US citieshave had to discontinue all or part of their recycling programs because theywere too expensive; some critics have charged that these programs harm,rather than help, environmental quality (Zandi, 1991). The 1996 Germanpackage recycling law (Eco-Cycle and Waste Law or Kreislaufwirstschaftsund Abfallgesetz) cost more than twice what was originally expected; one

result has been warehouses filled with material to be recycled because there aretoo few customers for the material. Currently, the recycling authority is willingto pay firms to recycle the material.

We explore the reason why these are complicated issues and present sometools for answering them. In particular, we focus on three areas: first, how toget a quick, first order approximation of the environmental damage done bydischarging pollutants within an industry; second, how to set reasonable goalsfor benchmarking across similar industrie; and third, how to provide thisinformation to decision-makers to help them make informed decisions.

Useful tools for environmental performance analysisTo be useful for environmental analysis, tools must have four attributes:

(1) They must address the whole problem and provide the desiredinformation. The first attribute requires knowing what information isrequired to make informed decisions about packaging fast foods,comparing an electric car to a gasoline powered car, or choosing whichhousehold waste to recycle. For a battery-powered car, one source of airemissions is the generation of the electricity used to charge the batteries.

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If the electricity were generated by a dirty coal fired power plant, airemissions are likely to be greater than powering the same fleet of cars withlow emissions gasoline engines. More important, current electric cars arepowered by about 1,000 pounds of batteries. Mining, smelting andrecycling the batterys metals will lead to large environmental dischargesof highly toxic metals (Lave et al., 1995a,b; Steele and Allen, 1998).

Another example is that making a car of aluminum rather than steelproduces a lighter, inherently more fuel-efficient car. However, a great dealmore energy is required to make aluminum than is required to make steel.How far would the steel and aluminum cars have to be driven before thetotal energy required for manufacturing and use is less for the aluminumcar?

To assess the implications for environmental quality and sustainabilityof a product or process, we must examine the full life-cycle of the

alternatives, not just the energy and materials use or environmentaldischarges in one phase. Thus, to address the first attribute, life-cycleinformation is required to make informed environmental decisions.

(2) The tools must provide that information at the time when decisions aremade (ideally in real time).

(3) The tools must be inexpensive relative to the value of their information.The next two attributes, time and expense, do not have general answers,but rather depend on the particular decision. For microelectronics, delaysin bringing a product to market are crucial, particularly because someproducts have lives as short as a few months in the market. The designer

needs to make the decision quickly; information available next week isirrelevant.

(4) They must be reliable in the sense that their information, while even ifuncertain, is good enough to be helpful in making the decisions.Reliability is a complicated attribute. McDonalds probably did notdesire to become an environmental exemplar; they simply wanted to sellhamburgers without bad publicity. To McDonalds, reliability meantgetting all the relevant environmental groups to agree that a particularsolution was environmentally benign. Conventional life-cycle analysis ofpaper versus polystyrene cups generated a great deal of controversy(Hocking, 1991; Wells, 1991; McCubbin, 1991; Caveney, 1991; Camo,1991). The analysis indicated that making polystyrene cups resulted inmore air pollution, while making paper cups resulted in more waterpollution. Whether air pollution is better than water pollution isinherently controversial. The studies also found that the differencebetween materials was small relative to the difference amongmanufacturers and disposal practices. Materials selection decisions areinherently comprised of these types of tradeoffs.


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Developing tools requires difficult judgments. The toolmaker must decidewhich of the four criteria to emphasize. For environmental tools, researchershave tended to emphasize reliability. As a consequence, the tools are timeconsuming and expensive to apply and so are largely of academic interest.While tools must be reliable to be useful, they will not be used if they are notrelatively inexpensive and produce answers in the relevant time period.

An environmental performance screening toolNow that the relevant screening tool attributes and the issues relevant to firmshave been described, we discuss ways in which tools can be most helpful tocompanies. As noted above, firms need to be able to benchmark theirperformance against others within their industry. Looking at availableindustry-wide data can do this. If the confidentiality of data is an issue,

comparisons against industry averages can be done privately within the firm.A new tool has been created, building on Leontiefs input-output analysis

(Leontief, 1936; Lave et al., 1995b; Hendrickson et al., 1998). Economic input-output life-cycle analysis (EIO-LCA, 2002) is based on a linearized model ofproduction in the US economy supplemented with data on energy use,materials use, and environmental discharges. The basic assumption of input-output analysis is that inputs are proportional to outputs. For example,increasing automobile production by 1 percent is assumed to require 1 percentmore of each of the current inputs. EIO-LCA uses EPA data on discharges ofconventional air pollutants and toxic discharges and the census ofmanufactures and department of energy on use of fuels and other materials.

