LCC + Monetization

Question 1

What is life cycle costing?

Answer 1

• LCC is a cost-oriented economic life-cycle based assessment → similar terms: Whole-life costing, Total cost of ownership, total cost accounting, full cost accounting
• Addresses all relevant costs & revenues accounted by
  actors and participants in a product’s life cycle
   Investigates different cost factors (e.g. capital, labour, material, energy, disposal)
• Provides input for the decision making process of a product (design, development cycles, use phase, disposal costs)

–> Money does matter

Question 2

LCC „history“

Answer 2

• First used in the mid-1960s by the United States Department of Defense
• Originally developed to rank different investment options
  → for a long time without considering operating costs during product’s life time
• 1980ies: applied by the construction industry to assess building investments
  (incl. energy and disposal costs and considering an environmental context)
• 2008: ISO15686-5 standard, which defines LCC as
  “a technique which enables comparative cost assessments to be made over a specified period of time, taking into account all relevant economic factors both in term of initial costs and future operational costs”
• Since 2008 also specific standards/code of practice for (environmental) LCC

Question 3

Why LCC?

Answer 3

• Overview on/ improved awareness of total costs
• Evaluation of alternative options of purchase or
  of operating and maintenance cost strategies
   Identification of optimisation potential
   Forecasting of cost profiles
   Often used for supplier selection & evaluation

Question 4

Life cycle costs…

Answer 4

• Initial costs (planning, design, construction and acquisition)
• Operation costs (maintenance, renewal and rehabilitation)
• Replacement, recycling, disposal

Question 5

The three types of LCC

Answer 5

• Conventional LCC
  – purely economic evaluation
  – “real” internal costs, associated with a product´s life cycle (materials, auxiliaries, maybe revenues of wastes/co-products)
• Environmental LCC
  – Includes external costs, which are likely to be internalised in the decision-relevant future (e.g. through carbon price, taxes)
  – System boundaries & functional unit equivalent to LCA
• Societal LCC
  – All costs covered by anyone in the society, whether today or in the long-term, through the inclusion of preferably all external costs in a monetarized form
  – Includes stakeholders not directly related to the product system (governments, society)

Question 6

Internal costs

Answer 6

• Payment for production, use, or end-of-life expenses by e.g., a producer, transporter, consumer or other directly involved stakeholder
• Connection to business costs, and liability.
• Concern all costs and revenues within the economic system

Question 7

External costs

Answer 7

• Inclusion of the monetised effects of environmental and social impacts not directly billed to the firm (consumer, government, etc.) that is producing, using, or handling the product
   Outside the economic system, but inside the natural and social system

Question 8

LCC ‒ goal & scope

Answer 8

• Assessment of costs over the whole life cycle
• Conventional LCC? Environmental LCC? Societal LCC?
• For hotspot identification and/or comparisons?
• Conducting LCC alone or complementary to an LCA?
• Relation to Sustainability?

Question 9

LCC ‒ goal / scope & inventoy

Answer 9

• Conceptual framework of LCC is based on the physical product life cycle
  → Assigns monetary values to the inputs and outputs
• Determine the functional unit & the product system/ life cycle
• Determine costs for materials, energy, operation/maintenance & assign them to the f.U.
   Real values
   Generic data (e.g. price data, statistics)

Question 10

LCC ‒ cost bearers / perspectives

Answer 10

• When conducting an LCC, you also need to choose a perspective … Usually, costs for someone are revenues for others (usually in another LC stage)
• Producers/Manufacturers: production, maintencance, EoL
• Users: use, maintenance
• Government/ Society: EoL, Externalities

Question 11

What can LCC assess? What do we want do assess?

Answer 11

• LCC assesses costs over the life cycle
• LCC provides relevant information to the overall decision-making process, but not the final answer
• It is only a representation of the economic dimension, which is NOT sufficient as a stand-alone assessment for sustainability
• Currently, most LCC studies have a pure focus on money flows, but not on impacts…

Question 12

LCC ‒ impact categories & AoPs

Answer 12

• There is currently NO defined approach and no consensus on whether LCC should remain limited to the cost level (sum up of costs) or if the scope should be broadened to assessing impacts…
• Some proposed impact categories:
  – economic prosperity or economic resilience
  – gross domestic product (GDP) changes and value-added (VA)
  – include VA as an economic indicator and relate it to wealth generation/GDP by using economic modeling (input output (I/O) analysis) approaches
• Main question: “What do we in fact want to learn from LCC?”