The EIO-LCA tool calculates a wide range of factor inputs, such as bituminouscoal and electricity, and a variety of environmental discharges, such as toxic airreleases and greenhouse gases. It is available free on the Internet (available at:www.eiolca.net/).

The data used are available to anyone who desires them; they are datacollected by and reported to the federal government by companies and evenindividual plants. Thus the data may be over- or under-reporting actualreleases. There are some limitations in terms of data availability, but theprincipal limitation concerns the level of aggregation. With only publiclyavailable data, the tool can compare products by approximating them by the

USA commodity sector in which they are manufactured. This approach isespecially useful as a screening tool. With additional data on the composition ofa product, the tool has been used to compare specific materials and products(Joshi, 1999). A downside of the wealth of data available is that the input-outputtables are released only every five years (e.g. 1992 and 1997), and with asignificant lag the 1997 benchmark input-output table will be released in late2002. This limits comparisons to technology assumptions that are several yearsold. However, despite technological advances, purchases in the supply chains

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of products are very inertial, with few significant changes over short periods oftime.

The EIO-LCA model estimates both direct and indirect effects for the whole

supply chain. By focusing on the direct effects (which come as a result ofproduction by the manufacturer), a firm can gain insight into the industryaverage energy, environmental, or health and safety effects of production. Inthe previous example of an automobile plastic parts producer, they couldcompare their internally tracked data with industry benchmarks. As anexample, Table I shows the direct aggregate sector effects of producing $1million of automobile parts (from the motor vehicle parts and accessoriessector) as estimated by EIO-LCA (the total column will be explained below). Ofcourse, the estimates in Table I represent a fairly aggregate view of industryperformance. In this case, factories in the motor vehicle parts and accessoriessector which also produce brakes and oil filters would also be in this category.

In some cases, firms in very aggregate sectors such as this one will havedifficulty using EIO-LCA for industry comparisons since some of the firms in ahighly aggregate sector will have direct effects significantly higher or lowerthan the average.

Once firms have compared their performance against firms within theirindustry, they could also benchmark their performance against relatedindustries. As mentioned, this might arise from the need to find other, moreappropriate, sectors to be used for comparison. In the case of the plastic autoparts plant mentioned previously, this could mean against other manufactured

Effect Direct Total

Electricity used (Mkw-hr) 0.18 0.96Energy used (TJ) 0.93 16.8Conventional pollutants released (metric tons)

Sulfur dioxide (SO2) 0.1 4.3Carbon monoxide (CO) 0.07 5.8Nitrogen oxides (NOx) 0.12 2.9Volatile organic compounds (VOC) 0.2 0.92Lead 0.0 0.01Particulate matter less than ten microns in diameter (PM10) 0.0 0.45

OSHA safety (fatalities) 0.00004 0.0006OSHA lost workday cases 0.38 0.89

Greenhouse gases released (metric tons CO2 equivalents) 58 1,210Fuels used (metric tons) 21 467Ores used (metric tons) 0 535Hazardous waste generated (RCRA, metric tons) 6.8 50Toxic releases and transfers (metric tons) 0.8 2.8Weighted toxic releases and transfers (metric tons) 8.1 21.7

Note: Assumes $1 million of production of SIC 3-714 motor vehicle parts and accessoriesSource: EIO-LCA (2002)

Table I.Direct and total

coefficients ofreleases for

automobile partsproduction


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plastic products industries. Table II shows a summary comparison of the directeffects across several similar plastic products manufacturing sectors. Thiscomparison highlights the issues that arise when benchmarking firms evenwith similar materials and processes. While the direct energy use is similaracross the four sectors, the environmental, health, and safety effects varywidely. This is a familiar result of benchmarking.

As seen in Table II, these sectors vary widely in performance benchmarks.Conventional pollutant releases and fatalities are an order of magnitudedifference. Energy use and greenhouse gas emissions are more similar. Thesedifferences can be explained by technology, regulation, or other effects. Inaddition, using a simple measure such as $1 million of product might not be afair comparison.

Product stewardship, supply chain and life-cycle analysis

Product stewardship has motivated companies to consider the downstreamimplications of their products. For vertically integrated firms, that is the entirelife-cycle. If the firms environmental management scope goes beyond thefactory gate, then data across the production supply chain are needed for

Effect Auto-parts FootwearMiscellaneous

productsHoses and

belts

Electricity used (Mkw-hr) 0.18 0.16 0.35 0.26Energy used (TJ) 0.93 1.07 1.04 2.07Conventional pollutants released (metric tons)

Sulfur dioxide (SO2) 0.1 0.01 0.06 0.12Carbon monoxide (CO) 0.07 0.00 0.01 0.00Nitrogen oxides (NOx) 0.12 0.01 0.03 0.04Volatile organics (VOC) 0.2 0.73 0.92 0.53Particulate matter less than ten microns

in diameter 0 0.00 0.02 0.01OSHA safety (fatalities) 0.00004 0 0.00024 0OSHA lost workday cases 0.38 0.84 0.5 0.70Greenhouse gases released(metric tons CO2 equivalents) 58 159 49 135Fuels used (metric tons) 21 22 17 47Hazardous waste generated(RCRA, metric tons) 6.8 0.2 0.37 0.2

Toxic releases and transfers(metric tons) 0.8 0.6 0.7 1.3Weighted toxic releases and transfers(metric tons) 8.1 0.1 0.4 5.4

Note: Assumes $1 million of production of the following sectors: motor vehicle parts andaccessories, rubber and plastic footwear, misc. plastic products, and rubber and plastic hoses andbeltsSource: EIO-LCA (2002)

Table II.Comparison ofperformancebenchmarks for fourplastic productsectors

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comparison. Certainly, most firms are only concerned with the operation andmanagement of their own facilities.

Life-cycle analysis (LCA) is the key to making informed decisions about theimplications for environmental quality and sustainability of choosing amongmaterials, product configurations, and processes. EPA and the Society forEnvironmental Toxicology and Chemistry (SETAC) have developed the mostwidely used LCA method (Keoleian and Meneray, 1993; Vigon et al., 1993; Favaet al. (1991)). The first step is to scope the problem, defining the boundaries ofthe analysis. The second step is a life-cycle inventory where the environmentaldischarges of all processes within the boundary are calculated. The third step isestimating the implications for the environment of these discharges. The finalstep examines ways of reducing the environmental damage by reducing thedischarges or changing the materials, product configuration, or processes.

SETAC-EPA analysis has proven controversial (Portney, 1993). It is time

consuming and expensive to determine the energy and resource inputs to aprocess and the resulting product output and environmental discharges. Hence,the boundaries are drawn tightly, including only the largest supplier or two ateach stage. Since changing the boundaries changes the results of the analysis,often there is disagreement about where to draw the boundaries. The time andexpense of getting data on each process also leads to using out of date data.

Perhaps the most important problem is that few plant owners are willing toshare proprietary data on their energy and material inputs, outputs, andenvironmental discharges. Thus, the individual plant data are rarely seen byanyone other than the LCA analyst. As a result, it is impossible for anyoneother than the analyst to know the quality of the data. There are inherent

difficulties in relying on the person collecting the data for quality assurance ofthat collection process. Unless the data are open to scrutiny, there is littlereason to have confidence in the LCA results.

As an example of LCA, Table III displays the results of a comparison ofproducing paper and polystyrene cups using EIO-LCA. In both cases, themanufacture of cups is approximated by the input-output sector in which thecups are manufactured. As seen below, there is no obvious winner in thecomparison between plastic and paper cups. For example, while emissions ofconventional pollutants are uniformly higher for paper cups, RCRA hazardouswaste is more problematic across the board for plastic cups. It is not socially

obvious which environmental effect is more problematic. However, one resultof such an analysis is a better, more systematic understanding of themagnitude of impacts for the two types of cups.

For product use, such as an automobile, the inputs could consist of fuel usedover the vehicle lifetime, service estimates (parts and fluids replaced and labor)and fixed costs such as insurance, depreciation, etc. (Maclean and Lave, 1998).These inputs are approximated by their input-output sectors. As a result of itseconomy-wide boundary, EIO-LCA often leads to more complete results than


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other LCA methods. EIO-LCA estimates some discharges or resource uses thatare not typically associated with the product.