Question 13

Different positions…some ideas

Answer 13

• LCC is relevant for decision making on company level…
• LCC is a useful economic indicator…
  …but misses a link to sustainable development
  …fails to capture the full dimension of economic
  sustainability
   …thus, LCC should not be included in
  life cycle sustainability assessment (LCSA)….
• LCC is definitely relevant for decision making
  on company level
   ….thus it is part of LCSA

Question 14

Ideas on how to link LCC with sustainability
assessment

Answer 14

New conceptual approach: economic LCA (ecLCA) to include LCC In LCSA
1) Identifying relevant economic topics for broadening the scope within LCSA’s economic pillar
2) Defining relevant economic target functions (by means of “areas of protection (AOPs)
3) Defining relevant impact categories and interlinking them within an economic pathway
 Consideration of microeconomic effects on the midpoint impact category level and macroeconomic effects at the endpoint impact category level

Question 15

Monetization: Cost and Benefits

Answer 15

• In cost benefit analysis pleasures are translated to benefits and pain is translated to costs
• Usually you compare different scenarios or options and their associated costs and benefits (for companies or government regulations)
• E.g. the EU requires to carry out a CBA to co-fund large scale projects
• According to the European Commission Definition a CBA is: “Cost-Benefit Analysis (CBA) is an analytical tool for judging the economic
  advantages or disadvantages of an investment decision by assessing its costs and benefits in order to assess the welfare change attributable to it.” (European
  Commission 2014)

Question 16

What are External Costs?/Theory of Total eEonomic
Costs

Answer 16

“An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.”

• Negative externality: the pollution of a lake by a company that affects people living next to it: it affects their life expectancy, but also the value of their property negatively
• Positive externality: a country reduces its greenhouse gas emissions, but also other countries profit by this countries greenhouse gas reductions

Question 17

Public Goods

Answer 17

• Externalities can occur at the production or consumption side and mostly affect public goods
• “A public good is a product that an individual can consume without reducing its availability to others and of which no one is deprived. Examples of public goods include law enforcement, national defense, sewer systems, public parks, and the air we breathe. As those examples reveal, public goods are almost always publicly financed.
• Especially tricky with regard to global externalities such as biodiversity and climate change

Question 18

Environmentally-Extended Cost-Benefit-Analysis
Valuation of Non Marketed Environmental Goods

Answer 18

• Different approaches to assess non-marketed goods

– Market based approach
* The market price method
* Averting behaviour method
* Production function method

– Revealed preference approach/indirect valuation:
* Hedonic pricing
* Travel cost method

– Stated preference approach/direct valuation:
* Contingent valuation (Willingness to pay WTP and Willingness to accept WTA)
* Conjoint analysis

– Prevention costs-associated with a goal

Question 19

Valuation of Environmental Goods: the Market Based Approaches

Answer 19

• Market price method
• Averting-behaviour
• Production function method

Advantage:
* Valuation works via supply and demand
* Therefore real demand is used
* Easy to source data (for market price method and averting

Disadvantage
* Only the use value can be assessed
* Only very limited applicability
* If averting behavior is used the value is likely to be underestimated because only a fraction of the use value is assessed
* Production function is very difficult to determine

Question 20

Valuation of Environmental Goods: Revealed Preference

Answer 20

• Hedonic pricing
• Travel cost method

Advantage:
* For some aspects this method is very sensitive e.g. housing prices and local air pollution

Disadvantage:
* Only the use value can be assessed
* For hedonic pricing to work the real estate market should not be regulated
* High workload
* Travel costs could also occur because e.g. relatives are visited

Question 21

Valuation of Environmental Goods: Stated Preference

Answer 21

• Contingent valuation
• Conjoint-analysis

Advantage:
* Includes all kind of monetary value (use value, bequest value and existence value)
* Theoretically these studies can be used for all environmental goods
* The only option (ethically) for e.g. prolonging lives when they are shortened by air pollution

Disadvantage:
* A hypothetic market needs to be constructed
* People can give strategic answers
* People often value a fraction of a good as valuable as the whole environmental good (they are WTP as much to protect one species as for all species together)
* Difficult to decide between WTP and WTA
* Highest workload, because studies and surveys need to be developed and carried out

Question 22

Valuation of Environmental Goods: Abatement Costs

Answer 22

Advantage:
* Can be easily used for nearly all environmental goods
* Can be used for environmental emissions (no cause-effect modelling necessary to derive a damage)

Disadvantage:
* I doesn’t really value the value of an environmental good, but how much it costs to protect is or to avoid an emission
* A political target is necessary to derive the emission level up to which the abatement is necessary (only limited geographic validity)

Question 23

Equity Weighting

Answer 23

• If we use Willingness-to-Pay-approaches typically poorer people have a lower willingness to pay than richer people
• It is often assumed that richer people do not care so much for an additional unit of utility (diminishing marginal utility)
• Many valuation methods use equity weighting (that environmental damages or
  human health damages are not based on WTP, but on the same amount of money for all people irrespective of their income and according ability to pay)
• E.g. Germany suffered the loss of 5,038 million dollars due to climate change impact in 2018 according to Germanwatch, while Madagskar lost only about 568
  million dollars in economic losses – should the economic values Germany lost be weighted less important?