For automobile parts manufacturing, suppliers use more energy than theassemblers. As an easy example of the difference between including just thedirect effects of production, Table I shows the total (direct plus indirect) effectsof producing $1 million of automobile parts. The total estimate furtherconsiders all purchases across the supply chain needed to produce the autoparts, as opposed to just those direct purchases made by the final

Description Units Polystyrene cup Paper cupFinal demand $ million 0.300 0.600Economywide output $ million 0.745 1.463

Energy consumptionBituminous coal MT 100.04 232.6Natural gas MT 79.72 63.6Light fuel oil MT 9.18 25.1Heavy fuel oil MT 4.67 24.8Electricity Mk Wh 0.37 0.51Total energy TJ 9.27 13.9

MTNon-renewable ore consumption

Iron ores MT 8.84 13.94Copper ores MT 85.64 33.79

Toxic releases

Air MT 0.35 0.51Water MT 0.04 0.05Land MT 0.04 0.03Total releases MT 0.6 0.62Releases and transfers MT 1.7 0.92

Conventional pollutantsSulfur dioxide MT 1.7 4.2Carbon monoxide MT 1.4 4.4Nitrogen oxides MT . 1.5 3.5Volatile organics MT 0.76 1.1

RCRA hazardous wasteGenerated MT 155 41Managed onsite MT 151 40

Shipped out MT 4 2Summary indices of emissionsGlobal warming potential MT CO2 eq. 566 984

Notes: Polystyrene cups are approximated by the plastic materials and resins sector. Papercups are approximated by the paperboard containers sector. The price of a polystyrene cup is3 cents and a paper cup is 6 cents.MT = metric tons; MkWh = million of kilowatt-hours; TJ = terajoules; MT CO 2 eq. = metric tonsof equivalent CO2 emissions (using IPCC weights)Source: EIO-LCA (2002)

Table III.Selected summaryenvironmentalimpacts fromproduction of 10million cups

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manufacturer. With this expanded scope, it is possible to see several orders ofmagnitude more effects across the supply chain.

This life-cycle perspective can also enhance benchmarking activities withina firm. Taking a life-cycle perspective of automobiles suggests that driving theautomobile uses much more energy than producing the vehicle, servicing it, ordisposing of it (MacLean and Lave, 1998). Incorporating the life-cycleperspective could facilitate a benchmark of competing vehicle designs (ormaterials choices, e.g. steel vs. aluminum). It could also show a specific vehicledesign versus a generic (sector average) vehicle design over the life-cycle.

Social cost accounting and pricing for environmental managementA revolution has taken place in accounting in recent years to provide managerswith better information. Unfortunately, the applications of activity-basedaccounting that we have seen neglect important aspects of a firms

environmental costs and so lead to bad decisions.In our work with a number ofFortune 500 companies, we have not found a

single company that has been able to compute the environmental costs andliabilities of individual materials, processes, products and designs. In addition,companies focus on their environmental expenditures, rarely attempting toquantify the extent of future liability from their disposal and other practices.Unfortunately, they have no direct information about how their costs andliabilities would change if they switched materials or processes, or changedtheir product configurations and disposal methods.

A companys accounting system does not provide good informationconcerning these costs. Unfortunately, the accounting system is themanagement information system (MIS) for many companies. The accountingsystem is designed to satisfy the Internal Revenue Service (and state and localtaxing authorities) and the Securities and Exchange Commission. Depreciation,the valuation of property and treatment of liabilities satisfy tax standards; onlyin the most remote sense can these accounting values be said to approximatecurrent market values. Rather, accounting assumptions about depreciation,length of life of equipment and building, and values for capital goods aredetermined by tax authorities with little attempt to relate the assumptions tocurrent market values. We stress that accounting systems are not designed toprovide the sort of information that is needed to make informed decisions about

products, production, and disposal.An MIS should provide executives with the information needed to makedesign, production, and disposal decisions. A reasonable MIS tabulates currentenvironmental costs and likely future liabilities and traces them to the material,product, and process generating them, allowing decision-makers to assess theircurrent status. A good MIS would give decision-makers information about howenvironmental costs and liabilities would change if there were a change inmaterials, design, or process. While enterprise resource planning (ERP)


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systems are becoming more pervasive within corporations, few are being usedto fully support environmental, health and safety missions.

We have been working with several companies on improving their MIS. A

companion paper details some results and lessons learned from theseinvestigations. In many cases, we find that a company would increase its profitby changing design and practices to lower environmental costs and liabilities.For example, a plant doing injection molding for plastics seemed to have fewenvironmental problems. It proudly displayed its equipment for recycling scrappolyethylene plastic. A closer examination revealed that the plant had a highscrap rate that increased its costs dramatically and increased its wastematerial, including the material that could not be recycled. The accountingsystem valued scrap parts at the cost of materials, understating the costs by theamount of labor and machine time going into each part, as well as disposalcosts. Furthermore, the system credited them with the value of the recycled

plastic without charging them for the labor and machines required for therecycling. Thus, it saw scrap as almost costless. In fact, scrap parts were threeto ten times more expensive than the accounting system estimated. Faced withthe real costs of this scrap, it saw that decreasing scrap rates was the mostimportant short-term priority of the plant.

We find that few firms attempt a quantitative assessment of their possibleliabilities from environmental discharges. They assume that satisfying currentenvironmental laws and regulations will protect them from future liability. Ourhistory indicates this assumption is not prudent. Many Superfund sitesresulted from companies that satisfied all applicable environmental laws and

regulations or even went far beyond these regulations. A more prudentassumption is that any discharges of toxic materials into the environmentcould result in future liability.

The MIS described so far attempts to help firms increase their profits bygenerating better information about their costs and liabilities. However, a firmcan be fully in compliance with all environmental regulations and still imposelarge costs on society. For example, a paint company in Los Angeles that wasin compliance with its permits might have emissions of volatile organiccompounds that were a major contributor to ozone levels.

The next step in constructing a better MIS would be to use the social, ratherthan private, costs of discharges. If a company calculated its costs on the basisof social costs, it would see where it was imposing large costs on society andperhaps where it is likely to be regulated in the future. Using social costs wouldshow the firm where corporate citizenship could contribute the most toenvironmental quality. Having social costs substantially greater than privatecosts indicates a possible problem. In our judgment, a firm should have thisinformation to make informed decisions about its design, processes, andmaterials.

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By applying known estimates of the damage associated with air pollution,firms could account for the social costs of air pollution associated with aproduct or process. Tables IV and V show the comparative external airpollution costs of producing paper and plastic cups (using the sameassumptions as in Table III). The values in Tables IV and V display a range ofsocial cost valuations resulting from air pollution emissions, and are found bymultiplying these valuations by the tons of conventional pollutants andgreenhouse gases emitted for the 485 sectors in the US economy. They aregiven in percentage terms and represent a valuation of how much society mightbe willing to pay to avoid these air emissions. See Matthews and Lave (2000)for details on the valuation method.

The values suggest that the social air pollution costs of manufacturing papercups are roughly twice the social cost of an equivalent number of plastic cups.If only the social costs of air pollution are important, then plastic cups should

be chosen. The values estimated only consider social costs of air pollution, andnone related to water or release of toxins. Including these would furtherincrease estimates of social costs.

Low Median High

Total 0.6463 2.9785 9.0536Paper and paperboard mills 0.2181 0.9188 2.9466Electric services (utilities) 0.1867 0.7151 2.0225Pulp mills 0.0534 0.2035 0.751Crude petroleum and natural gas 0.0259 0.1677 0.3396Paperboard containers and boxes 0.0223 0.1571 0.3165

Trucking and courier services, except air 0.0186 0.1519 0.5585Railroads and related services 0.0154 0.0743 0.4139Industrial inorganic and organic chemicals 0.0145 0.0682 0.2164Natural gas distribution 0.0122 0.0764 0.1407Coal 0.0115 0.0789 0.1348

Table IV.External air

pollution costs forpaper cups (percent)

Low Median High

Total 0.3076 1.4912 4.3139Electric services (utilities) 0.1128 0.4319 1.2216Industrial inorganic and organic chemicals 0.0557 0.2618 0.8311Plastics materials and resins 0.0346 0.1865 0.5264Crude petroleum and natural gas 0.0337 0.2184 0.4423Natural gas distribution 0.0091 0.057 0.1049Railroads and related services 0.0064 0.0309 0.1721Trucking and courier services, except air 0.0061 0.05 0.1837Coal 0.005 .0.0345 0.0589Other repair and maintenance construction 0.0045 0.0145 0.0839Nitrogenous and phosphatic fertilizers 0.0042 0.02 0.052

Table V.External air

pollution costs forplastic cups

(percent)


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Finally, we offer a more radical suggestion. To an economist, environmentalpollution arises because companies do not face the social costs ofenvironmental discharges. Environmental discharges are an externality andso lead to market failure. As Pigou suggested in 1918, the most straightforwardway to deal with an externality is to impose a tax equal to the external cost tosociety (Pigou, 1918). If firms face the correct prices for their discharges, theywill have incentives to make the right decisions regarding these environmentaldischarges. In this case, there would be no need for regulatory agencies tocompel firms to modify their behavior the combination of the market systemand social cost pricing would lead to the right behavior.

The notion of social cost accounting and pricing is both attractive andfrightening to executives. It is attractive to think about getting away from EPAcontrol. However, the pollution charges could be large, adding to costs andreducing sales. We think social cost pricing is worth serious attention even

though firm costs would be increased in the short term.Social cost pricing would force society to clarify its environmental goals and

set priorities. Is the social cost of emitting a pound of sulfur dioxide one cent,one dollar, or $100? How important is abatement of sulfur dioxide compared toabating emissions of nitrogen oxides (NOx) or emissions of a carcinogen suchas benzene?

Setting these values would unleash market incentives. Firms would findways to abate environmental discharges in order to lower their productioncosts. Entrepreneurs would search for new technologies to abate discharges ortechnologies that are naturally low polluting. These incentives lowered the costof abating sulfur dioxide under the 1990 Clean Air Act by more than two-thirds

(Burtraw, 1995).Social cost pricing would give better information to consumers about the

environmental costs of their purchases. The market price would reflect the fullsocial costs. Customers would not need recommendations from consumergroups about which products to buy, since the product price would embody itsenvironmental costs.

Finally, social cost pricing would give greater stability to firm decisions.Currently environmental legislation and regulation are subject to chaotic, oftenpunitive behavior. For example, automobile companies have a difficult timepredicting new emissions regulations. They also point out that they are subject

to much more stringent NOx emissions controls than are stationary sources.Under social cost pricing, cars and electricity generation plants would face thesame marginal costs for NOx emissions control, leading to lower total costs ofNOx abatement.

Social cost pricing would not replace regulation. For discharges that lead toglobal or regional rather than local problems, social cost pricing would besufficient. For greenhouse gases, CFCs, and, to a lesser extent, the precursors ofacid rain and ozone, social cost pricing would be expected to lead to the desired

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level of abatement, the only issue. For suspended particulate matter and toxicemissions, emissions can cause local hot spots that could result inunacceptably high local risks, even though the overall level of abatement isachieved. Regulations would still be needed to deal with these hotspotproblems.

In the paper versus plastic cup example, given public outcry about airpollution, consumers would face a fully costed price of paper cups that wasbetween 0.6 and 0.9 percent higher, and 0.3 to 0.4 percent higher for plasticcups. A social cost analysis can aid benchmarking activities within the firm byshowing dollar-valued social cost comparisons of environmental dischargesagainst production cost. If air pollution damages are the primary concern, thenthe method used would give social cost benchmarks of the two alternatives.The firm could use the benchmarking data to minimize the total cost ofproduction with air pollution damages included.

ConclusionThe first step in improving environmental quality and sustainability is toclarify social goals. The environmental legislation of the 1970s set outenvironmental goals, although Congress was far from clear as to the precisegoals. The next step is to fashion tools that allow firms to calculate theimplications for their profitability and social goals of their decisions regardingproduct design (choice of materials and product configuration), processes,materials, and disposal practices. To be useful, these tools must address thefirms problems, must be quick, inexpensive, and sufficiently reliable to beworth using.

We have described a tool that can help to improve this decision making, bothfor the private sector and for government. EIO-LCA can provide good estimatesof impacts for industries, especially if the time and resources are not availablefor a detailed analysis. It can be used to help firms benchmark their progressbroadly within an industry or across common industries. Finally, social costaccounting and pricing provide information so that executives can makeinformed decisions.

These tools enable environmentally-conscious companies to examine theimplications of their decisions and track future performance or efficiency gains.They also create a demand for better data on composition of a product or

component and of the materials use and environmental discharges associatedwith a particular manufacturer. Many of the companies purchasingcomponents of consumer products are now demanding this information fromtheir suppliers. Environmental management tools, such as ISO 14000, requirethis information. Although they have complained about providing these data,much of the confidential information (e.g. TRI and RCRA) has already beendisclosed. The required reporting has led to large reductions in environmentaldischarges to the benefit of the environment and society more generally.


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Local, state, federal, and international law is requiring firms to evaluate andimprove their environmental performance and look forward to sustainableoperations. Companies that fail to comply with the letter and spirit of theselaws will be censured by stockholders, employees, and the community, andfined by regulatory agencies. Until now, companies thought of compliance as apainful, costly process. The tools we describe can help firms to lower theircosts, better understand the implications of their products, and predict futuresocial and regulatory concerns.

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